JS+A 2006 Tax Alerts

2008 Tax Breaks for Troubled Times

Things change in the real world, and then they change in the tax world. Gas prices have hit record highs, the housing market continues to stagger, the credit crunch ties up capital, and the economy hiccups as a result.

In making plans for your business or household, bear in mind some important tax changes – as well as established rules - that can help at least a little with these problems.

And don’t despair: Our great nation has faced far worse in the past and muddled through just fine. With courage, affection -- and good accounting -- we’ll clean up this mess, too!

Note: This memo is intended to provide general guidance. You should consult a qualified tax professional for advice specific to your situation.

STANDARD MILEAGE RATE MOVES UP FOR JULY – DECEMBER 2008

Effective July 1, 2008, the IRS standard mileage allowance for business use of a car is 58.5 cents per mile, up from 50.5 cents. If you use your car in your business or for your job, and if you use the cents-per-mile method to figure your deduction, you will need to be able to report business miles driven for each half of the year in order to do your 2008 taxes properly.

Remember that this cents-per-mile method does not include excise taxes, interest on a car loan, or business tolls and parking. So you will want to keep track of these things in addition to your mileage.

Note that businesses are not required to reimburse their workers at the new, higher rate. They can stick with a lower rate if they wish. In that case, the workers may be able to deduct the difference between the reimbursement they received and their expenses calculated at the new rate on their personal tax returns.

Use of a car to get medical care or in connection with a deductible move can be deducted at 27 cents per mile for July through December, up from 19 cents; charitable use of a car stays at 14 cents for the whole year.

BIGGER AND QUICKER WRITE OFFS FOR BUSINESS EQUIPMENT AND LEASEHOLD IMPROVEMENTS

This could be a good year to buy equipment, machinery, furniture or other assets for your business, or to do build out of your rented office, store or other business location. That’s because Congress has increased the depreciation deductions allowed in 2008 for such expenditures – by a lot. A bigger deduction means lower tax, which means more cash to sustain your business.

Generally, fixed assets like equipment and furniture that you buy and place in service in 2008 can be written off in full up to a maximum of $250,000. This maximum starts to shrink for larger companies who put in service more than $800,000 of assets during the year.

Leasehold improvements can’t be deducted all at once. But business build-out gets a special break this year: half of the cost can be taken off your income, with the rest spread out over 39 years. This generous deal doesn’t apply if you own the building you are fixing up.

Cars, vans and light trucks have their own limits for first year depreciation. These have gone up, too: for passenger cars, to $10,960, for vans and light trucks, to as much as $11,160. These maximums are lower for cars used less than 100% for business. The rest of the cost can be deducted over 5 or more years. (If you use the cents-per-mile method mentioned above, forget about these depreciation deductions: you can’t take both deductions for the same car in the same year.)

LAST CALL FOR BIG OL’ BREAKS FOR BIG OL’ SUVS

And there still may be a Hummer-sized loophole through which big SUVs or trucks can drive: for a new SUV with a loaded weight of 6,000 pounds or more, $25,000 of the cost can be expensed, half of the remaining balance can be claimed as special depreciation, and 20% of what’s left can be taken as regular depreciation. This deduction is less if the car is used less than 100% for business. Used heavy SUVs generally won’t qualify for this incredible subsidy.

ALL of the cost of a pickup truck can be written off if it weighs more than 6,000 pounds, is used 100% in business and has a cargo bed separate from the cab and at least six feet long.

TAX FORGIVENESS FOR UNDERWATER HOMEOWNERS

Usually, if you borrow money, and the lender later agrees to settle the debt for less than you owe, you are considered to have taxable income. For this year and next, you will generally not have to pay tax on such debt forgiveness if your home is foreclosed on and sold for less than you owe. Nor will you incur tax if your mortgage lender agrees to accept lower monthly payments rather than foreclose. These breaks only apply to residences, not to investment property.

REMEMBER THE WASH SALE RULE

Taxpayers sitting on investments that have gone down in value may want to sell them to take a tax loss. This can be a smart move. But you can be too clever, and lose your tax break: if you purchase a substantially identical security within 30 days of the loss-making sale, you cannot take the loss until you sell the replacement security.

Here’s an example:

Bob owns LameCo stock which he bought for $1,000 and now is worth $400. He thinks LameCo will rebound in the next several quarters, but he’d like to take a tax loss. So he sells his LameCo shares on May 1 2008. If he buys LameCo any time between April 1 and May 31, he will NOT get to take the $600 loss on his 2008 tax return. The IRS will regard this sale as a “wash”. Bob will have to wait to take his loss till he sells the replacement LameCo shares he purchased. Note that if Bob waited till June 1 to buy back LameCo, he would be in the clear.

GETTING OUT FROM UNDER A HOME THAT HAS GONE DOWN IN VALUE

You can’t take a tax deduction for loss on sale of a personal residence. You CAN take a deduction for loss on sale of a rental property. Therefore, homeowners facing the need to sell a home that could result in a loss should consider renting it out rather than selling. Doing this will put a floor under their loss: any further decrease in its value after the home is rented will be deductible. And if the market recovers and the home goes back up in value within a couple years, the owner can sell it at a profit and still take advantage of generous breaks for homeowners: the first $250,000 of profit on sale of a principal residence ($500,000 on a joint return) escapes tax so long as the seller has owned and used the home for two of the five years prior to the sale.

If the rent won’t cover the cost of carrying the home, however, homeowners could be better off selling and getting out from under.

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