On October 3, 2008, the President signed The Emergency Economic Stabilization Act of 2008 (the Act) into law. The Act contains three distinct divisions: Division A, which addresses the current economic crisis, provides for a troubled assets relief program to stabilize the economy, and contains tax reform and relief provisions; Division B, which provides for energy improvements, extensions and modifications of energy tax credits; and Division C, which contains alternative minimum tax relief, extensions of expiring individual and business tax provisions, disaster tax relief, and other miscellaneous tax provisions.
This Tax Alert discusses the major tax provisions in each of the three divisions of the Act and is intended to apprise the reader of the most important tax provisions in the Act. Baker Donelson intends to issue separate Tax Alerts in the future that will discuss some of these provisions in greater detail and address the uncertainty and unanswered questions presented by such provisions.
Division A of the Act establishes the troubled asset relief program (TARP) to purchase, and to make and fund commitments to purchase, troubled assets from financial institutions. Troubled Assets are defined in the Act as residential or commercial mortgages, or any securities, obligations or other instruments based on or related to such mortgages that were originated or issued on or before March 14, 2008.
The Secretary of the Treasury is authorized to establish and implement the TARP under the Office of Domestic Finance of the Department of the Treasury, which will be headed by an Assistant Secretary of the Treasury, who is to be appointed by the President, by and with the advice of the Senate. For immediate implementation, the Treasury Secretary is authorized to appoint an interim Assistant Secretary.
The Treasury Secretary also is authorized to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. These guarantees are to be funded by premiums collected from financial institutions participating in the Troubled Assets Insurance Financing Fund.
The Act also authorizes the purchase of troubled assets in increments with an initial $250 billion limit, subject to a Presidential certificate of a need to raise the outstanding limit to $350 billion at any one time; and thereafter subject to a Presidential written report to Congress requesting authority to raise the limit to $700 billion outstanding at any one time. The requested increase from $350 billion to $700 billion outstanding at any one time can be denied by a Congressional joint resolution of disapproval within 15 days after transmission of the Presidential written report.
Increase in FDIC and FCU Insurance
The Act temporarily increases the amount of Federal Deposit Insurance Corporation and Federal Credit Union insurance from $100,000 to $250,000. These increases became effective on October 3, 2008 and will continue through December 31, 2009.
The concept of mark-to-market accounting requires that value be assigned to a position held in a financial instrument based on the current market price for the instrument or similar instruments. Following the Enron scandal, the Financial Accounting Standards Board (FASB) issued FASB Statement 157 (FAS 157), which became effective after November 15, 2007. FAS 157 required that companies deeply mark down or reduce the value of mortgage backed securities (MBS) due to their inability to sell them, which resulted in margin calls from investors, even when cash flows from the securities suggested a much higher value. The concept of requiring mark-to-market accounting treatment for MBS has been blamed, in part, for the subprime mortgage crisis.
The Act authorizes the SEC to suspend the application of FAS 157, if the SEC determines that it would be in the public interest and would protect investors. This suspension may occur by SEC rule, regulation or order.
The Act also requires the SEC, in consultation with the Federal Reserve Board and the Treasury Department, to conduct a study on the mark-to-market accounting standards and to consider the effects on a financial institution's balance sheet, the impact on the 2008 bank failures, the impact on the quality of financial information available to investors, and to evaluate alternative accounting standards. This report is to be submitted to Congress on or before January 1, 2009. For a more comprehensive analysis of TARP, please refer to Baker Donelson's Mortgage Industry Alert, entitled "Emergency Financial Stabilization Plan Clears Congress and Gets President's Signature," issued by the Subprime Mortgage Task Force on October 3, 2008.
TARP Tax Provisions
- Preferred Stock Gains and Losses. The Act provides that gains and losses on the sales of preferred stock in FNMA (Fannie Mae) and FHLMC (Freddie Mac) by financial institutions or their holding companies will be treated as ordinary gains and losses. The preferred stock must be held by the applicable financial institution on September 6, 2008, or have been sold on or after January 1, 2008 and before September 7, 2008. This provision is intended to provide tax relief to banks and financial institutions for their losses on Fannie Mae and Freddie Mac preferred stock, and is effective for sales or exchanges occurring after December 31, 2007 in taxable years ending after such date.
