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Hiring Incentives to Restore Employment Act of 2010

The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” (i.e. HIRE Act). The centerpiece of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. In addition to these new hiring incentives, the HIRE Act also includes a one-year extension of the enhanced small business depreciation expensing option under Code Sec. 179 . If you have any questions about how the new changes may affect your specific situation, please contact a Moore Colson tax professional at 770-989-0028.

The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year.
Workers hired after Feb. 3, 2010 are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after March 18, 2010 receive the exemption for payroll taxes.
There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
An employer can't claim the new tax breaks for hiring family members.
A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
The payroll tax holiday doesn't apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
The new law extends for tax years beginning in 2010, the Sec. 179 depreciation expense maximum amount of $250,000 and the $800,000 threshold of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009.

If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to contact a Moore Colson tax professional at 770-989-0028.

Tax changes affecting small businesses in the health reform legislation.

For owners of small businesses and their workers, the recently enacted health reform legislation has some key provisions to pay attention to. The major ones include: tax credits; excise taxes; and penalties. But whether a business will be affected by them depends on a variety of factors, such as the number of employees the business has. I'm writing to give you an overview of the provisions in the new law with the biggest impact on small business. If you have any questions about how the new changes may affect your specific situation, please contact a Moore Colson tax professional at 770-989-0028.

Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for non-elective contributions to purchase health insurance for their employees. The credit can offset an employer's regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.
Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's non-elective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase.

Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won't have to worry about this provision because employers with fewer than 50 employees aren't subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn't offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than projected. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to contact a Moore Colson tax professional at 770-989-0028.

Tax changes affecting individuals in the health reform legislation.

Below is a brief overview of the key tax changes affecting individuals in the recently enacted health reform legislation. If you have any questions about how the new changes may affect your specific situation, please contact a Moore Colson tax professional at 770-989-0028.

Individual mandate. The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty after 2013. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance. The health care legislation provides tax credits to low and middle income individuals and families for the purchase of health insurance. Specifically, for tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis.

Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be subject to a tax increase on wages and a new levy on investments.

Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit. Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed persons will pay 3.8% on earnings over the threshold.
Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans. Effective on Mar. 30, 2010, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.

If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to contact a Moore Colson tax professional at 770-989-0028.

The Worker, Homeownership and Business Assistance Act of 2009 (WHBAA) was signed into law Nov. 6. Not only does the act extend unemployment benefits for millions of Americans, but it also extends and enhances the homebuyers credit and the five-year net operating loss (NOL) carryback election for businesses.

The homebuyers credit

Last year, a refundable tax credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, and generally required repayment. But in February the American Recovery and Reinvestment Act of 2009 (ARRA) extended its availability to purchases made before Dec. 1, 2009, and generally removed the repayment obligation for qualifying purchases after Dec. 31, 2008.

WHBAA has now extended the credit to purchases made before May 1, 2010 — or July 1 if a binding contract is in place before May 1 to close on the purchase before July 1.

The maximum credit remains at $8,000 ($4,000 for married filing separately) for first-time homebuyers. For purposes of the credit, a first-time homebuyer is someone who has had no ownership interest in a principal residence in the United States during the prior three-year period.

In addition, WHBAA expands the credit to many "long-time" homeowners purchasing a subsequent home. The maximum credit for these taxpayers is $6,500 ($3,250 for married filing separately). To qualify, the homeowner must have maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the purchase date of a subsequent principal residence.

WHBAA also significantly increases the modified adjusted gross income (MAGI) phaseout ranges for the credit. For qualifying purchases made after Nov. 6, 2009, the phaseout range is $225,000-$245,000 for joint filers, $125,000-$145,000 for single filers.

WHBAA does add a few new limits. Effective for purchases made after Nov. 6, 2009, no credit is allowed if:

The home's purchase price exceeds $800,000 (regardless of regional market factors),
The homebuyer (or his or her spouse) is related to the seller,
The homebuyer is under age 18 on the date of purchase (unless his or her spouse meets the age requirement), or
The homebuyer is the dependent of another taxpayer.

There are other expansions, enhancements and limitations as well, so it's important to consult your tax advisor to determine whether you're eligible for the credit.

The NOL carryback

Generally, when business deductions exceed gross income, the difference is an NOL for tax purposes and may be carried back two years to offset income. This generates a tax refund, providing a cash infusion in times of loss. Any loss that's not absorbed is carried forward up to 20 years.

