March 2008

• • • • • • •

In the 1980's, a Wendy's commercial titled "Fluffy Bun" featured an elderly actress searching for the meat in an oversized bun and asking "where's the beef?" The obvious answer was: other burgers had very little beef, but Wendy's burgers were filled to overflowing with it.

There are several parallels between the Wendy's commercial and the bipartisan Economic Stimulus Act of 2008 (the Act). First, there is the magnitude of the Act. The competitors' beef patties were very small in comparison to their buns - and the rebates available are relatively small in comparison to the economy. The idea of the Act is to jump start the massive $13 trillion U.S. economy. Congress crafted, and the President signed, a bill that is expected to put $152 billion in the hands of consumers in order to help the economy. But will injecting buying power equal to 1% of the economy really have a significant effect? Only time will tell.

A second parallel is that, regardless of the size of the beef patty, there is still something to eat on the bun - and that is true of the Act as well. It has two major features: the one that received substantially all the attention is the "rebate" payment that will go to approximately 130 million Americans. Technically called "advance credit payments," these monies are expected to total approximately $108 billion. This article will discuss that feature.

The second major feature of the Act is an increase in the amount of equipment purchases businesses can expense in 2008. This benefit, along with some additional help for homeowners caught in the credit crunch, is expected to provide approximately $45 billion in tax savings for small businesses, which Congress hopes will encourage spending. For further discussion of these provisions, see this month's general business article.

What's In It For You?

So far, the Act sounds good to the average taxpayer, but just exactly what is the definition of an average taxpayer? Do you fit in this category and how much will the rebate be anyway?

The rebate amount will depend on your 2007 adjusted gross income, but there are a few maximum amounts to keep in mind. To understand how the law will affect you, you must understand what it really does. The "rebate" is actually an advance payment for a credit you would get on your 2008 tax return as a result of the law. Keep this in mind as we continue our discussion.

The maximum a single taxpayer can hope to get is an amount equal to their 2007 income tax liability, not to exceed $600. The amount is double that for taxpayers who are married and filing jointly. In addition you will receive $300 for each qualifying child, with the definition of a qualifying child being the same as a child who qualifies for the child tax credit.

One of the major issues in negotiating the bill centered on individuals who don't pay tax, such as those who depend on Social Security, those receiving certain veteran's benefits, and individuals who earn enough to pay employment taxes. If the combination of an individual's earned income, Social Security benefits and veteran's benefits equals or exceeds $3,000, that individual will be eligible for a $300 credit. Alternatively, if a person has at least a $1 tax liability and income equal to the standard deduction amount ($8,950 for singles and $17,900 for joint filers), he or she will also be eligible for the $300 credit.

Earlier, we discussed the fact that the rebate you get depends on your 2007 adjusted gross income. That's because the IRS will assume that your income for 2007 is indicative of your 2008 tax liability. Since the rebate is really an advance payment of a credit against 2008 taxes, this assumption is a key one. It's also a very good reason to file your 2007 tax return as quickly as possible, since you won't get a rebate until the IRS can calculate it based on 2007 numbers.

There is, as usual, some bad news for high-income earners. The rebates begin to phase out at $75,000 for singles and $150,000 for joint filers. If you are single and have no children, your rebate will phase out completely at $87,000 of adjusted gross income, while the comparable number for joint filers is $174,000. If you have qualifying children, the phase-out formula is such that the point of total loss is higher than the $87,000 or $174,000 just mentioned.

So Are You Confused?

The foregoing is a high level overview of the new law. The fact is that there are various other eligibility requirements and the calculations are not as easy as they might sound. The good news is you won't have to worry about calculating the amount of rebate for which you qualify - the IRS will do that. Your job will be to get your tax return filed quickly and accurately so that, when the rebates begin to be paid in May, yours won't be delayed. To minimize the time it will take you to get your refund, you should consider providing the IRS with authorization to deposit it directly into your account.

Final Thoughts

When you think about it, by basing the rebate amount on 2007 adjusted gross income, Congress and the President have put you in a box of sorts. The need to file early is great if you have a refund coming, but those who expect to owe - and also expect a rebate - will have a decision to make; file early and pay the tax to get the rebate as soon as possible or extend and put off receiving it. Realistically, though, regardless of when you file, your 2007 tax is due in April anyway. For this reason, it's best to file as early as possible and, as always, if you need help, give us a call.
 

Back to top of page

• • • • • • •

General Business News

Is Now The Time To Buy?

According to a lot of pundits, the U.S. economy looks to be slipping into a recession. The leading economic indicators seem to be heading south; housing starts are down and foreclosures are up. Adding up all the recent bad economic news, and mixing in the fact that 2008 is a presidential election year, Congress and the President felt it would be a good idea to try and give a boost to the country's $13 trillion economic engine; hence, the birth of the Economic Stimulus Act of 2008 (the Act).