- Executive Compensation of Employers Participating In TARP – Auction Purchases of Troubled Assets. · The Act provides that when Treasury buys troubled assets by auction, a tax deduction is denied to an "applicable employer" for compensation paid to a "covered executive" during or with respect to an "applicable year," to the extent the compensation exceeds $500,000. Special rules apply to avoid exceeding the limit for an applicable year through deferred compensation which will be paid in a later year. Some usual Code Section 162(m) exceptions for deductibility purposes, such as for commissions and Board-approved performance-based pay, are not available. An "applicable year" is a tax year of the employer which includes or follows the date that the aggregate Treasury auction purchases of troubled assets from the employer exceed $300 million. Certain related entities will be treated as a single employer in applying these rules. Direct purchases are included in the total purchases, but only if auction purchases are also involved. A "covered executive" includes the CEO and CFO (or anyone effectively acting in those capacities) and the three other highest-paid officers. In addition, once all troubled asset purchases from an applicable employer exceed $300 million, no new employment contract with a senior executive officer while the Act is in effect may provide for a golden parachute payment. These rules will apply for periods at least through 2009, and may be extended by approval of Congress until October 3, 2010.
- Executive Compensation of Employers Participating In TARP – Direct Purchases of Troubled Assets. This Act also provides that for direct purchases of troubled assets, if Treasury acquires a "meaningful equity or debt position in the financial institution" in the process, then Treasury must require the seller to satisfy "appropriate standards for executive compensation and corporate governance" for as long as Treasury holds that equity or debt position. These standards will include limits on the compensation of senior executive officers (the top 5 executives for 1934 Act reporting purposes), a "clawback" for recovery of bonus or incentive pay in the event of materially inaccurate reports or statements, and a prohibition against any golden parachute payment to those senior executive officers for as long as Treasury holds the equity or debt position. See the discussion of auction purchases, above, for rules restricting compensation deductions where auction purchases are also involved, and the modified golden parachute rules, below.
- Modified Golden Parachute Rules. The Act also provides that any financial institution that sells troubled assets to the Treasury is subject to new golden parachute rules. If a covered executive of an applicable employer is involuntarily terminated or leaves due to a bankruptcy, liquidation or receivership, while the Act is in effect, then the golden parachute deduction and excise tax rules apply to any resulting severance payments, even without a change in control. The covered payments include amounts that are accelerated or payable upon severance, vest or are no longer subject to a substantial risk of forfeiture on account of the separation, or are accelerated on account of severance from employment.
- Qualified Principal Residence Indebtedness Extension. The Act also extends the exclusion from gross income for discharge of principal residence indebtedness income for an additional three years, or through December 31, 2012. This Mortgage Forgiveness Debt Relief Act of 2007 provision previously was discussed in Baker Donelson's January 7, 2008 Tax Alert, entitled "End Of The Year Tax Legislation For 2007."
TAX RELIEF AND EXTENDERS:
Division C of the Act, entitled "Tax Extenders and Alternative Minimum Tax Relief," includes alternative minimum tax relief provisions, extensions of expired or soon-to-be expired individual and business tax provisions, disaster tax relief, revenue raisers and miscellaneous tax provisions.
Increased 2008 AMT Exemption Amounts
In determining the alternative minimum tax (AMT) amount, taxpayers apply the AMT tax rate against their alternative minimum taxable income (AMTI), as reduced by the taxpayer's exemption amount. Congress previously had temporarily increased the exemption amount for 2007. The Act provides a similar temporary increase for 2008. The Act increases the AMT exemption amounts for tax years beginning in 2008 to the following amounts:
- $69,950 for couples filing jointly or surviving spouses (increased from $66,250 for 2007);
- $46,200 for single persons (increased from $44,350 for 2007); and
- $34,975 for married persons filing separate returns (increased from $33,125 for 2007).
Extension of AMT Offset by Nonrefundable Personal Credits and Increased Credit Amount
The Act extends for tax years beginning in 2008 a "patch" that permits all otherwise allowable nonrefundable personal credits to offset AMT. These credits include the child and dependent care credit, credit for the elderly and disabled, child tax credit, and the Hope and Lifetime Learning credits, among others. The Act also increases through 2012 the AMT refundable credit amount for individuals with long-term unused credits for prior year minimum tax liability.
