Economic Stimulus Act of 2008
2009 American Recovery and Reinvestment Act
On February 13th 2008, President Bush signed into law the Economic Stimulus Act of 2008 (the "Act"). The centerpiece of the Act is the government's issuance of rebate checks to most Americans. In addition, several new business tax incentives are included in the Act to promote business investment in 2008 and to temporarily relieve the tax burden of business owners by significantly expanding depreciation and one-time expensing options for qualified capital expenditures in 2008.
In brief, there will be tax rebates of up to $600 for individuals, $1,200 for couples and $300 for low-income taxpayers, disabled veterans and the elderly. In addition, there will be an extra $300 rebate for each qualifying child claimed by the taxpayer. All of the rebates are subject to income limitation rules and phase-out provisions. 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) his 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 (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 by the end of 2008.
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 are not valid for this purpose.
Delivery of rebate checks. Eligible taxpayers will receive the credit in the form of a check issued by the Department of the Treasury. At this time, there is no definitive date when taxpayers will receive their rebate checks. Preliminary estimates from congressional officials and the IRS have stated checks will start being mailed in May. Taxpayers who file late or go on extension will receive their rebates later. No rebate checks will be issued after Dec. 31, 2008.
Phase-out of rebate. The amount of the total rebate phases out at a rate of 5% of adjusted gross income (AGI) above $75,000 for single individuals (includes "head of household" filers) and $150,000 for joint returns. For example, joint filers with no children who would otherwise get the maximum $1,200 rebate, it would be fully phased out at AGI of $174,000. For a single parent with one qualifying child who would otherwise get the maximum $900 rebate, it would be fully phased out at AGI of $93,000.
True up of rebate in 2009: To act as an advance payment, the initial rebate checks will be based off the taxpayer’s 2007 return. However, a true up calculation of the rebate will be necessary when the taxpayer files a 2008 return in 2009. By using a special worksheet, the taxpayer will reconcile the amount of the rebate they received in advance compared to the rebate they should have received based off the 2008 tax return information. For most taxpayers, the end result should be the same and no action is required. However, if the result is a positive number (underpaid rebate), the taxpayer will be able to claim the excess as a credit against 2008 tax liability. If the result is negative (overpaid rebate), the taxpayer will not be required to repay the balance to the Treasury.
An example of an underpaid rebate is as follows. A single taxpayer receives an advance $300 rebate check since he was considered a low-income taxpayer that had a federal tax liability of $150 on his 2007 return. However, upon filing a 2008 tax return, the taxpayer’s liability went up to $850, making him eligible for the maximum $600 rebate for a single individual. Therefore, the excess $300 rebate owed can be claimed as a credit against the $850 liability in 2008, leaving a net liability of $550.
If a taxpayer receives an overpaid rebate using the same example above, except for switching the tax liability in each year (receives $600 in advance based on 2007 but only should get $300 based on 2008), the taxpayer is not required to pay back the $300 difference to the Department of the Treasury. In essence, there is a chance a taxpayer could get overpaid for a rebate, but never underpaid.
2008 Business Incentives
In addition to the rebate checks for individuals and families, the Economic Stimulus Act of 2008 includes several business provisions intended to jump-start the economy, in part through 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 capital expenditures in 2008. In addition, businesses will be able to deduct an additional 50% of the cost of certain capital expenditures in 2008.
Boosted Section 179 expensing. Under pre-Act law, taxpayers can expense up to $128,000 of qualified business property for 2008 in lieu of taking depreciation over a certain amount of tax years. This annual expensing limit is reduced on a dollar for dollar basis by the amount that the cost of qualifying property placed in service exceeds $510,000. The expensing rules are eased for qualifying empowerment zone property, renewal property and Gulf Opportunity (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 new Act, for tax years beginning in 2008, the $128,000 one-time expensing limit is increased to $250,000, and the overall limit before the phase-out applies is increased from $510,000 to $800,000. After $800,000 of qualified additions, the maximum allowable Section 179 deduction is reduced on a dollar for dollar basis up to $1,050,000 of qualified additions. As a result of this incentive, many businesses with moderate capital equipment needs will be able to obtain a substantial deduction for the cost of qualified business property placed in service in 2008. Note that there is no alternative minimum tax (AMT) adjustment with respect to property expensed under these new increased limits.
Bonus depreciation makes a comeback. Bonus first year depreciation was first introduced following the terrorist attacks of 2001 but generally was not available for property acquired after 2004, except for certain qualified GO Zone property from Hurricane Katrina relief provisions.
The Act provides for bonus (accelerated) depreciation by allowing a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property placed in service after Dec. 31, 2007, and 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 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 to opt out of utilizing additional first-year depreciation.
The interaction of the additional first-year depreciation allowance with the otherwise standard depreciation deduction may be illustrated as follows. Assume that a taxpayer purchases new depreciable equipment and places it in service in 2008. The property's cost is $10,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year bonus depreciation allowed under the new provision is $5,000. The remaining $5,000 of the cost of the property is depreciated under the rules applicable to 5-year property. Thus, 20 percent of the $5,000 remaining basis, or $1,000, is also allowed as a standard depreciation deduction in 2008. Accordingly, the total depreciation deduction with respect to the property for 2008 is $6,000 ($5,000 bonus plus $1,000 standard depreciation). The remaining $4,000 cost of the property is recovered over the remaining class life until fully depreciated.
Bonus depreciation is allowed for AMT purposes as well as for regular tax purposes. Additionally, bonus depreciation is permitted only for: (1) property to which MACRS applies that has an applicable recovery period of 20 years or less,
(2) water utility property, (3) non-custom-made computer software, and (4) qualified leasehold improvement property. Original use of the property must begin with the taxpayer after Dec. 31, 2007. 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. Also note that the otherwise applicable "luxury auto" cap on first-year depreciation is increased by $8,000 for vehicles that qualify.
For state purposes, it is unknown at this time how each individual state will react to the new bonus depreciation and Section 179 incentives. Note that historically, many states have decoupled from federal provisions like bonus depreciation or have implemented much lower ceilings on the maximum Section 179 deduction. It is advisable to review and address any state law differences upon filing 2008 state business returns.