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Tax Implications of Financial Rescue Bill with Extenders

On Friday, October 3, Congress passed and President Bush signed a massive financial stabilization package, The Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008 and Tax Extenders and Alternative Minimum Tax Relief Act of 2008. The law authorizes the Secretary of the Treasury to establish a troubled assets relief program, provides a temporary alternative minimum tax (AMT) fix, and extends certain expiring tax provisions and energy tax incentives.

As has been fairly heavily reported, the legislation grants the Treasury Department up to $700 billion to purchase assets from troubled financial companies in an effort to stimulate the flow of credit. The ultimate bill contained greater congressional oversight over the flow of funds to the Treasury and supposedly includes greater protections for taxpayers. Another significant provision raises the ceiling on the Federal Deposit Insurance Corporation's (FDIC) guarantee on bank deposits from $100,000 to $250,000. The bill also took aim at the so-called "golden parachutes" that executives of failed institutions can receive if their firms take advantage of the Treasury bailout plan.

What may not have been so heavily reported is the Senate's addition of the "tax extenders" package — a $150 billion piece of legislation arguably required to get the necessary votes on the rescue plan. Among the provisions are the following:

• Extension of the research and development tax credit (R&D credit) through 2009. Increase in the alternative simplified credit from 12% to 14% for 2009. Repeal of the alternative incremental research credit for 2009.
• Increase in the alternative minimum tax (AMT) exemption level.  Raising the AMT exemption level will prevent more than 21 million additional taxpayers from having to pay the AMT tax for the first time. The bill's AMT patch raises the exemption for individuals to $46,200 and to $69,950 for married couples filing jointly. In 2007, the exemption levels were $44,350 and $66,250, respectively.
• Provision permitting use of personal credits against AMT.
• Increase in tax on certain executives, including hedge fund managers who receive deferred income through offshore entities in low- or no-tax countries. The provision is designed to prevent companies from deferring the taxes owed to the federal government on such compensation.
• Requirement that securities brokers report cost basis for transactions to the Internal Revenue Service. This is intended to apply to stock, debt, commodities, derivatives and other financial transactions as may be specified by Treasury. This is designed to improve compliance in reporting gains and losses on the sale of capital assets.
• A freeze on the Section 199 manufacturing deduction for oil and gas companies. The deduction is currently 6% of qualified production activities income. It has been scheduled to increase to 9% and will do so for other industries. However, for oil and gas companies, the deduction will remain 6%. Note that there had been discussion about removing the deduction entirely for the five major oil and gas companies, but the ultimate resolution was to freeze the deduction at 6%.
• A tax credit for the purchase of plug-in hybrid-powered vehicles.
• A two-year extension of the deduction of state and local general sales taxes for individuals. This is especially relevant to taxpayers in states where there is no state income tax.
• Extension of the deduction for qualified tuition expenses through the end of 2009, allowing teachers to continue to expense their costs for classroom supplies.
• Extension of provision allowing Taxpayers older than 70 1/2 to continue to be able take up to $100,000 from their individual retirement accounts to give to certain public charities without being taxed.
• Removal of adjusted gross income limits for the refundable AMT credit and raise in the usage rate of unused credits from 20% to 50%.
• A $20 per month allowance permitted by employers for workers who commute to work by bicycle.
• Extension of the 15-year straight line cost recovery provision for qualified leasehold restaurants and retail improvements and new restaurants through 2009.
• Extension of the exception under subpart F for active financing income to the end of 2009.
• Modify preparer penalty standards to more closely conform to taxpayer standards.
• Extension of the FUTA surtax at the current level for one year.

For more information, please contact your Alpern Rosenthal representative at 412.281.2501.