The following is a brief summary of the individual tax extenders:
- Election to Deduct State and Local Sales Taxes. The Act extends for two years a provision that permits taxpayers to deduct state and local general sales taxes in lieu of deducting state and local income taxes. This election is available for tax years beginning before January 1, 2010.
- Deduction of Qualified Tuition and Related Expenses. The Act extends through December 31, 2009 the above-the-line deduction for higher-education expenses. Taxpayers may deduct qualified tuition and related expenses paid for the enrollment or attendance at an eligible institution of higher education. The deduction applies to expenses of the taxpayer, the taxpayer's spouse, or any dependent for whom the taxpayer may claim a personal exemption. The deduction is available for expenses during the tax year for which the deduction is claimed, or in connection with an academic term beginning in that year or during the first three months of the next year. The maximum amount of the deduction varies from $2,000 to $4,000, depending on the taxpayer's income.
- Deduction for Certain Expenses of Eligible Educators. Elementary and secondary teachers, instructors, counselors, principals, or aides make take an above-the-line deduction of up to $250 for out-of-pocket expenses paid for materials used in the classroom, including equipment, books and supplementary materials, supplies, computer equipment and software. The deduction is available for tax years beginning in 2008 or 2009.
- Additional Standard Deduction for Real Property Taxes for Nonitemizers. For 2008 only, nonitemizers may deduct a portion of their real property taxes. These taxpayers will add to their standard deduction a real property tax deduction. The real property tax deduction equals the lesser of (i) $500 for singles or $1,000 for a joint return and (ii) the amount allowable as a state and local real property tax deduction under the itemized deduction rules.
- Tax-Free Distributions from IRAs for Charitable Donations. The Act extends for 2008 and 2009 a provision that allows tax-free treatment of distributions from traditional or Roth IRAs if the taxpayer donates the distribution to charity. A taxpayer may exclude up to $100,000 of qualified charitable distributions from gross income in a tax year. To qualify, the charitable distribution must meet the following criteria:
- The distribution is made on or after the date on which the the IRA owner has reached age 70 ½; and
- The IRA trustee makes the distribution directly to a charitable organization. For this purpose, charitable organization does not include a private foundation under Code Section 509(a)(3) or a donor advised fund under code Section 4966(d)(2).
- Treatment of Certain Dividends of Regulated Investment Companies (RICs). The Act extends through 2009 a provision permitting RICs to designate all or a portion of a dividend as an interest-related dividend. Interest-related dividends received by foreign taxpayers generally are exempt from U.S. taxation.
- Look-Through Rule for RIC Stock for Purposes of Determining Estates of Nonresident Noncitizens The Act extends an estate tax look-through rule for determining whether property of a decedent is treated as property within the United States. Look-through applies for nonresident noncitizens who die during 2008 or 2009.
- RICs as Qualified Investment Entities. Through the end of 2009, RICs are included as "qualified investment entities" for purposes of determining whether a distribution received by a foreign person is treated as gain subject to the Foreign Investors in U.S. Real Property Tax Act.
The following is a brief summary of some of the important business tax extenders:
- Extension and Modification of Research Credit. The Act includes several changes to the research credit. First, the Act extends availability of the regular research credit for amounts paid or incurred during the 2008 and 2009 calendar years. The credit was previously scheduled to expire at the end of 2007. The Act also eliminated taxpayers' option to elect an alternative incremental research credit (AIRC) in lieu of the regular research credit. Taxpayers still may elect an alternative simplified research credit (ASC) in lieu of the regular research credit, which for 2009 is increased from 12% to 14% of the excess of the qualified research expenses for the tax year over 50% of the average qualified research expenses for the three prior tax years. The Act also includes certain computational changes to the amount of the research credit.
- Subpart F Exception for Active Financing Income and Extension of Look-Through Rule. The Act extends through the end of 2009 the active financing income exception from Subpart F income for earnings of a controlled foreign corporation (CFC) engaged in an active banking, financing or similar business. The Act also extends through the end of 2009 a look-through rule deferring certain dividends, interest, rents, and royalty payments received by one CFC from a related CFC.
- Extension of 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant and Retail Improvements. The Act provides that qualified leasehold improvement property, qualified restaurant improvement property and qualified retail improvement property placed in service in 2009 must be depreciated over 15 years under MACRS.