ARRA allowed taxpayers to elect to carry back 2008 NOLs from qualifying small businesses (businesses with average gross receipts of $15 million or less for the three years ending with the loss year) for three, four or five years instead of two. WHBAA expands the longer carryback option to businesses that don't qualify as "small" and extends it to 2009 NOLs.

Under WHBAA, generally taxpayers can apply the longer carryback to only one tax year's NOL and to offset only 50% of income in the fifth year back, 100% in the other four. For qualifying small businesses, taxpayers can apply the longer carryback to both 2008 and 2009 NOLs, and the 50% limit applies only to 2009 NOLs.

Taxpayers also have the option to use the normal two-year carryback or to waive the carryback period entirely and carry the loss forward. The extension and expansion of the homebuyers credit and the five-year NOL carryback option could provide you or your business with a valuable tax-saving opportunity. But the rules surrounding these breaks are complex. We'd be glad to help you determine whether you're eligible and, if so, how you can make the most of these breaks.

Are you eligible?

The extension and expansion of the homebuyers credit and the five-year NOL carryback option could provide you or your business with a valuable tax-saving opportunity. But the rules surrounding these breaks are complex. We'd be glad to help you determine whether you're eligible and, if so, how you can make the most of these breaks.

Highlights of the American Recovery and Reinvestment Act

The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) contains a wide-ranging tax package. The information below covers three main areas: changes affecting individuals and families, changes affecting businesses and the energy incentives tax. If you have any questions or would like to know how this new law may affect you, please call your Moore Colson Tax Consultant at 770-989-0028.

Tax Changes Affecting Individuals and Families

Here is an overview of the tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers.

“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.

Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.

Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.

Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.

Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the earned income threshold to $3,000 (from $8,500 in 2008).

Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.

Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.

Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.

Tax break for new car purchasers. The new law allows taxpayers to deduct State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes.

Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

Changes Affecting Businesses

Below is an overview of the key tax changes affecting business in the “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act).

Extension of bonus depreciation. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write off 50% of the cost of depreciable property acquired in 2008 for use in the United States. The new law extends this temporary benefit for qualifying property purchased and placed into service in 2009.

Extension of enhanced small business expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The new law extends these temporary increases for capital expenditures incurred in 2009.

Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Incentives to hire unemployed veterans and disconnected youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The new law expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.

Extension of monetization of accumulated AMT and R&D credits in lieu of bonus depreciation. The new law extends the provision contained in the Foreclosure Prevention Act of 2008 and allows AMT and loss taxpayers in 2009 to receive 20% of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets that qualify for bonus depreciation.

Delayed recognition of certain cancellation of debt income. To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income (“CODI”) over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five tax years) for specified types of business debt repurchased by the business in 2009 or 2010.

Qualified small business stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50% to 75% for stock issued after the enactment date and before 2011.

S corp holding period. The new law temporarily shortens the holding period of assets subject to the built-in gains tax from ten years to seven years.

Repeal of IRS's built-in loss rules. The new law provides a prospective repeal of Notice 2008-83, the controversial IRS guidance which provided that if a bank recognizes a loss from the disposition of a loan or takes a bad debt deduction under the specific charge-off or reserve methods of accounting after a change in ownership, that loss or deduction will not be treated as a built in loss attributable to the pre-acquisition period.

Energy Tax Incentives

This section is an overview of tax incentives geared to encourage investments in renewable energy projects or more-efficient technologies.

Long-term extension and modification of renewable energy production tax credit. The new legislation extends the placed-in-service date for wind facilities for three years (through December 31, 2012). It also extends the placed-in-service date through December 31, 2013 for certain other qualifying facilities: closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities.

Temporary election to claim the investment tax credit in lieu of the production tax credit. Facilities that produce electricity from solar facilities are eligible to take a 30% investment tax credit in the year the facility is placed in service. Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit, payable over a ten-year period. The Act provides a temporary election to claim the investment tax credit in lieu of the production tax credit.

Business energy credit. The new law enhances the business energy credit by eliminating the cap on small wind property and repealing the basis reduction requirement for subsidized energy financing.

Energy-efficient existing homes. The new law extends the tax credits for improvements to energy-efficient existing homes through 2010. For 2009 and 2010, the amount of the tax credit is increased from 10% to 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the tax year. The property-by-property dollar caps on the tax credit are also eliminated, and an aggregate $1,500 cap applies to all property qualifying for the credit.

