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Heather A. Kmetz
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2008 Tax Benefits under the Bailout Plan

November 2008

Heather A. Kmetz
503.243.1661 x 226

As the Dow Jones industrial average plummeted to levels not seen in five years and the American economy shed jobs for the ninth consecutive month, Congress passed the Emergency Economic Stabilization Act of 2008 ("EESA").

Signed into law on October 3, 2008, EESA was principally designed to prop up failing US credit markets and build investor confidence with provisions such as a temporary (through 2009) increase of government insurance on bank deposits from $100,000 to $250,000 and the authority to modify troubled loans wherever possible to help American families keep their homes.  Also included in EESA's 451 pages were numerous tax benefits focused in the areas of clean energy incentives; tax relief for individuals and businesses; tax relief associated with natural disaster areas; and tax incentives for charitable giving.

Now, more than a month later, the federal government has invested about $250 billion in banks and the Dow Jones is still an unraveling yo-yo.  Treasury Secretary Henry M. Paulson, Jr. announced on November 12 that the remaining funds of the Troubled Asset Relief Program ("TARP," established under EESA) will be re-oriented to helping consumers – abandoning the program's namesake intent of purchasing troubled assets.

Although the ever-changing TARP has proved to be the most newsworthy EESA component, the certainty of EESA's tax benefits may be of greater interest to individuals and businesses as the 2008 tax year draws to a close.  Some of the 2008 tax benefits include:

Benefiting Individuals

Alternative Minimum Tax "Patch".  EESA raises the 2008 alternative minimum tax (AMT) exemption from $33,750 to $46,200 (single, head of household) and from $45,000 to $69,950 (married filing jointly).

Election to Deduct State and Local Sales Taxes.   Individual taxpayers will have the ability to choose to deduct the amount of state and local sales taxes paid or of state and local income taxes paid when calculating income for federal income tax purposes through tax year ending December 31, 2009.

Additional Standard Deduction for Real Property Taxes.  Taxpayers who do not itemize can claim, in addition to the standard deduction, a real property tax deduction equal to the lesser of $500 (single, head of household) / $1,000 (married filing jointly) or the amount allowed as a State and local and foreign real property tax deduction.

Residential Energy-Efficient Property Tax Credit.  Homeowners are eligible for tax credits if they install energy-efficient home improvements including solar panels (electricity generation), solar water heaters (so long as it is not used to heat a swimming pool or hot tub) and biomass fuel stoves.  Generally, the credit is equal to 30 percent of qualifying expenditures, with a maximum $2,000 credit for each of these systems, although there are additional restrictions relating to fuel cells and fuel stoves.

First Time Homebuyer Credit.  Taxpayers who purchased their a principal residence after April 8, 2008 (through June 30, 2009) and who did not own a principal residence in the previous 3 years may claim a refundable credit for 10 % of the purchase price of up to $3,750 (single, head of household) / $7,500 (married filing jointly). Eligibility for the credit phases out for taxpayers with income of $75,000 to $95,000 (single) / $150,000 to $170,000 (married filing jointly).  It is important to note that this credit must be repaid in 15 equal installments starting in 2010, or when the home is sold or no longer used as a principal residence.

Qualified Tuition Deduction. An above-the-line tax deduction for qualified higher education expenses has been extended. A maximum deduction of $4,000 is available to taxpayers with income not exceeding $65,000 (single, head of household) or $130,000 (married filing jointly); a maximum deduction of $2,000 is available to taxpayers with income not exceeding $80,000 (single, head of household) or $160,000 (married filing jointly).

Teacher Expense Deduction. Teachers can claim an above-the-line deduction for up to $250 for unreimbursed out-of-pocket educational expenses.

Child Tax Credit Expansion.  The income threshold for the refundable child tax credit has been lowered from $12,050 to $8,500 for tax year ending December 31, 2008 only.  This change will increase the number of families who become at least partially eligible for the $1,000 tax credit for each qualifying child under the age of 17 credit and enable currently-qualifying families for a greater portion of the credit.

IRA Rollover Contribution.  IRA owners who are 70½ or older are able to make tax-free contributions of up to $100,000 per year from their IRA plans to qualified charitable organizations.  The distribution will not be taxable income and the contribution will not be deductible, however the distribution will count toward satisfying the IRA owner's minimum distribution requirements.

Benefiting Businesses

Biodiesel Production and Renewable Diesel Tax Credits. The $1.00 per gallon production tax credit for biodiesel and for diesel fuel created from biomass (usable as home heating oil, as a fuel in vehicles, or as aviation jet fuel) has been extended.  Also extended is the 10¢ per gallon tax credit for small biodiesel producers.  There is no longer a distinction between biodiesel and agri-biodiesel and the requirement that renewable diesel fuel must be produced using a thermal depolymerization process has been eliminated.  Diesel fuel created by co-processing biomass with other feedstocks (e.g., petroleum) will be eligible for the 50¢ per gallon tax credit for alternative fuels.

Special 15-Year Depreciation Schedule for Restaurants and Retailers.  Business owners are generally permitted to depreciate original building costs, renovations or improvements over a 39 1/2-year depreciable life.  A special 15-year depreciation schedule is permitted to restaurant and leasehold improvements and certain retail improvements.

Film and Television Domestic Production Deduction. The domestic production deduction is modified to allow more film and television show production companies to use the deduction, which is expected to encourage more production of films and television productions in the United States.

Enhanced Charitable Deduction for Food Contributions.  Concerns relating to the decreased inventory of food banks across the country spurred the extension of an enhanced charitable deduction to businesses that contribute food and the elimination of a percentage limitation for 2008 food contributions made by certain farmers and ranchers.

Enhanced Charitable Deduction for Qualified Computer Contributions.  Businesses that contribute computer equipment and software to elementary, secondary, and postsecondary schools can claim an enhanced deduction.

Expensing of "Brownfields" Environmental Remediation Costs. A provision allowing for the expensing of costs associated with cleaning up contaminated sites has been extended.

 

Related Practice Areas

Tax

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