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Handout 1 - CFMA

VIEWS: 3 PAGES: 62

									              2008 Tax Update
                     and
            Tax Planning Strategies

               Construction Financial
               Management Association

Presented by:
Edward T. Blair, CPA
Witt Mares, PLC
eblair@wittmares.com
2008 TAX UPDATE



Economic Stimulus
   Act of 2008
Economic Stimulus Act of 2008
 Enacted February 13, 2008
 • Rebates For Individual Taxpayers
   – Rebates well publicized
   – Based on 2 credits
      • Basic credit
      • Qualifying child credit
   – On 2008 return,
      •   Calculate the amount of credit due
      •   Compare to rebate received
      •   Can use excess credit against 2008 tax
      •   Not required to repay excess rebate
Economic Stimulus Act of 2008
 • Section 179 Deduction
   – Section 179 limit increased to $250,000
   – Qualifying property limit increased to
     $800,000
   – Previously scheduled to be $128,000 and
     $510,000
   – Effective for tax years beginning in 2008
Economic Stimulus Act of 2008
 • Bonus Depreciation
   – Additional first-year depreciation of 50%
   – Property acquired and placed in service
     during 2008
   – No AMT adjustments for bonus depreciation
     property
   – Qualifying property
      •   MACRS recovery period less than 20 years
      •   Water utility property
      •   Computer software other than self-developed
      •   Qualified leasehold improvements
Economic Stimulus Act of 2008
   – New property
   – Business vehicles
      • 1st year depreciation limit increased to $8,000 if
        bonus depreciation is taken
   – Virginia has not conformed to this provision
     2008 TAX UPDATE


Heartland, Habitat, Harvest, and
   Horticulture Act of 2008
       (2008 Farm Act)
2008 Farm Act
Enacted May 22, 2008
• Overview
  – Contains many specialized tax breaks
    related to the farming industry
     • Limits farm losses for taxpayers who do not
       materially participate in a farming activity
     • Credits related to production of certain fuels
     • Tax breaks related to Kansas Presidential
       disaster area
  2008 TAX UPDATE



The Heroes Act of 2008
The Heroes Act of 2008
 • Tax Relief For Military Members
   – Miscellaneous individual tax provisions for
     military members
   – Retirement plan provisions for individuals who
     leave for qualified military service and cannot be
     rehired due to death or disability
   – Revised tax treatment of differential pay
      • Applies to employers who continue to pay compensation
        during active duty
      • Qualifies as compensation for retirement plans
      • Certain small businesses can receive a tax credit for
        paying differential wages
   – Reservists get extra time to make health FSA
     payouts
      • Allows exceptions for qualified reservist distribution
The Heroes Act of 2008
 • Miscellaneous Relief Provisions
 • Tax Changes For Expatriates and
   Certain Controlled Foreign Entities
2008 TAX UPDATE