Residential energy property. The new law removes the dollar limitations on certain energy credits, e.g, for qualified small wind energy property ($4,000 cap); for qualified solar water heating property ($2,000 cap); and qualified geothermal heat pumps ($2,000).

Tax credits for alternative fuel pumps. The new law provides an increase for 2009 and 2010 in the 30% alternative refueling property credit for businesses (capped at $30,000) to 50% (capped at $50,000).

Credit for investment in advanced energy facilities. The new law establishes a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.

Vehicles. The new law provides a tax credit for purchases of plug-in electric drive vehicles ranging from $2,500 to $7,500 depending on battery capacity. The new law also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits.

More funding for bonds. The new law authorizes additional funds for new clean renewable energy bonds and qualified energy conservation bonds.

We will continue to provide you with the same breadth and depth of services that you have come to expect from us. We will also continue to keep you apprised of any further developments in the American Recovery and Reinvestment Act. If you would like more details about the new law, please do not hesitate to call us at Moore Colson, 770-989-0028.

New economic relief act benefits seniors and employers

The economic downturn and mounting stock market losses are shrinking retirement accounts and impeding employers’ ability to meet pension funding requirements. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) is designed to help seniors recover some of the value their retirement accounts have lost this year and ease employer pension funding requirements that could have forced businesses to make large pension fund contributions at a time when cash is in short supply. In addition, the act “corrects” several technical provisions of the Pension Protection Act of 2006 (PPA).

Excise tax affecting seniors suspended

Due to the steep drop in the stock market during the past several months, you likely have found that the value of your retirement plan has plummeted, too. Many seniors have been particularly hard hit because of rules stipulating that those age 70½ or over generally must take required minimum distributions (RMDs) from their IRAs, 401(k)s or other tax-deferred retirement plans each year. Failure to withdraw the RMD in any year could result in a 50% excise tax on the shortfall. The RMD for a given year is the balance as of Dec. 31 of the prior year divided by a factor based on age.
As a result, those having to take RMDs in 2008 have had to base their withdrawals on Dec. 31, 2007, values — which in many cases were considerably higher than current ones. This requirement has caused them to take larger RMDs than they would have based on current values. These relatively larger withdrawals, combined with the drop in market value of the assets remaining in their accounts, have left many seniors with significantly reduced retirement funds.
WRERA temporarily suspends the RMD excise tax for 2009 for IRAs as well as all defined contribution plans, including 401(k), 403(b) and 457 plans. This gives seniors the option to keep remaining funds in their plans for another year without incurring a tax penalty — providing time for their investments to perhaps recoup recent losses. This provision applies to all individuals age 70½ or older, regardless of their retirement plan’s account balance or whether the plan has incurred any losses.
Seniors, of course, still have the option of withdrawing funds from their plans if they need the money. But even before the recent stock market volatility, many have preferred to withdraw only the RMD to maximize continued tax-deferred growth. And now, thanks to WRERA, they can choose not to withdraw at all — at least in 2009.

Employer pension funding requirements eased

The economic downturn has also greatly affected employers’ ability to fund pension plans. WRERA eases the pension funding requirements enacted in PPA. Here are some of the key changes for:
Single-employer plans. Under PPA, employers were required to increase funding for single-employer pension plans to 100%, from 90%, over a seven-year period. The target funding level is 92% in 2008 and 94% in 2009. The penalty if employers didn’t reach those benchmarks had been that they must immediately fund the plan 100%. Under WRERA, employers who can’t meet these requirements must make subsequent contributions only up to the target for that year, rather than hit the 100% target.
Multiemployer plans. WRERA offers relief for multiemployer pension plans that are “endangered” or in “critical status.” PPA provided funding restrictions for these plan types, and the new law eases those restrictions. Specifically, the act allows plan sponsors to elect to temporarily freeze the status of certain multiemployer plans at the funding status held during the previous plan year. This covers plan years beginning on or after Oct. 1, 2008, and before Oct. 1, 2009. Also, if the plan was “endangered” or in “critical status” the preceding plan year, it isn’t required to revise its funding improvement plan or schedules until the following plan year.

Allowing nonspouse beneficiary rollovers now mandatory

WRERA makes it mandatory that, beginning after 2009, qualified retirement plans, 403(b) plans or 457 plans allow nonspouse beneficiaries of a deceased participant to roll over their balance directly to an “inherited IRA.” PPA had made this a permissible option, but not a requirement.