- New Markets Tax Credits (NMTCs) Extended. The Act extends the NMTC provisions from their pre-Act expiration date of December 31, 2008 until December 31, 2009. The NMTC provisions provide tax credit incentives for qualified equity investments in community development entities that make loans or invest in economically distressed areas, including those areas affected by Hurricane Katrina. The NMTC provisions previously were discussed in Baker Donelson's Tax Alert entitled "Spotlight on Real Estate Development in The Gulf Opportunity Zone: Tax incentives for Alabama, Louisiana and Mississippi," dated February 22, 2006.
- Work Opportunity Tax Credit. The Act also retroactively extends the work opportunity tax credit for Hurricane Katrina employees hired after August 27, 2007 until December 31, 2009. This credit is intended to assist businesses located in the Hurricane Katrina disaster area and previously was discussed in Baker Donelson's Tax Alert entitled "Katrina Emergency Tax Relief Act of 2005," dated September 26, 2005.
- Rehabilitation Credit for GO Zone Structures. The Act also extends the expiration date for the increased rehabilitation credit applicable to structures in the Gulf Opportunity Zone (GO Zone) from December 31, 2008 until December 31, 2009. This rehabilitation credit is extended another year from 20% to 26% of qualified rehabilitation expenditures for certified historic structures and from 10% to 13% for qualified rehabilitated buildings located in the GO Zone.
Disaster Tax Relief
The Act provides relief measures for taxpayers in currently-existing disaster areas which resulted from severe weather in the Midwest and from Hurricane Ike. In addition, the Act provides more comprehensive relief for taxpayers in all Federally-declared disaster areas in calendar years 2008 and 2009.
- Midwestern Disaster Tax Relief and Hurricane Ike Disaster Tax Relief. The provisions applicable to Midwestern states generally expand the Hurricane Katrina GO Zone tax benefits to include the "Midwestern Disaster Area," with certain exceptions. The Midwestern Disaster area includes the States of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Washington. Specifically included in these relief measures are, among others, waiver of the 10% penalty on early withdrawals from certain retirement plans; tax-exempt bond financing, low-income housing credits, expensing for certain demolition and clean-up costs, expensing for environmental remediation costs, an increase in the rehabilitation credit, favorable treatment of net operating losses, and a temporary suspension of limitations on charitable contributions which assist disaster relief efforts.
The Hurricane Ike relief provisions are narrower, extending tax-exempt bond financing and low-income housing tax credits to the Hurricane Ike disaster area. This area includes certain enumerated counties in Texas and parishes in Louisiana.
- National Disaster Tax Relief. The most far-reaching provisions of the Act provide tax relief for any Federally-declared disaster which occurs between December 31, 2007 and January 1, 2010. The key relief measures are as follows:
- Individual Casualty Loss. Under Code Section 165(h), taxpayers may itemize deductions for individual casualty losses. However, any deductions under this section must exceed two thresholds: (1) a $100 per casualty floor and (2) a 10% of adjusted gross income floor for all casualty loss deductions claimed. Under the Act, the 10% of adjusted gross income floor is waived entirely in the case of disaster victims, but the individual casualty floor is increased to $500. In addition, the Act allows non-itemizing disaster victims to add casualty losses to the standard deduction (to the extent each individual casualty loss exceeds $500).
- Qualified Disaster Expenses. Under current law, costs incurred in cleanup, demolition, environmental remediation, and repair must be capitalized. The Act provides that these costs may be deducted by disaster victims in the year they are incurred. However, recapture provisions will apply to these deductions if the property is later disposed of by the taxpayer.
- Net Operating Loss Carryback Extension. Current law allows excess net operating losses to be carried back over a period of two years. When a net operating loss is carried back to an eligible previous tax year, taxpayers are usually entitled to a tax refund. The Act extends the carryback period to five years for net operating losses created by casualty losses and qualified disaster expenses.
- Additional Depreciation. Businesses in Federally-declared disaster areas are eligible for additional depreciation of new personal and real property acquired by the business. Under the Act, businesses may deduct a full 50 percent of the cost of the acquired property in the year of purchase. Furthermore, the Act provides that the additional depreciation deductions will be exempt from the alternative minimum tax. Eligible property must be placed in service on or before December 31, 2011 in the case of personal property, and on or before December 31, 2012 in the case of real property. The Act provides recapture rules for the deducted amounts if the taxpayer later disposes of the property or ceases to use it in the trade or business.
