The act provides qualifying taxpayers an advance tax credit for the 2008 tax year called a “recovery rebate.” An individual taxpayer is eligible for a maximum $600 ($1,200 if married filing jointly) rebate. An additional $300 rebate may apply for each qualifying child.
Taxpayers must file their 2007 returns by October 15, 2008, to be eligible for the rebate. The IRS may apply payments (in part or in full) to back taxes and certain debts.
The maximum Sec. 179 expense deduction is increased to $250,000 and the phaseout threshold for the deduction is increased to $800,000 for tax years beginning during 2008.
An additional first-year depreciation deduction equal to 50% of adjusted basis is allowed for qualifying property placed in service after December 31, 2007, and before January 1, 2009.
With economists and economic indicators forecasting a recession for 2008, and in the midst of the subprime lending crisis, the Economic Stimulus Act of 2008, P.L. 110-185 (ESA), was signed into law on February 13, 2008. The act is intended to help mitigate or forestall the recession. It provides two tax benefits: recovery rebates for individuals and incentives for business investment. Rebate checks are being sent to taxpayers in the hopes that people will spend the money and thus stimulate the economy. The business provisions include incentives for investment as well as some planning opportunities that should be taken advantage of before the end of the year.
Recovery Rebates for Individuals
The rebate—an advance tax credit for tax year 2008—is available to individuals other than nonresident aliens, dependents, and estates or trusts.1 Treasury started sending rebate checks to taxpayers in May 2008. Most taxpayers who qualify will receive between $300 and $600 (between $600 and $1,200 for married couples). The IRS will calculate the rebate based on the taxpayer’s 2007 tax return. However, a reconciliation process with the actual 2008 return is required, which may result in an additional benefit in 2009.
Under Sec. 6428, the rebate is computed in two parts. The primary part is determined as a function of the taxpayer’s net income tax liability and filing status.2 The secondary part is a function of the qualifying child credit.3 The child must be both a qualifying dependent child (under Sec. 152(c)) and less than 17 years old.
The taxpayer must meet a qualifying income or net tax liability threshold to be eligible for the rebate.4 The qualifying income must be at least $3,000 from the following sources: earned income including combat pay5 and taxable self-employment income;6 Social Security benefits for retirement, disability, or survivors’ benefits;7 or amounts received from veterans’ affairs for disability compensation, disability pension, or survivors’ benefits (under USC Title 38, chapters 11, 13, or 15).8
Otherwise, net tax liability (including alternative minimum tax (AMT)) determines eligibility.9 That net tax liability must be greater than zero after the application of nonrefundable credits except the child tax credit.10 Moreover, the net tax liability threshold requires gross income greater than the basic standard deduction plus a personal exemption (two exemptions for a joint return).11
The maximum primary rebate is the lesser of the tax liability or $600 ($1,200 for a joint return).12 The minimum primary rebate is $300 ($600 for a joint return) as long as the taxpayer satisfies the de minimis requirements under Sec. 6428(b)(2)(A) or (B). The primary rebate is increased by $300 per qualifying child.13 For example, a married couple with two qualifying children would have a maximum rebate of $1,800 ($1,200 primary plus $600 for two child credits) and a minimum rebate of $1,200 ($600 primary plus $600 for two child credits).
However, the total rebate phases out based on the taxpayer’s adjusted gross income (AGI). The rebate is reduced by 5% of AGI in excess of $75,000 ($150,000 for a joint return).14 The $1,800 maximum credit for the married couple with two qualifying children would be reduced to zero at AGI of $186,000 ($186,000 – $150,000 = $36,000 × .05 = $1,800).
Tax returns must be completed by October 15, 2008 (the customary six-month extension per Regs. Sec. 1.6081-4T) to be eligible for the rebate.15 No rebates will be paid after December 31, 2008.16 The calendar 2008 payment deadline ensures that taxpayers do not receive a double benefit (i.e., the check is in the mail when the taxpayers claim the maximum credit on a 2008 return filed in early 2009).