Know how WRERA affects you

Even though WRERA’s main provisions are relatively simple, knowing exactly how they affect you and what to do about them is a more complicated matter. To find out, please give us a call. We would be glad to answer any questions you have and help you take advantage of this legislation to mitigate the impacts of the current recession.

Rescue act includes tax breaks for individuals and businesses

The Emergency Economic Stabilization Act of 2008 (EESA) is designed to address the current U.S. credit crisis. But this "rescue" act also extends and expands a multitude of tax breaks for individuals and businesses that had already expired or were set to expire after this year, including many energy-related incentives. In addition, it provides relief for natural disaster victims in the Midwest, Louisiana and Texas.

AMT relief for individuals

Perhaps the most significant tax provision affecting individuals is the extension of alternative minimum tax (AMT) relief. The AMT is a separate tax system that limits some deductions and doesn't permit others — you must pay the AMT if your AMT liability exceeds your regular tax liability. Unlike the regular tax system, the AMT system isn't regularly adjusted for inflation. So if Congress hadn't acted, many middle class taxpayers would have had to pay AMT for 2008.
EESA provides a one-year "patch" that increases the AMT exemption. For married couples filing jointly, the 2008 exemption is $69,950. For singles and heads of households, it's $46,200, and for married filing separately, it's $34,975. These amounts are up slightly from 2007, but significantly higher than what they would have been for 2008 without the patch — $45,000, $33,750 and $22,500, respectively.
The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2008 phaseout ranges are now $150,000 to $429,800 for married filing jointly, $112,500 to $297,300 for singles and heads of households, and $75,000 to $214,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range.
Additionally, the act extends a provision through 2008 that allows certain nonrefundable personal tax credits to provide a benefit against the AMT, such as the dependent care credit, the Hope credit and the Lifetime Learning credit. (The child credit and the adoption credit are already allowed for AMT purposes under previous law.)
EESA also provides more relief to many taxpayers whose incentive stock option (ISO) exercises have made them subject to the AMT. It abates unpaid AMT liability, as well as interest and penalties, generated by ISO exercises before 2008. It also increases the amount of refundable long-term AMT credit for AMT paid in past years. For calendar years 2008 through 2012, eligible taxpayers can now claim 50% — up from 20% — of their unused credit.
Despite these AMT-related provisions, many taxpayers will continue to be subject to this additional tax until more substantial changes are made.

Extensions benefiting individuals

Some other important tax breaks for individuals that expired in 2007 have now been extended through 2009:

The state and local sales tax deduction. It allows you to deduct state and local sales taxes rather than state and local income taxes. It primarily benefits those living in states with no income tax but may also benefit taxpayers who live in low-income-tax states or who purchase major items during the year, such as cars or boats.
The qualified tuition deduction. It allows eligible taxpayers to deduct up to $4,000 of qualified higher education tuition and fees "above the line," which means, unlike an itemized deduction, it reduces your adjusted gross income (AGI). But this deduction is limited to $2,000 for joint filers with AGIs of $130,000 to $160,000 ($65,000 to $80,000 for single filers) and is unavailable to taxpayers with higher AGIs. Taxpayers ineligible for education credits may be eligible for this deduction.
Additional breaks that have been extended through 2009 include:

The provision allowing taxpayers age 70½ or older to make tax-free distributions from their IRAs (up to $100,000 annually) to tax-exempt charities,
The above-the-line deduction for certain out-of-pocket expenses (up to $250) of elementary and secondary school teachers, and
The additional standard deduction for real property taxes for nonitemizers (up to $1,000 for joint filers, $500 for single filers) that was provided earlier this year under the Housing and Economic Recovery Act.

Plus, EESA extends through 2012 a provision that generally allows homeowners to avoid paying federal income taxes on debt forgiveness received in connection with a foreclosure or a mortgage workout on a principal residence.