- Increased Expensing. Under Code Section 179, businesses may expense in the year of purchase up to $250,000 of the cost of new tangible property or computer software acquired for use in the trade or business. The Act increases this expensing ceiling by the lesser of $100,000 or the cost of qualified Section 179 disaster property acquired. Thus, a maximum of $350,000 of the cost of Section 179 property may be expensed by businesses which are damaged by a Federally-declared disaster. Current law provides that the standard $250,000 ceiling is gradually phased out by the amount which the purchased Section 179 property exceeds $500,000 in cost. The Act increases this phase-out amount to the lesser of $600,000 or the cost of the purchased property. As with the additional depreciation provisions, the Act provides recapture provisions for amounts deducted under Section 179 if the property ceases to be used in the trade or business.
ENERGY TAX PROVISIONS:
Division B of the Act, entitled the "Energy Improvement and Extension Act of 2008," includes numerous extensions and modifications of existing energy tax incentives, as well as the addition of new energy tax incentives.
- Extensions and Modifications of Existing Renewable Energy Incentives for Individuals. The Act includes extensions of a number of energy tax credits primarily available to individuals that were set to expire on December 31, 2008 or January 1, 2009. Energy tax credits being extended and/or modified include:
- Credit for residential energy efficient property. The Code Section 25D residential energy efficient property credit is extended through December 31, 2016, and such credit is expanded to apply to certain wind turbine and geothermal heat pump expenditures. The Act also allows the credit to offset the AMT.
- Nonbusiness energy property credit. The Act reinstates the Code Section 25C nonbusiness energy property credit, extends the credit to certain stoves and water heaters using biomass fuel (meaning any plant-derived renewable fuel, including wood) for expenditures after December 31, 2008, and extends the credit to asphalt roofs with cooling granules for property placed in service after October 3, 2008, the date of enactment of the Act. The Act also modifies the efficiency standard that certain appliances placed in service after December 31, 2008 must meet in order to qualify for the credit.
- Extensions and Modifications of Existing Energy Incentives for Businesses. The Act also includes extensions of a number of energy tax credits primarily available to businesses that were set to expire on December 31, 2008 or January 1, 2009. Energy tax credits being extended and/or modified include:
- Renewable energy production credit. The Act extends the placed-in-service date for most facilities pursuant to Code Section 45, adds marine and hydrokinetic renewable energy facilities to the categories of facilities eligible for the credit, and adds special provisions applicable to refined coal used as steel industry fuel.
- Energy credit. The business energy credit pursuant to Code Section 48 for solar energy property, fuel cell property, and microturbine property is extended through December 31, 2016 and includes combined heat and power system property, qualified small wind turbine property, and geothermal heat pump systems in the categories of property eligible for the credit.
- Coal industry provisions. The Act includes a number of provisions primarily applicable to coal projects and the coal industry. The Act includes tax credit recapture for projects that fail to meet specified carbon dioxide sequestration requirements and extends and modifies the advanced coal project investment credit and the coal gasification investment credit. The Act also extends the temporary increase of the coal excise tax, provides for an excise tax refund to certain coal producers and exporters, and restructures the Black Lung Disability Trust Fund.
- Energy efficient appliance credit. The Act extends and expands the Code Section 45M energy efficient appliance credits for energy-efficient dishwashers, clothes washers, and refrigerators produced after December 31, 2007.
- Biodiesel and renewable diesel credits. The Act extends the income and excise tax credits for biodiesel and renewable diesel through December 31, 2009, modifies the credits, and increases the credits for biodiesel and biodiesel mixtures.
- Alternative fuel and fuel mixture credits. The Act extends the alternative fuel and alternative fuel mixture credits through December 31, 2009. The Act modifies the alternative fuel credit to include compressed or liquified natural gas and alternative fuel used for aviation and to require carbon capture requirements to alternative fuels derived from coal.
- Alternative fuel vehicle refueling property credit. The Act extends the alternative fuel vehicle refueling property credit through December 31, 2010 and adds electricity to the list of clean-burning fuels that can be dispensed from property eligible for the credit.