There are some potential impediments to receiving the rebate. Tax-payers must file a return to receive the rebate. Taxpayers not otherwise required to file a return because their gross income does not exceed the standard deduction plus exemption(s),17 or those whose self-employment income does not exceed $400,18 can file a return in compliance with Notice 2008-28.19 This allows taxpayers to file a return reporting $1 of AGI without any IRS challenges. However, Sec. 6651 failure-to-file penalties will apply if taxpayers have legitimate AGI but report only $1 for purposes of satisfying the rebate requirements.
If the taxpayer files a return but does not receive a rebate, some likely causes include:
- Invalid taxpayer identification number (TIN): The taxpayer must have a valid Social Security number rather than an IRS-issued TIN (individual taxpayer identification number or adoption taxpayer identification number).20
- Rebate applied to past-due amounts: The rebate is treated like a customary refund21 and will be applied to past-due federal or state income taxes. It can also be used to pay past-due student loans and child support. If the taxpayer does not receive a rebate check, the IRS will mail a letter to the taxpayer indicating how the payment was used.22
- Taxpayers are divorced: The ESA provides that half of the credit belongs to each spouse.23
- Taxpayer moved: Taxpayers should complete Form 8822, Change of Address, or the refund will be returned to the IRS.24
- Expatriates: Expatriates who began their international employment during 2007 and wait to meet the Sec. 911 duration tests may exercise their right to a 2007 filing extension of January 30, 2009.25
Practice tip: If one spouse does not have a valid Social Security number, the pair should file separately. The taxpayer with the valid Social Security number will receive a rebate based on his or her separate return. If a married taxpayer files a return claiming married filing separately status in order to receive a rebate and amends his or her return to married filing jointly status after receiving the rebate, the taxpayer will not be required to return the rebate.26
Reconciliation with 2008 Tax Return
In 2009, taxpayers filing their 2008 returns will calculate the Sec. 6428 credit based on their actual 2008 information. If the allowable credit exceeds the rebate received in 2008, the taxpayer may use the excess credit against the 2008 tax liability.27 Two likely scenarios can occur in which the computed 2008 credit will exceed the rebate payment.
Taxpayers with a 2007 tax liability that falls between the rebate’s minimum and maximum amounts could receive an additional benefit.
Example 1: H and W, a married couple with no qualifying children, file a 2007 joint return with $50,000 AGI and a $900 tax liability. Their rebate payment is $900 because they are not subject to the AGI phaseout. In 2009, they compute their 2008 tax liability at $1,300. Since the couple’s actual 2008 tax liability exceeds the maximum $1,200 credit, they would be eligible for an additional $300 benefit ($1,200 computed credit – $900 rebate payment).
Taxpayers that have their first (or an additional) child after they file their 2007 return may be eligible for an additional qualifying child credit.
Example 2: H and W from Example 1 had their first children (twins) on November 12, 2008. The couple is now eligible for the primary credit of $1,200 (based on their actual $1,300 2008 tax liability and filing status) plus a $600 qualifying child credit. Since the couple’s 2008 credit is $1,800, they would be eligible for an additional $900 benefit ($1,800 computed credit – $900 rebate payment).
However, if the 2008 rebate amount exceeds the allowable credit, the taxpayer will not have to recognize the excess as taxable income (i.e., the taxpayer received a refundable tax credit via the 2008 rebate). Taxpayers should save the second rebate notice the IRS sends to facilitate the preparation of their 2008 tax returns.28
Example 3: Assume the same facts as in Example 1, but reverse the tax liabilities to $1,300 in 2007 and $900 in 2008. H and W would have received a rebate of $1,200 in 2008. However, based on their actual 2008 tax liability, the applicable credit is only $900. The couple was overpaid $300 ($1,200 rebate payment – $900 computed credit). The $300 is construed as a refundable tax credit and does not affect their 2008 taxable income.
Incentives for Business Investments
The ESA provides two business tax benefits. Both the Sec. 179 election to expense depreciable property and the Sec. 168 accelerated (“bonus”) depreciation provisions have been amended to allow qualifying taxpayers to take increased first-year deductions for property placed in service in 2008 and, for certain property, 2009. Taxpayers ineligible for Sec. 179 expensing due to the provision’s income limitations may still be able to benefit from the Sec. 168 amendment, which allows an additional 50% first-year depreciation deduction on qualified property.