Extensions benefiting businesses

Here are some of the more significant breaks for businesses that EESA has extended through 2009 and, in some cases, expanded:
The research and development (R&D) credit. Generally, it's equal to 20% of qualified research expenses in excess of a certain amount based on the company's historical activity. But businesses can instead take the alternative simplified credit (ASC), equal to 12% (14% for 2009) of qualified research expenses exceeding 50% of the previous three tax years' average expenses.
Accelerated depreciation for leasehold and restaurant improvements. This provision allows a shortened recovery period of 15 years — rather than 39 years — for qualified leasehold and restaurant improvements (generally those made by the lessor or the lessee to the interior of a nonresidential building more than three years after the building was placed in service).
EESA also expands the provision to cover certain:

New construction for qualified restaurant property, and
Improvements to retail space.

These expansions apply only to property placed in service after Dec. 31, 2008, and before Jan. 1, 2010.
The enhanced deduction for food, book and computer donations.
Businesses can take a deduction for more than their cost of certain contributions of food to charity and of books and computer equipment to qualifying schools. The deduction is equal to cost plus one-half of any increase in value, not to exceed double the cost. The items contributed must be used by the charity for its exempt purpose.

Energy incentives

EESA extends many energy-related tax provisions and adds some new tax incentives. There are breaks for both individuals and businesses, including:

An extended credit for nonbusiness energy property,
A modified energy-efficient appliance credit,
A new credit for qualified plug-in electric drive motor vehicles,
A new transportation fringe benefit for bicycle commuters,
An extended energy-efficient commercial buildings deduction,
An accelerated recovery period for depreciation of smart meters and smart grid systems, and
A special depreciation allowance for certain reuse and recycling property.

Contractors may benefit from breaks for qualified green building and sustainable design projects.
Natural disaster relief

For certain areas in the Midwest damaged by floods, tornadoes and severe storms earlier this year, EESA provides many tax incentives that are similar to the relief provided in the Gulf Opportunity (GO) Zone after Hurricanes Katrina, Rita and Wilma. It also extends certain GO Zone relief provisions.
EESA provides more limited relief for the Hurricane Ike disaster area, but it expands national disaster relief overall, generally for natural disasters occurring after Dec. 31, 2007, and before Jan. 1, 2010.

How will EESA affect you?
EESA is one of the largest tax acts in recent years and may significantly affect your tax liability in a variety of ways. So please let us know if you have any questions about this or other tax laws, as well as strategies you might implement to minimize your taxes for 2008 and beyond.

New tax laws provide mortgage & AMT relief

After a fairly lackluster year on Capitol Hill, Congress rushed to pass several highly anticipated tax bills before recessing for the holiday break. Here’s a look at the key laws and how they may affect you:

Mortgage relief
Congress spent much of 2007 trying to hammer out legislation that would offer help to homeowners caught in the subprime mortgage crisis. The Mortgage Forgiveness Debt Relief Act of 2007, signed into law by President Bush on Dec. 20, 2007, creates a three-year exception (from Jan. 1, 2007, through Dec. 31, 2009) to current law so that affected homeowners won’t have to pay federal income taxes for debt forgiveness on their troubled loans. This provides relief to homeowners who receive debt forgiveness in a foreclosure or in a mortgage workout, under which the terms of the mortgage are changed, resulting in a lower mortgage balance.

The law specifically applies to mortgages on a principal residence, and not to vacation or secondary homes. The law also doesn’t apply to taxpayers in Chapter 11 bankruptcy.

Moreover, the new law extends through Dec. 31, 2010, a provision enacted in 2006 that allows taxpayers to take an itemized deduction for premiums paid or accrued on qualified mortgage insurance. The law applies only to contracts entered into after Dec. 31, 2006, and before Jan. 1, 2011.
Another provision of the mortgage act extends the time period that a recently widowed person can use the joint-return filers’ $500,000 home sale gain exclusion to cover sales occurring up to two years after the spouse’s death. Plus, the act clarifies the low-income housing credit and the definition of a cooperative housing corporation.

AMT patch
The alternative minimum tax (AMT) continues to be a bugaboo for Congress. They understand the need to overhaul the system, but can’t seem to find the key to simplifying it. With time running out, Congress finally approved a “patch” that includes 2007 AMT exemption amounts that are significantly higher than they would have been without the act but only slightly higher than the 2006 amounts. Under the Tax Increase Prevention Act of 2007, signed into law by President Bush on Dec. 26, 2007, the 2007 amounts are:

$44,350 for singles and heads of households,
$66,250 for married filing jointly, and
$33,125 for married filing separately.

The IRS and Treasury Department estimated that, without the patch, roughly 25 million taxpayers would have paid on average $2,000 more in taxes for 2007. Once again, this issue will need to be addressed for 2008 because the increased exemption is only for 2007.

