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SUMMARY OF THE 2008 ECONOMIC STIMULUS ACT

In an effort to head off a major economic slowdown, the Administration and Congress agreed on a package of tax provisions intended to stimulate the economy. The Economic Stimulus Act of 2008 (“Act”) provides benefits to both individuals and businesses.

Below, we highlight the Act’s provisions and illustrate how they might apply to your personal and business situations. Of course, before acting on anything you read here, you should consult with us.

Rebate for Individuals

Each qualifying individual will receive a tax credit in the form of a “recovery rebate” check to be received generally in 2008. Some taxpayers will receive a credit for some of or the entire rebate amount on their 2008 tax returns (filed in 2009).

The rebate has two components: (1) a base amount generally dependent on filing status and income-tax liability and (2) an increase in the child tax credit.

Base Amount.— The minimum base rebate amount is $300 ($600 for married couples filing jointly). Very generally, a person will be entitled to this amount if he/she has at least $1 of federal income-tax liability or $3,000 in qualifying income. “Qualifying income” means the sum of earned income, veterans’ disability payments (including payments to survivors of disabled veterans), and Social Security benefits. So, those who do not pay taxes but have these other sources of income could be eligible for a rebate check.

The maximum base rebate amount is $600 ($1,200 for joint filers). The amount of the rebate will be equal to the lesser of the individual’s tax liability or 10% of the first $6,000 of taxable income ($12,000 for joint filers).

Example: A married couple is retired and living on Social Security benefits only. They pay no income tax on their joint return. The couple would be entitled to a $600 rebate check.

Example: A single individual has a taxable income of $25,000 and pays income tax of $500. The rebate amount is $500 — the lesser of her tax ($500) or 10% of $6,000 ($600).

Example: A married couple files a joint return showing $50,000 in taxable income and a tax of $10,000. The couple would receive a base rebate of $1,200 (10% of the first $12,000 of taxable income).

In determining taxable income for eligibility and rebate purposes, taxpayers generally must use 2007 income as reported on their 2007 tax return, filed in 2008. If a person isn’t eligible for a rebate check based on 2007 income (for example, where the individual was someone else’s dependent for 2007), but becomes eligible during 2008, then the IRS won’t send that person a rebate check. However, the individual will be able to claim a credit when he files his 2008 return.

Child Credit Amount.— If an individual receives at least $1 of the base rebate and has qualifying children under age 17, that individual will receive an additional child tax credit of $300 per child, which will be included in the rebate check. This amount is a refundable credit, so the recipient receives this extra amount even if the amount of the recipient’s 2007 income tax is less than the total child tax credit.

Example: A married couple files jointly with three qualifying children. Their taxable income is $45,000 and their income tax is $5,000. The amount of the total rebate check for the couple would be $1,200 (base amount) plus $900 (three times $300 as additional child tax credit), for a total of $2,100.

Recovery Rebate Phase Out.— The rebate amount (including both the base credit and the additional child tax credit) is phased out at a rate of 5% of adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

Example: A married couple filing a joint return has two qualifying children and $160,000 of AGI. The maximum rebate of $1,800 (i.e., $1,200 base credit plus $600 additional child tax credit) is reduced by $500 (5% of the $10,000 AGI in excess of $150,000), so the couple’s rebate is $1,300.

Therefore, most higher-income individuals’ rebate amounts will be reduced or eliminated. There is no specific amount of AGI at which the credit is fully phased out, since that amount will depend on the specific family situation of the taxpayer.

Valid ID Requirement.— No rebate amount is allowed to an individual if he/she doesn’t include on the tax return a valid identification number (that is, a Social Security number). Both joint return filers must provide their own numbers. If a child tax credit amount is claimed for a qualifying child, the child’s Social Security number must be included on the return.

Increase in Section 179 Expensing

One provision intended to stimulate business spending is an increase in the limits applicable to the so-called “Section 179 expensing election” for the 2008 tax year.

Under Section 179 of the tax law, a taxpayer may elect to deduct, up to a dollar limit, the cost of qualifying property placed in service during the tax year. So, a taxpayer could elect to write off the cost of a purchase all at once instead of depreciating it over time. Generally, qualifying property includes tangible personal property, like equipment, vehicles, machinery, etc. Certain off-the-shelf computer software can qualify as well.

The dollar amount of purchases that qualify for the expensing election is phased out dollar-for-dollar as the value of the taxpayer’s investment in qualified property exceeds a certain amount. In addition, the amount that can be expensed cannot exceed the taxpayer’s taxable income from the business for the year.

The new law raises both the expensing limit and the investment limit. For property placed in service in tax years beginning in 2008, the Act increases the pre-law $128,000 expensing limit to $250,000. The overall investment limit increases from $510,000 to $800,000. Neither new amount is to be indexed for inflation.

Example: ABC Company, having taxable income of $300,000 in 2008, purchases and places in service new equipment worth $220,000 during the year. Under the Act, the full $220,000 purchase price of the equipment can be deducted for 2008 tax purposes.

Example: XYZ Corporation places in service new equipment worth $850,000 in 2008. The business’ taxable income is $1 million. The maximum Section 179 expensing election that XYZ can make is $200,000 (i.e., $250,000 maximum expensing election less $50,000 phase-out ($850,000 purchases less $800,000 investment limitation)). Note the remainder of the purchased equipment may be eligible for deduction under the regular depreciation rules (as amended by the Act — see below).

Due to these increases, most small businesses and some medium-sized businesses may be able to claim a full deduction for the cost of business equipment and machinery placed in service this year.

Bonus First-year Depreciation

In addition to the limit increases in the Section 179 expensing election, the Act provides a second incentive for the purchase of business-related assets.

For property placed in service after December 31, 2007, and acquired after that date and before January 1, 2009, the taxpayer will be entitled to an additional depreciation deduction equal to 50% of the adjusted basis of the qualifying property (generally, new business property other than real estate). The adjusted basis of the property is then reduced by this bonus depreciation when computing regular depreciation on the property.

Example: M Corp., a calendar-year company, bought and placed in service $1 million of depreciable machinery with a five-year life under the tax law’s depreciation rules. Under the pre-2008 Act law, the first-year depreciation on the machinery would have been $200,000 (20%). Under the Act, M Corp. may deduct first-year depreciation of $600,000 (i.e., 50% of $1 million bonus depreciation ($500,000) plus 20% of the remaining $500,000 adjusted basis ($100,000)).

A taxpayer may “elect out” of the bonus first-year depreciation allowance for one or more classes of property for the tax year.

Several other requirements pertain to this provision and applying it to a specific situation can be tricky. See us for additional details.