Sec. 179 Election
The Sec. 179 election allows businesses to immediately expense tangible personal property rather than depreciating it using the modified accelerated cost recovery system (MACRS) under Sec. 168. Historically, this provision has benefited smaller businesses because of the small amount that is allowed to be expensed. The ESA adds paragraph 7 to Sec. 179(b), which increases the limitations for tax years beginning in 2008. Secs. 179(b)(7)(A) and (B) increase the 2008 expense from $128,00029 to $250,000 and the maximum placed-in-service amount from $510,00030 to $800,000.
The expense amount is reduced dollar for dollar after the placed-in-service maximum has been met. Thus, the Sec. 179 election is reduced to zero once the placed-in-service amount reaches $1,050,000. The 2008 amendments continue to cover purchased software.31 However, the $25,000 maximum sport utility vehicle expense remains unchanged.32
The 2008 changes may provide some tax relief to companies that have not benefited from this election in the past. However, the customary taxable income limits still apply. The expensing cannot create or add to an existing loss.33 Companies that cannot use the total amount of the expense, because of taxable income limitations, may carry it forward.34
Example 4: XYZ Co. has been profitable and has had substantial taxable income for several years. In 2008, it replaces 10 pieces of production equipment (seven-year cost recovery) on its assembly line. The equipment costs $750,000 ($75,000 each). Since the placed-in-service amount does not exceed $800,000, XYZ elects the Sec. 179 expensing. XYZ has a Sec. 179 expense of $250,000 for tax year 2008. The remaining $500,000 ($750,000 cost – $250,000 expense) equipment basis is depreciated under Sec. 168 using MACRS.
If the stimulus provision were not in place, the 2008 Sec. 179 expense would be zero because of the phaseout. The placed-in-service amount of $750,000 would reduce the otherwise allowable expense of $128,000 to zero ($750,000 exceeds the prior 2008 maximum of $510,000 by $240,000). However, the taxpayer could still take a MACRS depreciation deduction for the property under Sec. 168.
Example 5: Using the facts from Example 4, assume XYZ has $100,000 taxable income before the Sec. 179 expense. In this modified scenario, only $100,000 of the allowable $250,000 expense can be used. The remaining $150,000 expense must be carried forward to the next tax year. (See the exhibit below.) Assumptions: The taxpayer elects not to take the additional first-year bonus depreciation under Sec. 168(k) and the taxpayer’s marginal tax rate does not change. The analysis does not include time value of money.
Practice tip: Generally, taxpayers should defer revenue and accelerate deductions. It may be beneficial to use the Sec. 179 election even if a carry-forward occurs, since the limitation amendments are available only for tax year 2008 acquisitions. The stimulus benefits and cost of capital are unique to the taxpayer. Thus, a net present value calculation for the after-tax cashflows should be completed. Anticipated changes in marginal tax rates could have a different result. For example, if XYZ anticipates that its marginal tax rate will increase in 2009 and again in 2010, it may wish to forgo the 2008 Sec. 179 election and defer the depreciation deductions to maximize the present value of the after-tax cashflows.
Additional First-Year Depreciation
The ESA also amends Sec. 168 (accelerated cost recovery) by allowing an additional 50% first-year depreciation for qualifying property (bonus depreciation).35 The act increases first-year depreciation for passenger automobiles36 by $8,000.37 Any bonus depreciation under Sec. 168(k) is allowed for purposes of computing the AMT.38
Four conditions must be met for the bonus depreciation: qualifying property definition, original use date, acquisition date, and placed-in-service date. Several restrictions also limit what property qualifies.
Qualifying property39 must have a recovery period of 20 years or less or be classified as one of the following: off-the-shelf computer software40 that is not covered under Sec. 197 (i.e., software acquired, developed, leased, or licensed in connection with the acquisition of assets constituting a trade or business); water utility property,41 which includes municipal sewers and property that gathers, treats, or distributes commercial water; or leasehold improvement property,42 which includes interior improvements to leased nonresidential real property that are placed in service more than three years after the leasehold property was first placed in service.