The new law provides additional AMT relief by allowing more nonrefundable personal credits, such as the dependent care, Hope and Lifetime Learning credits, to be used to reduce AMT liability. (Many other popular credits, such as the child and adoption credits, were already eligible.)

As a result of the changes, the IRS is asking taxpayers filing certain forms to wait to file until Feb. 11, 2008. Affected forms include Form 8863, Education Credits; Form 5695, Residential Energy Credits; and Form 8396, Mortgage Interest Credit. Several other AMT-related forms, however, aren’t affected.
It’s also important to note that the 2007 tax materials that you’ll likely receive from the IRS in early January were printed before the new tax laws were passed.

Energy issues
On Dec. 19, 2007, the president signed into law a new energy bill. The Energy Independence and Security Act of 2007 raises fuel economy standards for automobiles and sets standards for improving the efficiency of home appliances. Provisions that were NOT included in the bill, but which may be resurrected in 2008, include extensions of the residential energy efficiency credits and research credit. In addition, future legislation may extend and enhance the alternative motor vehicle credit.

Other items of note
Technical corrections were also made to nine major tax laws dating back to 1998. Perhaps the most notable is a clarification of the definition of the AMT refundable credit. The change allows taxpayers to better take advantage of long-term unused credits.

Moreover, under a special tax law signed by President Bush on Dec. 19, victims and family members affected by the April 2007 Virginia Tech massacre may exclude from their gross income any payments they receive from a special memorial fund set up on their behalf after the tragedy.

Important change in IRS Section 409A compliance deadline for nonqualified deferred compensation plans

On Sept. 10, 2007, the Treasury Department and the IRS announced, in IRS Notice 2007-78, that companies will have until Dec. 31, 2008, to bring documents into compliance with the final nonqualified deferred compensation regulations under Section 409A of the Internal Revenue Code. Previously, the deadline was Dec. 31, 2007.

Sec. 409A applies to a broad variety of deferred compensation arrangements and sets forth requirements that affected plans must satisfy. Any company with a nonqualified deferred compensation plan — a deferred compensation plan that is generally designed to favor only certain individuals or groups of individuals — should be certain that the plan is in compliance with the law. The penalties for noncompliance can be severe: Plan participants will be taxed on plan benefits at the time of vesting, and a 20% penalty tax and potential interest charges also will apply.

It’s important to note that the notice extends only the time for bringing plan documents into conformity with Sec. 409A. It does not extend the effective date of the final regulations, which remains Jan. 1, 2008.

This means that, although plan sponsors now have until Dec. 31, 2008, to conform their plan documents to Sec. 409A, they must operate and administer their plans in compliance with the final Sec. 409A regulations by Jan. 1, 2008. (They must also have operated their plans in “good faith” compliance with Sec. 409A retroactive to 2005, when the requirements first went into effect.)

Plan sponsors should identify all plans or arrangements that may be subject to Sec. 409A and have them reviewed to ensure that they’re operationally and administratively Sec. 409A compliant. If they have plans that aren’t compliant, they should bring the plans — and plan documents — into conformity with Sec. 409A as soon as possible but no later than the applicable deadlines.

The Treasury Department and the IRS expect to issue further guidance regarding a limited voluntary compliance program that will help companies correct specific unintentional operational violations of Sec. 409A. But no date has been set for issuing that guidance.

Please consult us to find out exactly how this IRS notice affects your nonqualified deferred compensation plan.

On May 25, the President signed the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA). Passed in conjunction with legislation to continue funding the war in Iraq and to raise the minimum hourly wage, the tax-related provisions are designed in part to provide benefits to small businesses likely to be hit hard by the minimum wage increase.

Following are highlights of key provisions affecting businesses and individuals, as well as GO Zone incentives and other areas of tax law.

Businesses
The Section 179 election to expense property in its initial year (rather than depreciate it) is extended through 2010 and increased from $100,000 to $125,000, effective for years beginning after 2006. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000). These amounts will be adjusted for inflation annually.

The Work Opportunity tax credit, which had been set to expire Dec. 31, 2007, is extended until September 30, 2011. This credit is available to businesses that hire employees from targeted groups of individuals, such as veterans, ex-felons, high-risk youth, and food stamp and supplemental security income recipients. The new law expands this list to include disabled veterans and individuals in counties that have suffered significant population losses. If you hire a target employee, your business can receive a 40% tax credit for the first $6,000 paid to that worker.

