Small Business Taxes & Management^TM--Copyright 2008, A/N Group, Inc.

Recovery Rebates for Individual Taxpayers

The provision includes a recovery rebate credit for 2008 which is refundable. The credit is computed with two components in the following manner.

Basic credit. Eligible individuals receive a basic credit (for the first taxable year beginning) in 2008 equal to the greater of the following:

• Net income tax liability not to exceed $600 ($1,200 in the case of a joint return).
  
• $300 ($600 in the case of a joint return) if: (1) the eligible individual has qualifying income of at least $3,000; or (2) the eligible individual has a net income tax liability of at least $1 and gross income greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return).

An eligible individual is any individual other than: (1) a nonresident alien; (2) an estate or trust; or (3) a dependent.

Qualifying income is the sum of the eligible individual's: (a) earned income; (b) social security benefits (within the meaning of Sec. 86(d)); and (c) qualifying veteran's payments. The definition of earned income has the same meaning as used in the earned income credit except that it includes certain combat pay and does not include net earnings from self-employment which are not taken into account in computing taxable income.

Qualifying child credit. If an individual is eligible for any amount of the basic credit the individual also may be eligible for a qualifying child credit. The qualifying child credit equals $300 for each qualifying child of such individual. For these purposes, the child credit definition of qualifying child applies.

Limitation based on adjusted gross income. The amount of the credit (i.e., the sum of the amounts of the basic credit and the qualifying child credit) is phased out at a rate of five percent of adjusted gross income above certain income levels. The beginning point of this phase-out range is $75,000 of adjusted gross income ($150,000 in the case of joint returns).

Valid identification numbers. No credit is allowed to an individual who does not include a valid identification number on the individual's income tax return. In the case of a joint return which does not include valid identification numbers for both spouses, no credit is allowed. In addition, a child shall not be taken into account in determining the amount of the credit if a valid identification number for the child is not included on the return. For this purpose, a valid identification number means a social security number issued to an individual by the Social Security Administration. A taxpayer identification number issued by the IRS is not a valid identification number for purposes of this credit (e.g., an ITIN).

Rebate checks. Most taxpayers will receive this credit in the form of a check issued by the Department of the Treasury. The amount of the payment will be computed in the same manner as the credit, except that it will be done on the basis of tax returns filed for 2007 (instead of 2008). It is anticipated that the Department of the Treasury will make every effort to issue all payments as rapidly as possible to taxpayers who timely file their 2007 tax returns. (Taxpayers who file late or pursuant to extensions will receive their payments later.)

Taxpayers will reconcile the amount of the credit with the payment they receive in the following manner. They will complete a worksheet calculating the amount of the credit based on their 2008 income tax return. They will then subtract from the credit the amount of the payment they received in 2008. For many taxpayers, these two amounts will be the same. If, however, the result is a positive number (because, for example, the taxpayer paid no tax in 2007 but is paying tax in 2008), the taxpayer may claim that amount as a refundable credit against 2008 tax liability. If, however, the result is negative (because, for example, the taxpayer paid tax in 2007 but owes no tax for 2008), the taxpayer is not required to repay that amount to the Treasury. Otherwise, the checks have no effect on tax returns filed for 2008; the amount is not includible in gross income and it does not otherwise reduce the amount of withholding. In no event may the Department of the Treasury issue checks after December 31, 2008.

Examples of Rebate Determination

The following examples show the rebate amounts as calculated from the taxpayer's 2007 tax return.

Example 1-- A single taxpayer has $14,000 in Social Security income, no qualifying children, and no net tax liability prior to the application of refundable credits and the child credit. The taxpayer will receive a rebate of $300 for meeting the qualifying income test.

Example 2--A head of household taxpayer has $4,000 in earned income, one qualifying child, and no net tax liability prior to the application of refundable credits and the child credit. The taxpayer will receive a rebate of $600, comprising $300 for meeting the qualifying income test, and $300 per child.

Example 3--A married taxpayer filing jointly has $4,000 in earned income, one qualifying child, and no net tax liability prior to the application of refundable credits and the child credit. The taxpayer will receive a rebate of $900, comprising $600 for meeting the qualifying income test, and $300 per child.

