This tax update covers select provisions from recent Federal and Maryland tax legislation. If you have any questions, please do not hesitate to contact your Beers + Cutler advisor.
The Economic Stimulus Act of 2008
While the individual income tax rebates have received significant media coverage, it's the business tax incentives that provide meaningful savings opportunities.
Bonus depreciation. The Economic Stimulus Act ("the Act") provides for a current deduction of 50% of the cost of qualifying new equipment and qualifying tenant improvements placed in service during 2008. This is similar to the bonus depreciation enacted following September 11, 2001, first at 30%, and later increased to 50% through the end of 2004. The 2008 law restores the bonus depreciation rules, but only for property acquired after December 31, 2007 and before January 1, 2009.
What property qualifies for bonus depreciation?
Increase in first year auto depreciation limitation. First year depreciation on "luxury" automobiles had previously been limited to $3,060 (2007 amount adjusted for inflation). The Act increases the first year limitation by $8,000 to $11,060.
IRC Section 179 expensing. The Act doubles the amount of qualifying equipment purchases that can be expensed to $250,000. Under IRC Section 179, a taxpayer, other than an estate, trust and certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. Until a few years ago, the expense limitation was $25,000, but it was later increased and subject to annual inflation adjustments. The 2007 limit is $125,000. The Act increases the expensing limit to $250,000 and increases the overall investment in property limit to $800,000. This is a temporary increase for 2008 only. Unless there is further legislation, these limits fall to $125,000 and $500,000 for 2009 and 2010, and then to $25,000 and $200,000 for 2011 and beyond.
Illustration: In 2008, XYZ Company buys and places in service $825,000 of equipment that is 5 year life property. XYZ exceeded the investment limit amount [$825,000 - $800,000], so its bonus depreciation expense will be reduced by the difference of $25,000. Therefore, XYZ may expense $225,000 of its 2008 purchases [$250,000 - $25,000] and may take bonus deprecation of $300,000 on the balance of $600,000 [$825,000 less $225,000 expensed under Section 179]. XYZ will depreciate the remaining $300,000 balance of its purchases over the depreciable life.
The bottom line? On 2008 purchases of $825,000, XYZ reports deduction of $585,000 for 2008 compared to $165,000 for the first year if the property was purchased in 2007 or 2009!
Tax rebates. Several times in the recent past, Congress has provided tax "rebates" to stimulate the economy. Some were targeted and some were broad based. The 2008 version is broad based but is subject to a phase out formula based on total income.
The 2008 Act provides for a "refundable recovery rebate credit" to eligible individuals. Most low and moderate income taxpayers will receive a rebate check in 2008 based on filing status and income reported on their 2007 returns. Some will receive the credit in 2009 when they file their 2008 returns, and still others (depending largely on income in tax years 2007 and 2008) may receive a combination of a rebate check in 2008 and an income tax credit in 2009. Here are some details of the rebate amount and the phase out.
Basic credit amount. The basic credit is equal to the greater of: (1) net income tax liability up to a maximum of $600 ($1,200 for a joint return), or (2) $300 ($600 for a joint return) if either (a) the taxpayer's qualifying income (generally earned income, veterans' disability payments, including payments to survivors of disabled veterans and social security benefits) is at least $3,000 or (b) net income tax liability is at least $1 and gross income is greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return).
Additional credit for qualifying children. An individual eligible for the basic credit may be eligible for an additional $300 credit per qualifying child. Generally, a qualifying child must have the same principal place of abode as the taxpayer for more than one-half of the tax year and satisfy a relationship test. Students who are (or can be) claimed as dependents by their parents are not eligible for a rebate, even if they have enough income to file their own tax return.
Phaseout. The amount of the tax rebate is reduced by 5% of a taxpayer's adjusted gross income (AGI) above $75,000 ($150,000 for joint returns). For example, for joint filers with no children who would otherwise get the maximum $1,200 basic credit, the credit would be zero at AGI of $174,000 or more [5% × ($174,000 - $150,000) = $1,200]. For a joint tax return with 2 qualifying children the rebate would be completely phased out at AGI of $186,000.
Conforming loan limit increase. The conforming loan amount is the dollar limit of a mortgage that the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation can purchase or guarantee. In the DC area, the conforming loan limit was $417,000 and the Act provides for an increase of up to $729,750. The amounts vary by geographic area based on median home sales price. The new limit has not been determined yet. These provisions expire on December 31, 2008.
Other 2007 Federal Tax Legislation
AMT patch for 2007. Near the end of 2007, Congress passed legislation to prevent millions of middle-income taxpayers from paying alternative minimum tax (AMT) for 2007. Congress again relied on a temporary "patch" to solve the problem, a one-year extension of the 2006 AMT exemption amounts, increased slightly. The slight increases only provides relief to middle income taxpayers on the cusp of the AMT. We do not expect this patch to provide meaningful savings to our clients.