The individual and corporate alternative minimum tax (AMT) limits on the use of certain credits are waived, effective for years after 2006 as well as for carryback of these credits. This applies to the Work Opportunity credit and the credit for taxes paid on employee tips. Employers are also now eligible for the full tip credit despite the increase in the minimum wage.

SBWOTA includes certain S corporation and pension provisions, but they are generally too obscure and technical to cover in this Alert. Contact your tax advisor to ascertain whether any of these changes affect your tax planning strategies.

Individuals
The new law also affects some individual taxpayers. The “kiddie tax,” which subjects children (and now young adults) to tax on most unearned income at their parents’ marginal tax bracket, had recently been expanded to include those under age 18 (up from age 14). Now, SBWOTA broadens that rule to include those who qualify as dependents because they are either under age 19, or under age 24 and a full-time student, if their earned income doesn’t exceed one half of the amount needed for their support.

GO Zone incentives
In addition, SBWOTA extends several tax incentives designated for the Gulf Opportunity Zone (GO Zone):

The increased Sec. 179 expense election, which is generally doubled for qualifying
property, is extended through 2008.
The low-income housing tax credit for GO Zone housing is extended through 2010.
Tax-exempt bond financing for GO Zone property is expanded to include expenses for all repairs and reconstruction. The provision applies to owner financing provided after May 25, 2007, and before 2011.

Other changes
Finally, the act subjects tax return preparers to increased levels of penalty for the redefined category of “unreasonable positions” taken on a tax return, as well as for the category of “willful and reckless” tax positions. The legislation also makes changes in the pension area, as well as numerous other minor changes and technical corrections.

Tax Relief and Health Care Act of 2006

On Dec. 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006. In addition to extending certain tax provisions that had expired at the end of 2005 or that had been set to expire soon, the act introduces some new rules and important tax breaks we think you’ll want to know about.

Extensions benefiting individuals
Some of the extended provisions are specific to individuals. Two of the more significant — both extended through 2007 — are:

1. The state and local sales tax itemized deduction. This deduction, which had expired at the end of 2005, allows you to deduct either state and local income taxes or state and local sales taxes. It primarily benefits those living in states with no income tax but may also benefit taxpayers who live in low-income-tax states or who purchase major items, such as cars or boats. Referring to the Optional State Sales Tax Tables in IRS Publication 600 is the easiest way to calculate the deduction. But if you spend more than average for your income level, you may enjoy a larger deduction by saving your receipts and totaling up the actual sales tax paid.

2. The above-the-line deduction for college tuition payments. This deduction also had expired after 2005. It allows you to deduct “above the line” a portion of qualified higher education tuition and fees. Taxpayers with adjusted gross incomes (AGIs) not exceeding $65,000 for singles and $130,000 for joint filers are eligible for a maximum annual deduction of $4,000. Those with AGIs up to $80,000 for singles and $160,000 for joint filers can deduct up to $2,000.

Note that you can’t claim this deduction if you claim the Hope or Lifetime Learning credit for the same student. But the AGI phase out ranges for the credits are lower ($45,000 – $55,000 for singles and $90,000 – $110,000 for joint filers). So the deduction may benefit you if you don’t qualify for the credits.

Other extensions that benefit individuals include the deduction for up to $250 of qualified out-of-pocket teacher expenses (through 2007), the availability of Archer Medical Savings Accounts (through 2007), and the credit for certain residential alternative energy expenditures (through 2008).

Extensions benefiting businesses
Several provisions geared more toward businesses have also been extended, including:

The research and development (R&D) credit. This credit, which had expired at the end of 2005, has been extended through 2007. Generally, it is equal to 20% of qualified research expenses in excess of a certain amount based on the company’s historical activity. But businesses can instead take the alternative incremental credit (AIC), based on a stated percentage of qualified expenses in excess of average expenses over four years.

For 2007 the new law enhances the R&D credit in two ways. First, it increases the stated percentage for the AIC. Second, it offers the alternative simplified credit (ASC), equal to 12% of qualified research expenses exceeding 50% of the previous three tax years’ average expenses. If there were no qualified expenses in any of those years, the ASC equals 6% of the current year’s expenses.

Combined with previous rule changes that have liberalized the requirements for taking this credit in recent years, the new law makes the credit a powerful tax-saving tool for many businesses.