Housing Assistance
 Tax Act of 2008
Housing Assistance Tax Act of 2008
 Enacted July 30, 2008
 • First-Time Homebuyer Tax Credit
   – Refundable tax credit
   – 10% of home purchase price, up to $7,500 ($3,750
     MFS)
   – Must be repaid
      • Additional tax installments over 15 years
      • Begin 2 years after purchase
      • Interest free
   – Applies to purchases 4/9/08 - 6/30/09
      • Provision for accelerating 2009 purchase into 2008
Housing Assistance Tax Act of 2008
   – Income Limitations:
      • Phase out:
          – Single: modified AGI between $75,000 and $95,000
          – MFJ: modified AGI between $150,000 and $170,000
   – Accelerated Recapture:
      • Immediately due when residence is sold or is no longer
        used as taxpayer’s principal residence
      • Recaptured credit is limited to amount of gain from the
        sale of the residence to an unrelated person.
   – First-Time Homebuyer:
      • No ownership interest in a principal residence during
        3-yr period prior to purchase
Housing Assistance Tax Act of 2008
 • Reduced Home Sale Exclusion
   – Applies to sale of personal residence
   – Gain from periods of non-qualified use will no
     longer be excluded from income
      • Non-qualified use:
          – Rental
          – Vacation home
          – Other than primary residence
   – Applies to home sales after December 31, 2008
   – Based only on nonqualified use periods after 2008
   – Gain allocated based on a time of use ratio,
     regardless of market fluctuations within ownership
     period
Housing Assistance Tax Act of 2008
 • Low-Income Housing Tax Credit (LIHTC)
   – Increases and simplifies the LIHTC
   – How program works:
      • LIHTC program provides authority to state & local
        agencies to issue tax credits for acquisition, rehabilitation,
        or construction of lower-income rental housing.
      • Credits are awarded to developers of qualified projects.
      • Developers sell these credits to investors to raise capital
        for their projects, which reduces required borrowing.
      • Certain expenses incurred in rehabilitating or purchasing
        an existing building also qualify
      • Credit is claimed over a 10-year period
Housing Assistance Tax Act of 2008
   – Value of a LIHTC typically is adjusted monthly by
     IRS. New law temporarily maintains the credit at
     9% through 2013
   – Increases states' allocation cap
   – New law simplifies many provisions:
      • Determination of area median gross income for purposes
        of the credit
      • Modifies the definition of federally-subsidized housing
      • Adds a third type of high-cost area eligible for the LIHTC
      • Increases certain minimum expenditure requirements for
        rehabilitations
   – Changes to LIHTC estimated to cost $1 billion over
     10 years
Housing Assistance Tax Act of 2008
 • Tax-Exempt Housing Bonds
    – Tax-exempt housing bonds issued by state
      and local governments fund acquisition,
      construction, and rehabilitation of
      affordable housing. Interest earned is
      exempt from federal tax.
    – New law simplifies the rules for tax-
      exempt housing bonds
Housing Assistance Tax Act of 2008
 • Mortgage Revenue Bonds
   – New law permits the refinancing of existing
     subprime loans
   – Authorizes states to issue an additional $11
     billion in mortgage revenue bonds for 2008
   – Expands the definition of first-time
     homebuyers to include buyers in “targeted
     areas”
   – Estimated cost of changes to be $1.475
     billion over 10 years
Housing Assistance Tax Act of 2008
 • Real Estate Investment Trust (REIT) Reforms
    – A REIT holds passive investments in real property
      and mortgages
    – Must satisfy complex organizational & record-
      keeping requirements along with source of income
      and asset holding tests
    – New law:
       • Expands types of income included in income tests
       • Changes requirements for REIT subsidiaries
       • Eases requirements to meet safe harbors
    – Expected to cost $359 million over 10 years
Housing Assistance Tax Act of 2008
 • Credit Card Information Reporting
    – Requires banks and other processors to report
      merchants' annual gross payment card receipts to
      the IRS
    – Also requires reporting on third-party network
      transactions
    – Effective for sales made after 2010
    – De minimis exception:
       • If the aggregate value of third party network transactions
         does not exceed $20,000 for the calendar year, or
       • Aggregate number of transactions does not exceed 200
    – Expected to raise $9.5 billion
Housing Assistance Tax Act of 2008
 • Miscellaneous Others
   – Election to allocate interest expense on a
     worldwide basis delayed until after 2010 ( expected
     to raise $9.5 billion)
   – Changes to estimated payment requirements for
     corporations with > $1 billion in assets
   – Corporations allowed to use accumulated AMT and
     R&D credits by electing not to claim the special
     50% bonus depreciation
   – More tax exempt bonds qualify for federal
     guarantees
Housing Assistance Tax Act of 2008
   – Tax-exempt interest on certain housing bonds no
     longer an AMT preference item
   – Eases requirements for rehabilitation tax credits
   – Bans seller-funded down payment assistance
     programs
   – Enhances foreclosure protection for military
     personnel
      • At service member's request, lender must reduce
        interest rate to no more than 6% during active military
        service
   – Authorizes the Treasury Department to transfer funds
     among different accounts to carry out the 2008
     economic stimulus payments
      2008 TAX UPDATE

