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.