- Publicly traded partnerships. A publicly traded partnership will not be taxed as a corporation if 90% or more of its income during a tax year consists certain passive-type income, including income and gains from developing, processing, refining, transporting, and marketing natural resources, and the Act adds industrial source carbon dioxide and biodiesel and certain other fuels to the list of such natural resources.
- Other incentives. The Act extends the Code Section 179D energy efficient commercial building deduction through December 31, 2013, extends and modifies the Code Section 179C election to expense certain refineries and extends the suspension of the taxable income limit on percentage depletion for oil and natural gas produced from marginal properties.
- New Energy Provisions.
The Act contains the following new energy provisions:
- Carbon Dioxide Sequestration Credit. The Act adds a new business tax credit for carbon dioxide captured from an industrial source and either sequestered or used in a qualified enhanced oil or natural gas recovery project after October 3, 2008.
- New qualified plug-in electric drive motor vehicle credit. The Act creates a new credit for tax years beginning after December 31, 2008 for new qualified plug-in electric drive motor vehicles placed in service by a taxpayer. The new credit can be taken by individuals and businesses and is creditable by individuals against the AMT.
- Carbon Audit of Tax Code. The Act directs the Secretary of the Treasury to engage the National Academy of Sciences to study the provisions of the Internal Revenue Code having the largest effects on carbon and other greenhouse gas emissions and report its findings to Congress within two years.
- New Clean Renewable Energy Bonds. The Act establishes a new category of qualified tax credit bonds for state and local governments, state utilities, and cooperative electric companies used for capital expenditures for qualified renewable energy facilities. There is a national limit of $800 million for these bonds, up to one-third of which can be allocated to qualified projects by state and local governments, state utilities, and cooperative electric companies, respectively.
- Qualified Energy Conservation Bonds. The Act establishes a new category of tax credit energy conservation bonds for state and local government projects focused on reducing energy consumption in publicly-owned buildings; implementing green community programs; rural development involving electricity from renewable energy sources; and other qualified projects to reduce greenhouse gas emissions. There is a national limit of $800 million for these bonds, allocated to the states, municipalities and tribal governments.
REVENUE OFFSETS AND MISCELLANEOUS TAX PROVISIONS:
Spread throughout Divisions B and C of the Act are revenue offset provisions, as well as other miscellaneous tax provisions.
- Revenue Offset Provisions.
- Limitation of Domestic Production Activities Deduction for Oil and Gas Production Code Section 199 provides a deduction equal to 6% of a taxpayer's qualified production activities income. For 2010, the Section 199 deduction is scheduled to increase to 9%. The Act freezes the Section 199 deduction at the current level of 6% for taxpayers with oil related qualified production activities income, which is defined to include income attributable to the production, refining, processing, transportation or distribution of oil, gas, or any primary product thereof.
- Brokers Required to Report Basis on Sales of Stock. The Act creates mandatory basis reporting by brokers for transactions involving publicly traded securities, such as stock, debt, commodities, derivatives and other items as specified by the Treasury. Currently, brokers are required to file with the IRS annual information returns providing the gross proceeds realized by customers from various sale transactions. The Act will obligate brokers to also report the customer's adjusted basis in the securities sold and whether any gain or loss recognized with respect to the transaction is long-term or short-term. The effective date of this provision varies based on the type of security traded. For corporate stock, the effective date of this provision is January 1, 2011. For stock acquired through a periodic stock investment plan and in a regulated investment company, the effective date is January 1, 2012. For all other securities, the effective date is January 1, 2013, or a later date as determined by the Secretary.
- Extension of the Additional 0.2% FUTA Surtax. The Federal Unemployment Tax Act (FUTA) imposes a 6.2 percent gross tax rate on the first $7,000 paid annually by covered employers to employees. In 1976, Congress passed a temporary surtax of 0.2%, which subsequently has been extended through 2008. The Act further extends the 0.2% FUTA surtax for one additional year through December 31, 2009.