Example 4--A married taxpayer filing jointly has $2,000 in earned income, one qualifying child, and $1,100 in net tax liability (resulting from other unearned income) prior to the application of refundable credits and the child credit (the taxpayer's actual liability after the child credit is $100). The qualifying income test is not met, but the taxpayer has net tax liability for purposes of determining the rebate of $1,100. The taxpayer will receive a rebate of $1,400, comprising $1,100 of net tax liability, and $300 per child.

Example 5--A married taxpayer filing jointly has $40,000 in earned income, two qualifying children, and a net tax liability of $1,573 prior to the application of refundable credits and child credits (the taxpayer's actual tax liability after the child credit is -$427). The taxpayer meets the qualifying income test and the net tax liability test. The taxpayer will receive a rebate of $1,800, comprising $1,200 (greater of $600 or net tax liability not to exceed $1,200), and $300 per child.

Example 6--A married taxpayer filing jointly has $175,000 in earned income, two qualifying children, and a net tax liability of $31,189 (the taxpayer's actual liability after the child credit also is $31,189 as the joint income is too high to qualify). The taxpayer meets the qualifying income test and the net tax liability test. The taxpayer will, in the absence of the rebate phase-out provision, receive a rebate of $1,800, comprising $1,200 (greater of $600 or net tax liability not to exceed $1,200), and $300 per child. The phase-out provision reduces the total rebate amount by five percent of the amount by which the taxpayer's adjusted gross income exceeds $150,000. Five percent of $25,000 ($175,000 minus $150,000) equals $1,250. The taxpayer's rebate is thus $1,800 minus $1,250, or $550.

Temporary Increase in Limitations on Expensing of Certain Depreciable Business Assets

The provision increases the $128,000 and $510,000 amounts under Section 179 for taxable years beginning in 2008 to $250,000 and $800,000, respectively. The $250,000 and $800,000 amounts are not indexed for inflation.

Special Depreciation Allowance for Certain Property

The provision allows an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property. The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes for the taxable year in which the property is placed in service. The basis of the property and the depreciation allowances in the year the property is placed in service and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. In addition, there are no adjustments to the allowable amount of depreciation for purposes of computing a taxpayer's alternative minimum taxable income with respect to property to which the provision applies. The amount of the additional first-year depreciation deduction is not affected by a short taxable year. The taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.

Example--Madison Inc. purchases a new shop crane for $10,000 and places it in service in 2008. The additional first-year depreciation is 50% of the $10,000 or $5,000. Madison claims that amount on its tax return for 2008. In addition, Madison depreciates the remaining $5,000 beginning in 2008 under the usual depreciation rules. For Madison, the crane qualifies as 5-year property. Thus, for 2008, Madison's total depreciation on the crane would be $5,000 plus $1,000 or $6,000. The depreciation schedule would be:

Year        Bonus   Depreciation   Total

2008       $5,000      $1,000     $6,000 
2009                    1,600      1,600
2010                      960        960
2011                      576        576
2012                      576        576
2013                      288        288

Special rules apply to property for which there is where there was a binding contract in effect before January 1, 2008 and for property for which there was a binding contract after December 31, 2007 and before January 1, 2009.

If property is originally placed in service by a lessor (including by operation of section 168(k)(2)(D)(i)), such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale.

Property does not qualify for the additional first-year depreciation deduction when the user of such property (or a related party) would not have been eligible for the additional first-year depreciation deduction if the user (or a related party) were treated as the owner. For example, if a taxpayer sells to a related party property that was under construction prior to January 1, 2008, the property does not qualify for the additional first-year depreciation deduction.

The limitation on the amount of depreciation deductions allowed with respect to certain passenger automobiles (sec. 280F) is increased in the first year by $8,000 for automobiles that qualify (and do not elect out of the increased first year deduction). The $8,000 increase is not indexed for inflation.

Tax Tip--There are two important points to keep in mind. First, to qualify for the 50-percent bonus depreciation the use of the property must begin with you. That is, used property doesn't qualify. Second, the amount of first-year depreciation can be substantial. Maybe too substantial. You may not want to take all the depreciation allowed under this provision. You can elect out of the bonus depreciation.

Tax Tip--The new law greatly increases the first-year depreciation for an auto, more than doubling the amount usually allowed. If you've been considering a new auto for the business, this would be the year to make the purchase.

Increase in Conforming Loan Limit

While not a tax issue, the new law increases the conforming loan limit for both FHA and GSE loans under a formula based on the area median price for mortgages originated during the period July 1, 2007 through December 31, 2008.

--Last Update 02/21/08