Emergency Economic Stabilization
Energy Improvement and Extension
         Tax Extenders
     AMT Relief Acts of 2008
    and Other Recent Tax Acts
“Financial Bailout Law”
 Enacted October 3, 2008
 • AMT Relief
   – Increase in AMT exemption amounts for 2008
      • $46,200 for unmarried’s, $69,950 for MFJ, and
        $34,975 for MFS
      • One year fix only. Will revert to 2000 levels
        without further action
   – Nonrefundable personal credits can offset
     AMT through 2008 (previously 2007)
   – Relief for employees who exercised incentive
     stock options and were left with worthless
     stock but an AMT bill
“Financial Bailout Law”
 • Investment Related Provisions
   – Enhanced broker reporting required
      • Adjusted basis
      • Character of gain or loss
      • Applies for sales of most securities acquired after
        December 31, 2010
      • Additional provisions for DRIPS and securities
        transferred between brokers
“Financial Bailout Law”
 • Executive Compensation
   – Changes to taxability of deferred compensation under
     a non-qualified plan of a "tax-indifferent party"
      • e.g. offshore corporation in low or no-tax jurisdiction
      • Must pay tax as compensation accrues rather than
        when paid
   – Executive compensation deduction capped at
     $500,000 for employers selling more than $300
     million of troubled assets in bailout program
      • Modifies the golden parachute rules by expanding the
        definition of “parachute payment”
“Financial Bailout Law”
 • Individual Provisions
    – Refundable child tax credit is increased for 2008
       • Lower income base threshold increases refundable
         amount
    – Casualty loss floor raised to $500 from $100 per
      casualty
       • Does not apply to special disaster relief provisions
    – Changes to Qualifying Child (QC) rules
       • Cleans up some inconsistent definitions
           –   QC must be younger than claimant
           –   QC must be unmarried
           –   Restricts QC benefits to child's parents
           –   Denies child tax credit for QC who is not dependent
“Financial Bailout Law”
• Business Extenders
  – Miscellaneous credits extended - various
    dates - generally through 2009
     • Research credit
         – Modification of calculation
         – Changes to several alternative research credits
     • Railroad track maintenance credit
     • Mine rescue team training credit
     • Possessions tax credit for American Samoa
     • Indian employment credit (work on reservations
       by Native Americans)
     • New markets tax credit (investment in low-
       income communities)
“Financial Bailout Law”
  – Domestic Production Activities Deduction
    for Puerto Rican activities extended through
    2009
  – Expense elections in lieu of capitalization
    extended through 2009
     • Qualified environmental remediation
       expenditures
     • Qualified advanced mine safety equipment
       property
     • Qualified film and TV production expense
“Financial Bailout Law”
  – Special depreciation provisions extended
    through 2009
     • Improvements to property > 3 years old
        – Qualified retail space improvements: 15-year straight-
          line
        – Qualified leasehold improvements: 15-year straight-
          line
        – Qualified restaurant improvements: 15-year straight-
          line
     • New motorsports entertainment facility: 7 year
       MACRS
     • Indian reservation property: Shortened recovery
       periods
“Financial Bailout Law”
  – DC Enterprise Zone and enterprise
    community designation extended through
    2009
     • 20% wage credit
     • Additional $35,000 Sec 179 expense for
       qualified zone property
     • Zero percent capital gain rate on qualified zone
       assets held more than 5 years
     • Expanded tax-exempt financing
  – S-Corp basis rule for charitable contribution
    of appreciated property through 2009
“Financial Bailout Law”
  – Enhanced deduction for corporate charitable
    contributions of property extended through
    2009
     • Qualified computers and related equipment
     • Qualified book inventory
     • "Apparently wholesome food" inventory
        – Additional special provision for farmers through 2008
  – Temporary suspension of charitable
    deduction limits through 2008
     • Contributions related to Midwestern disaster
       area
“Financial Bailout Law”
• Individual Extenders
