March Feature Article

The Economic Stimulus Act of 2008

By Earl H. Cohen and Jeffrey C. O'Brien, Attoneys at Law

Consumer Rebates

By now, you've probably heard about the recently-passed economic stimulus package (the Economic Stimulus Act of 2008), the centerpiece of which is the government's issuance of rebate checks to most tax payers. In brief, the measure will bring tax rebates of $600 for individuals, $1,200 for couples, and $300 checks to low-income individuals, including disabled veterans and elderly. Here are the key details of the rebate provisions in the stimulus package.

Amount of rebate
Eligible individuals will receive a rebate for 2008 equal to the greater of:

1) the taxpayer's net income tax liability, up to a maximum of $600 ($1,200 for a joint return); or
2) $300 ($600 for a joint return) if either (a) the taxpayer's qualifying income is at least $3,000; or (b) the net income tax liability is at least $1 and gross income is greater than the sum of the applicable basic standard deduction amount and one personal exemption or two personal exemptions for a joint return.

Qualifying income is earned income generally, social security benefits, and veterans' disability payments, including payments to survivors of disabled veterans.

There is an additional $300 credit for each qualifying child for whom the child tax credit can be claimed. This is generally a dependent child who is under age 17 at the end of the year.

The amount of the rebate credit, both the basic and qualifying child amounts, will phase out at a rate of five percent of adjusted gross income (AGI) above $75,000 - $150,000 for joint returns. For joint filers with no children who would otherwise get the maximum $1,200 basic credit, the credit will be entirely lost at AGI of $174,000. A single filer with no children who would otherwise get the maximum $600 basic credit will lose the entire credit at AGI of $87,000.

The amount of the rebate is not includible in gross income and does not otherwise reduce the amount of withholding. The rebates will be subject to offsets for items like past-due child support and debts owed to the federal government.

Eligible individuals
An eligible individual is any individual other than a nonresident alien, a dependent, or an estate or trust. Residents of the U.S. possessions will also receive the benefit. However, in an effort to bar illegal immigrants from receiving rebates, the rebate will not be available if an individual's tax return does not include social security numbers of the taxpayer, spouse, and any qualifying children. Taxpayer identification numbers (ITINs) that the Internal Revenue Service issues to aliens who are ineligible for social security numbers are not valid for this purpose.

Delivery of rebate checks
Most taxpayers will receive the credit in the form of a check issued by the Treasury. The amount of that check will be computed on the basis of tax returns filed for 2007 (instead of 2008).

Treasury will make every effort to issue payments as rapidly as possible to taxpayers who filed their 2007 tax returns on time. Taxpayers who file late or on extension will receive their payments later. No rebate checks will be issued after Dec. 31, 2008.

When taxpayers file their 2008 returns early in 2009, they will reconcile the amount of the credit with the rebate they received in the following manner. They will complete a worksheet calculating the amount of the credit based on their 2008 tax return. They will then subtract from the credit the amount of the rebate they received.

For many taxpayers, these two amounts will be the same. However, if the result is a positive number (because, for example, the taxpayer paid no tax in 2007 but is paying tax in 2008), the taxpayer will be able to claim that amount as a credit against 2008 tax liability. If the result is negative (because, for example, the taxpayer paid tax in 2007 but owes no tax for 2008), the taxpayer will not be required to repay the rebate amount to the Treasury.

Business Incentives

The Economic Stimulus Act of 2008 also provides tax incentives aimed at encouraging businesses to increase their investments in new equipment by the end of 2008. Under the Act, small businesses will be able to write off up to $250,000 of qualifying expenses in 2008. In addition, businesses will be able to deduct an additional 50 percent of the cost of certain investments in 2008. Here are the details.

Boosted section 179 expensing
Under pre-Act law, taxpayers can expense (i.e., deduct currently, as opposed to taking depreciation deductions over a period of years) up to $128,000 for 2008. This annual expensing limit is reduced - but not below zero - by the amount by which the cost of qualifying property placed in service during 2008 exceeds $510,000. The expensing rules are eased for qualifying empowerment zone property, renewal property, and GO Zone property. The amount of the expensing deduction is limited to the amount of taxable income from any of the taxpayer's active trades or businesses.

Under the Act, for tax years beginning in 2008, the $128,000 expensing limit is increased to $250,000, and the overall investment limit is increased from $510,000 to $800,000.

As a result of this incentive, most small businesses, and even some moderate-sized businesses with moderate capital equipment needs, will be able to obtain a full deduction for the cost of business machinery and equipment purchased in 2008, thereby reducing their effective cost for those assets. What's more, there is no alternative minimum tax (AMT) adjustment with respect to property expensed under Code Section 179.

Bonus depreciation makes a comeback
Bonus first year depreciation was first allowed following the terrorist attacks of 2001, but generally isn't available for property acquired after 2004. There are some exceptions, such as for qualified GO Zone property generally placed in service before 2008.

The Act provides for bonus (accelerated) depreciation by allowing a bonus first-year depreciation deduction of 50 percent of the adjusted basis of qualified property placed in service after Dec. 31, 2007, and, generally, before Jan. 1, 2009. The basis of the property and the depreciation allowances in the year the property is placed in service and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. The amount of the additional first-year depreciation deduction is not affected by a short taxable year. The taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.

The interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance may be illustrated as follows. Assume that in 2008 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is a five-year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to five-year property. Thus, 20 percent, or $100, is also allowed as a depreciation deduction in 2008. Accordingly, the total depreciation deduction with respect to the property for 2008 is $600. The remaining $400 cost of the property is recovered under otherwise applicable rules for computing depreciation.

Bonus depreciation is allowed for AMT purposes as well as for regular tax purposes. Additionally, bonus depreciation is permitted only for: property to which MACRS applies that has an applicable recovery period of 20 years or less; water utility property; non-custom-made computer software; and qualified leasehold improvement property. Original use of the property must begin with the taxpayer after Dec. 31, 2007. Additionally, the placed-in-service cutoff date is extended for an additional year (i.e., before Jan. 1, 2010) for certain property with a recovery period of ten years or longer and certain transportation and aircraft property.

The otherwise applicable "luxury auto" cap on first-year depreciation is increased by $8,000 for vehicles that qualify.

We hope this information is helpful. If you would like more details about these aspects or any other aspect of the new law, please do not hesitate to call either Jeff O'Brien or Earl Cohen at 800-4016-194.