In addition, the qualifying property’s original use must begin after December 31, 2007;43 the acquisition (including contract dates) must occur during 2008;44 and the asset must be placed in service during 2008.45 Similarly, self-constructed assets and sale-leaseback property must be placed in service during 2008.46 The act extended the placed-in-service date through December 31, 2009, for assets with longer production periods (including transportation property)47 and certain aircraft (subject to nonrefundable deposit and cost restrictions).48
The qualifying property’s adjusted basis is reduced by the bonus depreciation before computing the customary depreciation for the appropriate cost recovery period.49 The IRS is developing the 2007 Form 4562-FY, Depreciation and Amortization, for fiscal-year filers to facilitate computing the additional bonus depreciation deduction for the 2007–8 tax return.50
Example 6: In 2008, NGS Co. installed gas pipelines (15-year cost recovery) at a cost of $600,000. NGS is eligible for the additional first-year depreciation and did not elect to expense any of the cost of the pipelines under Sec. 179. The bonus depreciation provision allows NGS $300,000 (.50 × $600,000) in additional depreciation. The pipelines’ adjusted basis is $300,000 ($600,000 cost – $300,000 bonus depreciation). The customary MACRS 2008 depreciation is $15,000 (.05 × $300,000). The total 2008 depreciation deduction is $315,000 ($300,000 + $15,000). Absent the bonus depreciation provision, the first-year depreciation would be only $30,000 (.05 × $600,000).
Example 7: The facts are the same as in Example 6, except assume NGS elects to take the maximum Sec. 179 expense deduction. The Sec. 179 election results in the immediate expensing of $250,000 of the cost of the pipelines. Under the bonus depreciation provision, NGS can take an additional first-year depreciation deduction of $175,000 [.50 × ($600,000 – $250,000)]. In addition, the company can take a regular MACRS deduction of $8,750 (.05 × $175,000). The total 2008 deduction for the pipelines is $433,750 ($250,000 Sec. 179 expense deduction and $175,000 bonus depreciation plus $8,750 regular depreciation).51
Practice tip: It may not be beneficial to accelerate the depreciation deduction if the taxpayer anticipates increases in its marginal tax rate. Similarly, the bonus depreciation can create or add to a net operating loss (NOL). Subchapter C corporate NOLs are suspended so no immediate benefit occurs. However, passthrough entity NOLs can be used immediately if the taxpayer has other income to offset. Another passthrough benefit occurs if the taxpayer is subject to the AMT, since the bonus depreciation can be used for AMT.52
Practice tip: Although the depreciation conventions do not apply to the bonus first-year depreciation, they do apply to any regular depreciation taken on the property in the first year. Therefore, taxpayers that plan to use the bonus depreciation deduction should not wait until the last quarter to make their purchases. The mid-quarter convention applies to tangible personal property if more than 40% of the annual purchases occur in the last quarter of the tax year. Applying the mid-quarter convention to the adjusted basis (i.e., after the 50% first-year depreciation) can significantly reduce the total first-year depreciation deduction amount.
Joint Committee on Taxation Projections
The Joint Committee on Taxation (JCT) projects the total of recovery rebates and incentives for business investment to cost $124.5 billion in 2008–18.53 The specific budget decreases (in billions) for that period are:
- 2008 individual recovery rebates ($116.7);
- Appropriations to carry out recovery rebates ($0.3);
- Social Security Administration funding (less than $50 million);
- Increased Sec. 179 expensing and phaseout amounts for 2008 ($0.1); and
- 50% bonus depreciation for property placed in service in 2008 ($7.4).
Moreover, the Government Accountability Office reports that the IRS expects increased call volumes related to the ESA. In response, the IRS plans to reassign collections staff to telephones at a cost of $681 million.54
The tax benefits the ESA provides affect both individuals and businesses. The legislation’s purpose is to increase consumer and business spending in an effort to stimulate the economy. The magnitude of the economic benefit depends on taxpayers’ behavior; however, it is uncertain whether taxpayers will modify their behavior.
History suggests that individuals save and do not spend their tax rebate checks. Bruce Bartlett, former deputy assistant Treasury secretary for economic policy, reports that previous advance rebate checks (in 1975 and 2001) had little impact on taxpayers’ spending.55
History also suggests that taxpayers often forgo depreciable property benefits. Specifically, temporary expensing has little or no effect on business investment because the costs of capital reductions are nominal56 and business NOLs make the bonus depreciation benefit ineffective (i.e., no after-tax cashflow benefits).57
Will individual taxpayers spend or save the rebates? Will business investment increase because of the temporary expensing and deduction increases for depreciable business property? The actual effects of the legislation remain to be seen.
