On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (H.R. 1424) (“EESA”). EESA provides a significant financial bailout to many financial institutions. However, it has also changed many different tax provisions.
The following is a brief discussion of the highlights of the tax changes which may be of interest to many individuals and businesses.
Extension of Debt Forgiveness Relief for Homeowners
Under current IRS Code Section 108, homeowners may exclude up to $1,000,000 ($2,000,000 for joint taxpayers) of mortgage debt forgiveness on their principal residence. That is, any qualifying debt that is forgiven via a refinancing, loan workout or other discharge of debt with the mortgage company will not trigger ordinary income to the taxpayer. This is contrary to the general principle that any cancellation of debt constitutes gross income to the discharged taxpayer. This provision was set to expire after 2009, but has now been extended for an additional three years by EESA. The enhanced relief provided by this extension is of special interest to individuals who are in danger of losing their homes and may be renegotiating their mortgages.
The alternative minimum tax (“AMT”) is a separate scheme of taxation that was designed to target tax shelter-related deductions to ensure that all taxpayers pay their fair share of tax. Unfortunately, because the exemption amounts are not indexed, and have not been adjusted since 2000, each year the AMT has been subjecting more and more middle-class taxpayers to additional income tax. EESA includes a one-year “AMT patch” designed to raise the exemption amounts, and thereby reduce the number of middle-class taxpayers subject to it. Additionally, EESA provides: (i) for the first time, that personal nonrefundable credits may be used to offset both regular tax and AMT; and (ii) a revision and liberalization of the rules regarding the application of refundable minimum tax credits against the AMT. The rules for this are quite complex. The AMT relief provided by EESA will again disappear as of January 1, 2009.
EESA has extended many tax breaks for individuals and businesses. These include extensions through calendar year 2009, for the following:
- Higher Education Expenses – continuing the allowance of an above-the-line deduction to certain qualifying higher education costs;
- Sales Tax Deduction – continuing the opportunity of a taxpayer to elect to deduct sales taxes paid in lieu of state of local income taxes;
- Research Credit – continuing the allowance of a credit related to certain qualified research expenses;
- Qualified Environmental Remediation Expenses – continuing the allowance for a full deduction of such expenses in the year incurred instead of treatment as a non-deductible capital outlays; and
- Leasehold Improvement Property & Restaurant Property – continuing the allowance of an accelerated 15-year straight-line depreciation expense for both qualified leasehold improvement property and qualified restaurant property placed in service on or prior to December 31, 2009, in lieu of a 39-year straight-line depreciation).
50% Bonus Depreciation for Qualified Reuse and Recycling Property
EESA permits certain reuse and recycling property, placed in service after August 31, 2008, to receive a bonus depreciation deduction of fifty percent (50%) of its adjusted basis. The property must have a useful life of at least five (5) years and be qualified reuse and recycling property, which is defined as any machinery and equipment (not including buildings or real estate), along with all appurtenances thereto, including software necessary to operate such equipment, which is used exclusively to collect, distribute or recycle qualified reuse and recyclable materials. Such materials include scrap plastic, scrap glass, scrap textiles, scrap rubber, scrap packaging, recovered fiber, scrap ferrous and nonferrous metals or electronic scrap (which, in turn, means cathode ray tubes, flat panel screens or similar video display devices).
Included as part of EESA is the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008. This Act brings about major changes in ERISA law surrounding the extent of coverage offered to employees for health insurance for mental health and addition. Under the Act, ERISA has been amended to require that: (i) the financial requirements that apply to the provision of mental health or substance use disorder benefits be no more restrictive than the predominant financial requirements that apply to the provision of substantially all medical and surgical benefits covered by the plan; (ii) there be no separate cost sharing requirements that are applicable only with respect to the provision of mental health or substance use disorder benefits; and (iii) treatment limitations which apply to such mental health or substance use disorder benefits be no more restrictive than the predominant treatment limitations applied to substantially all medical and surgical benefits covered by the plan, and that there be no separate treatment limitations that apply only to mental health or substance use disorder benefits. In other words, to the extent an employer provides both medical and surgical benefits and mental health or substance use disorder benefits, all such benefits shall be afforded on equal terms.
These highlights offer only a brief glimpse into the broad legislation entitled the Emergency Economic Stabilization Act of 2008. To the extent you or your business are or may be impacted, or advantaged, by the provisions of EESA, we invite you to contact us to help you navigate your way through the complexities of this new legislation.