- Oil Spill Liability Trust Fund. The Act extends the oil spill tax through December 31, 2017, and increases the per barrel tax from 5 cents to 8 cents for the tax years 2009 through 2016 and then to 9 cents for 2017. The Act also repeals the requirement that the oil spill tax be suspended when the unobligated balance of the Oil Spill Liability Trust Fund exceeds $2.7 billion. The oil spill tax generally applies to crude oil received at a U. S. refinery and to petroleum products imported into the U. S. for consumption, use or warehousing. The tax increase is effective beginning January 1, 2009, while the remaining provisions are effective on October 3, 2008.
- Modification of Foreign Tax Credit Limitations for Certain Oil and Gas Income. The Act eliminates the distinction between foreign oil and gas extraction income (FOGEI) and foreign oil related income (FORI) that currently exists in the application of the foreign tax credit. Currently, FOGEI and FORI have separate foreign tax credit limitations. FOGEI relates to upstream production (extracting the oil from the well) and FORI relates to the downstream processes (i.e., transportation and refining). The Act combines the FOGEI and FORI into one foreign oil bucket and applies the existing FOGEI limits to the one bucket. Consequently, amounts paid as foreign taxes on FOGEI and FORI qualify for the foreign tax credit to the extent that they do not exceed the product of the highest marginal U.S. tax rate on corporations (presently 35%) multiplied by such income.
- Miscellaneous Tax Provisions
- Non–Qualified Offshore Deferred Compensation. The Act enacts new Code Section 457A, which determines the timing and rate of taxation for non-qualified deferred compensation from certain offshore entities. Deferred compensation which is based on post-2008 services is taxable when it ceases to be subject to a substantial risk of forfeiture – normally when no future substantial services are required for a vested right to future payment. However, when the amount of compensation cannot be determined upon the lapse of a substantial risk, taxation is delayed until it can be valued. In those cases, the income tax rate is increased by 20% of the compensation, plus an interest charge. With limited exceptions, Code Section 457A applies to the same broad types of deferred compensation which are covered by existing Code Section 409A. Key exceptions will apply to include SARs and some similar equity-related grants (other than certain non-discounted options and restricted stock), even if not discounted at grant. Deferred compensation which is based on pre-2009 services must be included in income by the end of 2017, or later if a substantial risk of forfeiture then still exists. The rules of existing Code Section 409A and other U. S. tax laws also continue to apply.
- Reduction in Income Threshold for Refundable Portion of Child Tax Credit. For 2008, the Code Section 24 child tax credit for families with three or more children will be refunded to the taxpayer to the extent of 15% of the taxpayer's earned income in excess of $12,050 (up to the per child credit amount), if the taxpayer's total tax liability reduced by nonrefundable tax credits previously taken, is less than the taxpayer's available child tax credit. The Act increases the refundable portion of the Code Section 24 child tax for 2008 only by reducing the income threshold used to calculate the refundable portion of the child tax credit from $12,050 to $8,500.
- Incentives for U.S. Film and Television Productions. The Act extends through December 31, 2009 the Code Section 181 tax incentive for U.S. film and television productions. Code Section 181 allows taxpayers to elect to deduct up to $15 million of the costs of a qualified film and television production (defined as a film or television production in which at least 75% of the total compensation of the production, not including participation and residuals, is paid for services in the U.S. by actors, directors, producers, and other relevant production personnel). The Act also modifies the Code Section 199 deduction for domestic production activities for taxable years beginning after December 31, 2007.
- Accelerated Depreciation of Farming Equipment. The Act provides that any machinery or equipment used in a farming business (other than a grain bin, cotton ginning asset, fence or other land improvement) placed in service after December 31, 2008 and before January 1, 2010 is depreciated as five-year property.
- Modification of Tax Return Preparer Penalty. Code Section 6694 imposes a penalty on a tax return preparer for any understatement of tax liability on any tax return or claim for refund attributable to an "unreasonable position." A similar penalty is imposed on taxpayers. Prior to the Act, a tax return preparer would be subject to the understatement penalty if the tax return preparer did not reasonably believe that the position would more likely than not be sustained on the merits. Effective for returns prepared after May 25, 2007, the Act conforms the standards for tax return preparers to the standards applicable to taxpayers, requiring generally only that positions be supported by substantial authority. However, as to returns prepared for years ending after October 3, 2008, positions with respect to a tax shelter or a reportable transaction under Code Section 6662A still require a reasonable belief that that such position will more likely than not be sustained on its merits.