For more information about this article, contact Prof. Jones at email@example.com.
1 Sec. 6428(e)(3).
2 Sec. 6428(a).
3 Sec. 24(c).
4 Sec. 6428(b)(2).
6 Sec. 6428(e)(4)(B).
7 Sec. 86(d).
8 Sec. 6428(e)(1).
9 Sec. 6428(e)(2)(A).
10 Sec. 6428(e)(2).
11 Sec. 6428(b)(2)(B).
12 Sec. 6428(a).
13 Sec. 6428(b)(1).
14 Sec. 6428(d).
16 Sec. 6428(g)(3).
17 Sec. 6012.
18 Sec. 6017.
19 Rev. Proc. 2008-21, 2008-12 IRB 657; and Notice 2008-28, 2008-10 IRB 546.
20 Sec. 6428(h)(C)(2).
21 Sec. 6402.
23 Sec. 6428(f)(2). See IRS, “Stimulus Payments: Answers to Frequently Asked Questions,” April 15, 2008, available at www.irs.gov/newsroom/article/0,,id=179181,00.html.
25 See Veliotis, “Stimulus Tax Rebate Deadline Poses Problems for Some U.S. Expatriates,” Tax Notes International (March 3, 2008): 791.
26 IRS, “Stimulus Payments: Answers to Frequently Asked Questions.”
27 Sec. 6428(f).
29 Sec. 179(b)(1), as adjusted for inflation by Rev. Proc. 2007-66, 2007-45 IRB 970.
30 Sec. 179(b)(2), as adjusted for inflation by Rev. Proc. 2007-66, 2007-45 IRB 970.
31 Sec. 179(d)(1)(A)(ii).
32 Sec. 179(b)(6).
33 Sec. 179(b)(3).
34 Sec. 179(b)(3)(B).
35 Sec. 168(k).
36 Secs. 280F(d)(5) and (a)(1)(A)(i).
37 Sec. 168(k)(2)(F).
38 Sec. 168(k)(2)(G).
39 Sec. 168(k)(2)(A).
40 Sec. 168(k)(2)(A)(i)(II), referring to Sec.167(f)(1)(B).
41 Sec. 168(k)(2)(A)(i)(III), referring to Sec. 168(e)(5).
42 Sec. 168(k)(2)(A)(i)(IV). See Sec. 168(k)(3) for the definition of leasehold improvement property.
43 Sec. 168(k)(2)(A)(ii).
44 Sec. 168(k)(2)(A)(iii).
45 Sec. 168(k)(2)(A)(iv).
46 Sec. 168(k)(2)(E).
47 Sec. 168(k)(2)(B).
48 Sec. 168(k)(2)(C).
49 Sec. 168(k)(1)(B).
51 The IRS plans to issue guidance that will apply Regs. Sec. 1.168(k)-1 (the original bonus depreciation regulations) to the ESA bonus depreciation (IR-2008-58). See Regs. Sec. 1.168(k)-1(d)(3), Example 2.
52 Sec. 168(k)(2)(G).
53 Joint Committee on Taxation, Estimated Budget Effects of the “Economic Stimulus Act of 2008” as Passed by the House of Representatives and the Senate on February 7, 2008 (JCX-17-08), February 8, 2008, available at www.house.gov/jct/x-17-08.pdf.
54 Government Accountability Office, Internal Revenue Service Fiscal Year 2009 Budget Request and Interim Performance Results of IRS’s 2008 Tax Filing Season (GAO-08-567), March 2008, available at www.gao.gov/new.items/d08567.pdf.
55 Bartlett, “Feel-Good Economics,” Wall Street Journal, January 19, 2008, p. A12.
56 See Cohen and Cummins, “A Retrospective Evaluation of the Effects of Temporary Partial Expensing,” Finance and Economics Discussion Series 2006-19,Federal Reserve Board, Washington, DC (April 2006).
57 See Knittel, “Corporate Response to Accelerated Tax Depreciation: Bonus Depreciation for Tax Years 2002–2004,” U.S. Department of the Treasury, Office of Tax Analysis Working Paper No. 98 (May 2007).