  – Sales tax itemized deduction alternative
    extended through 2009
  – Above-the-line tuition deduction extended
    through 2009
  – Above-the-line educator expense deduction
    extended through 2009
  – Additional standard deduction for state and
    local property taxes extended through 2009
  – Non-taxable IRA transfers to eligible
    charities extended through 2009
  – Credit for first-time DC homebuyer
    extended through 2009
“Financial Bailout Law”
  – Non-business energy property credit
    extended through 2009
     • 10% of qualified energy efficiency
       improvements
        – Insulation, windows, doors, roofs
     • Specific credits for energy efficient property:
        – Heat pumps, water heaters, fans, furnaces
     • Changes to definitions:
        – Geothermal heat pump eliminated (see REEP
          credit)
        – Includes biomass fuel stoves
        – Water heater types broadened
        – Includes asphalt roofs
“Financial Bailout Law”
  – Residential energy efficient property
    (REEP) credit extended through 2016
     • Solar electric, solar water heating, fuel cell
       property
     • Wind energy and geothermal heat pumps added
     • 30% of expenditures
     • $2,000 limit eliminated
“Financial Bailout Law”
• Tax Preparer Penalty
   – Changes preparer penalty for understatements
      • Penalty for understatement due to "unreasonable position"
        and
      • Preparer knew or should have known
   – "Unreasonable position" = no substantial authority
   – If position is disclosed, must have reasonable basis
   – Previously standard was "more likely than not"
     which is much stricter than "substantial authority"
     standard for taxpayers
   – Tax shelters and reportable transactions retain
     "more likely than not" standard
“Financial Bailout Law”
• Employee Benefits
  – Requires parity between mental
    health/addiction services and
    medical/surgical services
     • Financial requirements
        – Deductibles, co-pays, out-of-pocket
     • Treatment limits
     • Out-of-network coverage
     • Made permanent
  – Requires disclosure of medical necessity
    criteria and reasons for denial
“Financial Bailout Law”
• Energy Credits and Deductions
  – Business energy tax credit extended through 2016
     •   Solar energy property
     •   Fuel cell property
     •   Microturbine property
     •   Adds "combined heat and power system property"
          – Single source to generate electrical and thermal
            energy
     •   Adds wind energy property
     •   Adds geothermal heat pumps
     •   Increased limits
     •   Can offset 100% of AMT
“Financial Bailout Law”
  – Energy efficient home credit for contractors
    extended through 2009
  – Credits for manufacture of energy efficient
    appliances
  – Deduction for energy efficient commercial building
    property extended through 2013
  – New qualified plug-in electric drive motor vehicle
    credit
      • For vehicles placed in service 2009 - 2014
      • $2,500 - $7,500, based on battery capacity and weight
      • Phased out after 250,000th plug-in electric vehicle sold in
        the United States
  – Extensive credits/deductions and provisions related
    to production of alternative fuels, electricity, oil and
    gas
“Financial Bailout Law”
• Disaster related provisions
  – Numerous provisions related to federally
    declared disaster areas
• FUTA Tax Rate
  – 6.2% FUTA tax rate continues to apply
    through 2009, and the 6.0% rate applies for
    calendar year 2010 and later years
“Financial Bailout Law”
• Financial Bailout Provisions
  – Tax relief for community banks
     • Allows community banks to treat losses on their
       Fannie Mae & Freddie Mac preferred stock as
       ordinary losses that can offset ordinary income
  – Deductions for executive compensation
    limited for employers participating in
    bailout
     • Deduction limited to $500,000 per employee per
       year
     • Previously $1 million
     • Tax years ending after 10/2/08
“Financial Bailout Law”
  – Severance pay for top financial executives
    subject to golden parachute rules
     • Excess parachute payments are non-deductible
       by corporation
     • Subject to 20% excise tax by person receiving
       payment
  – Three year extension for home mortgage
    debt forgiveness relief
     • Taxpayers may exclude up to $2 million of
       mortgage debt forgiveness
2008 TAX UPDATE