The Act provides about $107 billion in cash to taxpayers in 2008, which Congress hopes will be spent, and $45 billion in tax relief to business. We discuss the individual taxpayer rebates in the Tax and Accounting article this month and will address the business aspects in this article.

Tax breaks offered to businesses come in the form of increased expensing of equipment purchases and the allowance of 50% bonus depreciation for 2008. These are the same type incentives offered in the wake of the economic downturn after the September 11, 2001 terrorist attacks and the Gulf Coast Hurricanes in 2005. Interestingly enough, the biggest tax break comes from the allowance of the bonus depreciation and not the increase in the election to expense equipment purchases.

Increase In Expensing Equipment Purchases

Under prior law, a business could deduct up to $128,000 in equipment purchases in a year instead of depreciating the equipment over more than one year. If the cost of qualified property exceeded $510,000, the deduction started phasing out. The new law increases the amount that's deductible under Code Section 179 to $250,000 for 2008. It also increases, to $800,000, the point at which businesses start losing Code Section 179 benefits.

There is no change in the definition of qualifying property under the new law. Basically, any tangible personal property that is actively used in a trade or business, and for which a depreciation deduction is allowable, will qualify. The property must also be used more than 50% for business purposes. Off-the-shelf computer software is qualifying property for purposes of the expense election.

As in all laws, wording is everything. It's important to note that the increased deduction is for qualifying property purchased in a taxpayer's year that begins in 2008. For example, assume your business is on an August 1 to July 31 year-end. The year you are currently in started in 2007 and any purchases before August 1, 2008 will still be subject to the $128,000 and $510,000 limitations. Beginning in August 2008 and ending on July 31, 2009, though, your business will be subject to the higher limits.

The Congressional Joint Committee on Taxation estimates this tax reduction will amount to a whopping $1 billion. At the median tax rate of all taxpayers (around 14.3%), this amounts to perhaps an additional $7 billion in qualifying purchases.

The Really Big Prize

There are a number of reasons the increase in the 179 expense deduction does not yield significant tax savings. Businesses must first have taxable income to avail themselves of the deduction and the limitations, however generous. Still excluded are a large group of taxpayers who invest millions and billions in new equipment each year. The allowance of 50% first year bonus depreciation does not suffer from these limitations.

To be eligible for the 50% bonus depreciation, property must be placed in service after December 31, 2007 and before January 1, 2009. Property eligible for this increased depreciation must 1) be eligible for MACRS depreciation and have a recovery period of 20 years or less; 2) be off-the-shelf computer software; 3) be water utility property; or 4) be qualified leasehold property. In addition, the use of the property must originate with the taxpayer - used equipment will not qualify for the 50% bonus depreciation.

Certain property will be allowed a one-year extension of the placed-in-service date, including: property with a greater than 10 year recovery life, transportation equipment, and equipment purchased under a binding written contract entered into after December 31, 2007 and before January 1, 2009. The new law will allow a maximum first year deduction for luxury automobiles of $11,060.

The Joint Committee on Taxation estimates this provision will decrease tax revenue by $44 billion in 2008, but the government will recoup this in the future through decreased depreciation deductions.

Parting Thoughts

It remains to be seen whether the Act will actually jump start the U.S. economy; however, what is certain is that it gives business taxpayers a powerful incentive to purchase equipment in 2008. If you are planning to purchase equipment that would qualify for the new tax rules, consider buying it in 2008, even if you had previously planned on a 2009 purchase. As with everything in life, timing is the key to maximizing your capital equipment dollar. Give us a call and let's look at a few scenarios before you make your next big purchase.
.

Back to top of page

• • • • • • •

What's New In Technology

Back to top of page

• • • • • • •

2008 Seminar Series

Leverage Your Business With Technology

Innovative Client Solutions

Presented by Strothman Technology Consultants

Bob Boyle and Brian Jackson

 Thursday, March 20, 2008

Owl Creek Country Club

Registration 7:30 AM

Seminar 8:00 AM – 10:00 AM

Refreshments Provided

Business owners are always looking for ways to improve the bottom line and provide better value for their customers. This requires a business owner to think “outside the box.” One of the most effective methods is to leverage technology in ways that address critical business and customer needs.

An assessment of your Business’s technology will provide a distinct advantage in the marketplace. The assessment may result in recommendations that include expanding your web site, use of a document management system to reduce paper or implementing a customer relationship management system to improve customer information.

Strothman & Company's Technology Group is on "The Cutting Edge" of current technology and will share how you can leverage your business with technology to improve your bottom line and keep you ahead of your competition.

Please invite friends and associates to attend this seminar. The fee for the seminar is $25. Each Strothman & Company seminar qualifies for two hours of Continuing Professional Education (CPE) for CPAs.

Please make your reservations by  Monday, March 17, 2008 in one of the following ways:

• Call 502.585.1600

• Email Donna Nevitt:  dnevitt@strothman.com

• www.strothman.com - Events section - 'Sign up today' and include your Name and Company

Back to top of page

If you have any questions, please call us at 502.585.1600 or email info@strothman.com