The Mortgage Debt Relief Act of 2007. This legislation will exclude from gross income up to $2 million ($1 million for married, filing separately) of debt forgiven in 2007 through 2009 if the debt was used to buy, build or substantially improve a principal residence. The excluded amount will reduce the residence's basis, but not below zero. The exclusion applies if the discharge is directly related to a decline in the value of the residence or to the taxpayer's financial condition.
In a separate provision, the Act also permits surviving spouses to qualify for the $500,000 (same as joint filing status) home sale exclusion if (1) the residence is sold no later than two years after his or her spouse's death, and (2) the exclusion requirements were met immediately before the spouse's death. This applies to sales and exchanges after December 31, 2007.
Maryland Tax Increases
At the end of 2007, a special legislative session enacted numerous tax provisions ("the MD Act"). All of these changes are tax increases effective in 2008.
Expansion of transfer and recordation tax. Previously, transfers of a controlling interest in a real estate entity were exempt from Maryland recordation and transfer taxes. Recent tax legislation provides that for transfers occurring after June 30, 2008, transfer and recordation taxes will be imposed on transfers of controlling interests in certain "real property entities."
The MD Act defines a real estate entity to include any corporation, partnership, association, limited liability company, limited liability partnership, other unincorporated form of doing business or trust that directly or beneficially owns real property that comprises at least 80% of the value of the entity (without reduction for any mortgage or other debts secured by the property) and has a value of at least $1,000,000. A controlling interest is defined as:
However, existing owners can transfer their interests to a new entity owned in the same proportions as the old without incurring the transfer taxes.
Both recordation and transfer taxes are imposed on the "consideration payable" for the transfer of interest. The consideration payable includes the amount of any debt related to the real property owned by the entity, including mortgages, deed of trusts, liens or other security interests, as well as any other debt payable by the entity. These amounts are reduced by the amounts allocable to assets owned by the entity other than real property. This provision is effective for transfers occurring after June 30, 2008.
Maryland tax rate increase for corporate taxpayers. Effective January 1, 2008, the corporate tax rate increased from 7% to 8.25%.
Maryland tax rate increase for individual taxpayers. Effective January 1, 2008, Maryland increased the state tax rate for income above $200,000 on a joint return and $150,000 on a single filing status return as part of a new graduated tax rate table. Remember that the Maryland income tax computation is two steps, state rate plus county rate.
Joint Filers Individual Taxpayers
|
Taxable Income |
State Tax Rate |
|
Taxable Income |
State Tax Rate |
|
$1 to $1,000 |
2% |
|
$1 to $1,000 |
2% |
|
$1,001 to $2,000 |
3% |
|
$1,001 to $2,000 |
3% |
|
$2,001 to $3,000 |
4% |
|
$2,001 to $3,000 |
4% |
|
$3,001 to $200,000 |
4.75% |
|
$3,001 to $150,000 |
4.75% |
|
$200,001 to $350,000 |
5% |
|
$150,001 to $300,000 |
5% |
|
$350,001 to $500,000 |
5.25% |
|
$300,001 to $500,000 |
5.25% |
|
Above $500,000 |
5.5% |
|
Above $500,000 |
5.5% |
The previous maximum individual state tax rate was 4.75%. When combined with the county tax rate, the highest Maryland individual income tax rate for 2008 is 8.7% for Montgomery County residents and lower for other counties.
Increased estimated tax payments to meet safe-harbor. The recent legislation increased the safe harbor amounts for estimated taxes beginning with tax year 2008. For individuals, payments must be at least 120% of the tax for the prior year or 90% of the tax for the current year. Estimated payments for corporations must total 130% of the tax for the prior year or 90% of the current year tax to avoid underpayment penalties.
Increased nonresident withholding rate. Maryland's nonresident pass-through withholding rate will increase in 2008 since it is tied to the top marginal state tax rate plus the lowest county income tax rate. Accordingly, the withholding rate will increase from 6% to 6.75% for nonresident individuals and from 7% to 8.25% for nonresident entity members.
Real estate taxes. The MD Act requires homeowners to submit a one-time application in order to continue their eligibility for the homestead tax credit applied to the real estate tax assessment for their principal residence. The application should be filed by April 1 of the year (2008, 2009 or 2010) in which you receive the triennial assessment notice. You can complete the online application form at http://www.dat.state.md.us/.
Sales and use tax. Effective January 3, 2008, the sales tax rate increased from 5% to 6%. Beginning July 1, 2008, computer services will be subject to sales tax.
For additional information on these topics or to discuss your individual or business tax issues, please contact:
Peter McKenna
Scott Barnard
Paul Dillon
Bill Apple
To ensure compliance with requirements imposed by the IRS, you are hereby advised that any written tax advice contained in this communication (including any attachments) was not written or intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.