  Current Issues
Current Issues
• Proposed regulations released 8/1/2008
  – Expands definition of "Home Construction
    Contracts"
  – Offers construction contractors more
    flexibility in applying the definition of a
    "home construction contract"
  – "Home Construction contracts" are exempt
    from certain tax provisions
Current Issues
• Limited Issue Focused Examination
  Program (LIFE)
  – New audit techniques designed to expedite
    the audit process
  – Will apply to corporations and partnerships
    having assets over $10 million
Current Issues
• Writedown of Real Estate "Inventory" to
  Market
  – Declining real estate values have caused
    developers to consider whether they can
    write down "inventory" to lower of cost or
    market
  – Real estate is not "inventory" under §471 or
    §263A and cannot be written down
  – Consistently upheld by courts
Current Issues
• S-Corps
  – IRS is stepping up audits on S-Corps
     • Proportionate distributions among shareholders
     • Long-term contract adjustment for alternative
       minimum tax
Current Issues
• Per-diems
  – Accountable plan OR
  – Include in W-2
  – What percentage is meals?
• Construction Industry Fraud
  – Paper issued October 2008 outlines criminal
    investigation statistics for the construction
    industry
              IRS Criminal Investigation

               Construction Industry Statistics
                                     FY2008   FY2007   FY2006

Criminal Investigations Initiated     268      325      251
Prosecution Recommendations           197      163      142
Indictments/Informations Filed        153      140      114
Convictions                           150      121      115
Incarceration Rate                   76.4%     70%     68.5%
Average Months to Serve (all Sent)     28       24       22
     2008 TAX UPDATE



Major Tax Proposals of the 2008
   Presidential Candidates
                   Major Tax Proposals of the
                  2008 Presidential Candidates
                    Sen. John McCain (R-AZ)            Sen. Barack Obama (D-IL)

Corporate Taxes    • Gradually lower corporate tax     • Codify the economic substance
                     rate from 35% to 25%                doctrine
                   • Immediate expensing of three-     • Lower corporate taxes for
                     and five-year equipment but         companies that begin or
                     disallow interest deduction for     expand operations in the
                     expensed equipment (from 2009       United States
                     to 2013)                          • Broaden the corporate tax base
                   • Repeal domestic production        • $3,000 per-worker-hired New
                     activities deduction                American Jobs Credit for firms
                   • Repeal LIFO                         that create jobs in the United
                                                         States
                                                       • Extend $250,000 Section 179
                                                         small business expensing limit
                                                         through 2009
                   Major Tax Proposals of the
                  2008 Presidential Candidates
                    Sen. John McCain (R-AZ) Sen. Barack Obama (D-IL)
International                                      • Limit the ability of large
                                                     MNCs to use tax havens to
                                                     hide income overseas
                                                   • Create International Tax
                                                     Evasion Watch List and
                                                     penalize companies that report
                                                     income from tax havens on the
                                                     list
                                                   • Reform deferral to deter
                                                     corporations from keeping
                                                     operations overseas
Research Credit     • Permanent, equal to 10% of   • Permanent
                      wages spent on R&D
Technology          • Ban new cell phone service   • Tax incentives to encourage
                      taxes                          broadband deployment
              Major Tax Proposals of the
             2008 Presidential Candidates
              Sen. John McCain (R-AZ)         Sen. Barack Obama (D-IL)

Investment    • Extend lowered rates on       • Increase capital
                capital gains, dividends        gains/dividend income rates
              • 7.5% top capital gains rate     to 20% for families with AGI
                for 2009, 2010                  over $250,000; maximum
              • $15,000 deduction for stock     15% rate for those under
                losses (up from $3,000,       • Tax “carried interest” at
                under current law)              ordinary income rates instead
                                                of capital gains rates
Estate Tax    • 15% rate, $10 million (per    • 45% maximum rate, $7
                couple) exemption               million (per couple)
                                                exemption
               Major Tax Proposals of the
              2008 Presidential Candidates
               Sen. John McCain (R-AZ)              Sen. Barack Obama (D-IL)