Employment credits for hiring low-income workers. The new law not only extends the previously expired Welfare-to-Work and Work Opportunity credits through 2006 but also combines and enhances them for 2007. These credits benefit businesses hiring employees from certain economically disadvantaged groups, such as ex-felons and food stamp recipients. The credits generally equal 40% of qualified first-year wages or 25% of such wages if employment is more than 120 hours but less than 400. “Qualified” wages cannot exceed $6,000. This means that, depending on whether the 40% or 25% amount applies, the credit cannot exceed either $2,400 or $1,500 per eligible employee. Combining the two credits should make calculations easier.

The other 2007 enhancements include an extension of the time employers have to file certification documents and elimination of the requirement that ex-felons be from an economically disadvantaged family.

Accelerated depreciation for leasehold and restaurant improvements. The extension of this provision through 2007 allows a shortened recovery period of 15 years (rather than 39 years) for qualified leasehold and qualified restaurant improvements. Those made to the interior of a nonresidential building more than three years after the building was placed in service generally qualify. And the improvements can be made by either the lessor or the lessee.

Energy-related tax breaks. Many provisions have been extended through 2008, including:

The credit for energy efficient new homes,
The deduction for energy efficient commercial buildings,
The renewable electrical energy production credit, and
The authority to issue clean renewable energy bonds.

Other extensions that benefit businesses include Gulf Opportunity Zone bonus depreciation (through 2010), the ability to deduct rather than capitalize certain environmental remediation costs (through 2007), and the deduction for corporate donations of certain computer and scientific equipment to schools and public libraries (through 2007).

HSA enhancements
As the act’s name suggests, it also addresses health care, specifically Health Savings Accounts (HSAs). The new law makes notable and permanent changes to the HSA rules. HSAs allow you to contribute pretax income to an account that bears interest or is invested in mutual funds, and withdrawals for health care expenses are tax free. The maximum HSA contribution previously was limited to the lesser of the policy’s deductible or the IRS-sanctioned maximum allowable amount. Now, starting in 2007, the policy’s deductible does not factor into the contribution limit. Thus, regardless of the policy’s deductible, for 2007 the contribution limit is $2,850 for a policy with individual-only coverage and $5,650 for a policy that covers the participant’s family.

Other important changes with respect to HSAs include the following:

Annual contribution limits are no longer pro-rated for participants who become eligible during the year, so long as they are eligible at the end of the year. One caveat is that participants who later become ineligible may be subject to a recapture of prior deductions.
Participants can make a one-time transfer to their HSAs from flexible spending accounts (FSAs) and health reimbursement accounts (HRAs). The maximum transfer is the account balance on the day of the transfer or on Sept. 21, 2006, whichever is less. Transfers can be made on or after the date of enactment through Dec. 31, 2011.

And, in an effort to allow quicker access to retirement savings to pay medical expenses, the new law allows participants to make a one-time, irrevocable rollover of funds from an IRA into an HSA after Dec. 31, 2006. The rollover, which is neither taxable as an IRA distribution nor deductible as an HSA contribution, is limited to the maximum allowable HSA contribution for the year.

Expanded AMT credit
In an effort to help taxpayers who were stung by the AMT when they exercised qualified stock options and who haven’t been able to use the resulting AMT credit in subsequent years, the new law allows for a refundable credit starting in 2007 and ending in 2012. The refundable amount each year depends on your long-term unused minimum tax credits and AGI. You may be able to claim as much as 20% of the unused AMT credit each year as a refundable credit if the unused amount is significant. Otherwise, you may be eligible to use the lesser of $5,000 or the entire unused amount.

More tax breaks, technical corrections and obsolete tax forms
Also included in the law is a new provision that permits you to deduct amounts paid for private mortgage insurance premiums — but only for amounts paid during 2007 and only in certain situations. Further, there are various miscellaneous provisions in the law that range from breaks with narrow applicability, such as permanent capital gains treatment for self-created musical works, to items as innocuous as technical corrections.

One interesting impact of changes being passed so late in the year is that the 2006 tax forms have already been printed and will have to be updated.

The bottom line
There are many tax saving opportunities within the Tax Relief and Health Care Act of 2006 — some that may greatly benefit you. Please call us for more information about this important tax law and to see how you might take full advantage of it to reduce your tax liability for 2006, 2007 and beyond.