Individuals   • Extend and index AMT patch to       • Extend and index AMT patch to
                inflation, with temporary bump up     inflation
                to inflation-plus-5%                • Increase top rates to 36%, 39.6%
              • Extend 2001, 2003 rate cuts         • Eliminate capital gains taxation
              • Phase-in doubling of dependent        for investments in start-up small
                exemption: $4,000 in FY2010,          businesses
                $500 increase in each subsequent    • Making Work Pay tax credit of up
                year until $7,000 in FY2016           to $500 per person and $1,000
                                                      per working family
              • Dependent exemption doubled in
                                                    • 10% universal mortgage credit to
                FY2010 for families earning less
                                                      homeowners who do not itemize
                than $50,000 annually               • $4,000 American Opportunity
              • Ban Internet access taxes             Tax Credit applicable to college
              • Eliminate taxes on unemployment       tuition expenses
                benefits                            • Expand EITC
                                                    • Suspend unemployment benefit
                                                      taxes
              Major Tax Proposals of the
             2008 Presidential Candidates
              Sen. John McCain (R-AZ)                         Sen. Barack Obama (D-IL)
Energy   • Rationalize system of temporary tax credits       • Energy rebates of $500 per individual
         • $5,000 tax incentive would be provided for          and $1,000 per married couple
           zero-emissions vehicles                           • Windfall profits tax for oil companies
         • Summer gas tax holiday                            • $7,000 tax credit for the purchase of
         • Replace expensing of exploration and                advanced technology vehicles
           development costs with regular depreciation       • Tax incentives for biofuels
         • Eliminate 15% tax credit for enhanced oil
           recovery costs for tertiary wells
         • Reform foreign tax credit rules and limitations
           regarding foreign oil and gas extraction
           income to eliminate excessive use
         • Eliminate the exception to uniform
           capitalization rules for intangible drilling
           costs with respect to oil and gas wells
         • Replace special depreciable lifetimes for
           assets used in offshore drilling and domestic
           drilling, exploration assets, refining, and
           pipeline transportation with regular
           depreciation lives
         • Subject working interests in oil and gas to the
           passive loss rules
          Major Tax Proposals of the
         2008 Presidential Candidates
           Sen. John McCain (R-AZ)           Sen. Barack Obama (D-IL)

Health     • Direct refundable tax credit    • Tax credits to subsidize
             of $2,500 for individuals and     health insurance
             $5,000 for families to offset
             the cost of health insurance
           • Repeal income exclusion for
             employer-provided health
             care
                  Major Tax Proposals of the
                 2008 Presidential Candidates
               Sen. John McCain (R-AZ)                 Sen. Barack Obama (D-IL)
Retirement   • Supplementing Social Security       • After 10 years, possible 2 to 4%
Policy         system with personal accounts, but    increase in Social Security payroll tax
               not as a substitute for addressing    for those earning over $250,000
               benefit promises                      annually
             • Suspend required minimum            • Automatic enrollment in retirement
               distribution rules                    plans, with one-time government
             • Maximum tax rate of 10 percent on     contribution of $500-per-worker
               money seniors withdraw from IRAs • Refundable Saver’s Credit, expanded to
               and 401(k) retirement plans in 2009   include government match of 50 percent
               and 2010                              of the first $1,000 in savings for a
                                                     family earning under $75,000 annually
                                                   • Suspend required minimum distribution
                                                     rules
                                                   • Allow withdrawals of up to 15% from
                                                     IRAs or 401(k)s, up to a maximum of
                                                     $10,000, without any fine or penalty
                                                     throughout 2009
          Major Tax Proposals of the
         2008 Presidential Candidates
          Sen. John McCain (R-AZ)          Sen. Barack Obama (D-IL)

Budget    • 60-vote threshold for Senate   • Supports Pay-As-You-Go
            approval of tax increases        budget rules
Questions
Please Contact:
Edward T. Blair, CPA
Member of the Firm
Witt Mares, PLC
3951 Westerre Parkway, Suite 200
Richmond, VA 23233
Phone: (804) 323-0022
eblair@wittmares.com

								
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