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Emergency Economic Stabilization Act of 2008: Effect on Business Returns

By Nancy Faussett, CPA
Publication date: 10/07/2008

The legislation, signed into law on October 3, 2008, actually contains three separate bills: the Emergency Economic Stabilization Act of 2008; the Energy Improvement and Extension Act of 2008; and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. While the main focus of this Act was to address the recent financial crisis, it ended up including $150 billion in tax incentives for both individuals and businesses.

This article will look at some of the principal provisions of the Act, including tax extenders, energy incentives, and disaster relief as they affect business income tax returns. For those provisions that affect fixed assets management or individual taxpayers see the related articles on this site.

Tax Extenders

The Act extends the following credits, deductions, and various rules that were about to expire:

• Research and Development Credit: The Act extends the Research and Development Credit for two years, through 2009. The Act also increases the alternative simplified credit to 14% (it was 12%) for tax years ending after December 31, 2008 and repeals the alternative incremental research credit for tax years beginning after December 31, 2008.
• New Markets Tax Credit: The Act extends the New Markets Tax Credit under IRS Code Section 45D for one year, through 2009.
• Subpart F Exception for Active Financing Income: Certain income from a foreign subsidiary engaged in banking, financing, or similar business is temporarily excluded from Subpart F income. The exclusion applies to active, not passive, income. The Act extends this provision for one year, through 2009.
• Look-Through Treatment of Payments between Related CFCs under the Foreign Personal Holding Company Rules: Certain payments, such as dividends, interest and rents, between commonly controlled foreign corporations (CFCs) may be deferred from income. The Act extends this provision for one year, through 2009.
• Basis Adjustment to Stock of an S Corporation Making Charitable Contributions of Property: The Act extends, for two years, through 2009, the provision that allows an S corporation shareholder to reduce their stock basis by the adjusted basis of qualifying property (rather than the property’s fair market value) contributed by the corporation to a charity.
• Increased Limit on Cover over of Rum Excise Tax Revenues to Puerto Rico and the Virgin Islands: The Act extends for two years, through 2009, the temporary increase in payments to Puerto Rico and the Virgin Islands for the excise tax on rum imported into the U.S. ($13.25 per proof gallon).
• American Samoa Economic Development Credit: Certain domestic corporations operating in American Samoa have been able to claim a possessions tax credit to offset their U.S. tax liability on income earned there. The Act extends this credit for two years, through 2009.
• Mine Rescue Team Training Credit: There is an IRS Code Section 45N credit for up to $10,000 to train mine rescue team members. The Act extends this credit for two years, through 2009.
• Domestic Production Activities Deduction for Puerto Rico: The Act allows Puerto Rico to be treated as part of the U.S. for claiming a deduction under IRS Code Section 199 for two more years, through 2009.
• Qualified Zone Academy Bonds (QZABs): QZABs assist school districts with low-income populations to save on interest costs of public financing school renovations and repairs. This provision expired at the end of 2007. The Act allows another $400 million annually of issuing authority to state and local governments for 2008 and 2009 for QZABs.
• Indian Employment Credit: The Act extends the business tax credit for employers of qualified employees who live and work on or near an Indian reservation for two years, through 2009.
• District of Columbia Tax Incentives: The Act extends the designation of the District of Columbia as an Enterprise Zone for two years, through 2009. The Act also reinstates the first-time D.C. homebuyer credit of $5,000, through 2009.
• "Brownfields" Environmental Remediation Costs: The Act extends the provision that allows the expensing of qualified environmental remediation costs to clean up contaminated sites. The provision is now affective through 2009.
• Work Opportunity Tax Credit (WOTC) for Hurricane Katrina Employees: The Act extends the provision that treats a victim of Hurricane Katrina as a member of a targeted group for the Work Opportunity Tax Credit. This is effective for those qualifying employees hired though August 28, 2009.
• Expensing Rules for Film and Television Productions: The Act extends the provision that allows certain film and television production costs to be expensed, through 2009. The Act modifies the rule by allowing the first $15 million ($20 million if incurred in economically depressed areas) to be expensed regardless of the ending cost of the film.
• Increased Rehabilitation Credit for GO Zone: The rehabilitation credit was increased for certain expenditures for qualifying expenditures in the Gulf Opportunity Zone. This has been extended for one year, through 2009.
• Enhanced Charitable Deductions: The Act extends, through 2009, the enhanced charitable deductions allowed for qualified computer contributions and book inventories to schools, as well as the enhanced charitable deduction for food inventories.
• Undercover Operations: The Act permanently authorizes the IRS to use the proceeds it obtains from undercover operations to offset any necessary expenses of such operations. (This had been a temporary provision and had expired at the end of 2007.)
• Disclosing Information Related to Terrorist Activities: The Act permanently extends the law allowing the disclosure of information relating to terrorist activities.

Energy Incentives

• Energy Credits: The Act extends and modifies several of the existing energy credits. The Section 48 credit for solar energy, fuel cell, and microturbine property is expanded and extended for eight years through 2016. The Section 45 credit for producing electricity from qualified wind and refined coal facilities is extended through 2009.
• New Clean Renewable Energy Bonds ("CREBs"): CREBs are used to finance certain renewable energy and clean coal facilities. They are the equivalent of an interest-free loan. The Act authorizes $800 million of new CREBs and extends the termination date for existing CREBs for one year.
• Advanced Coal Electricity Projects: The Act provides $1.5 billion in new tax credits for creating advanced coal electricity projects under IRS Code Section 48A and certain coal gasification projects under Section 48B.
• Black Lung Disability Trust Fund: The Act provides for the restructuring and taking the Black Lung Disability Trust Fund out of debt. This fund is used to assist eligible miners and their survivors.
• CO2 Capture Credit:There is a $10 credit per ton of CO2 captured and transported from an industrial source and used in enhanced oil recovery. This applies to the first 75 million metric tons of CO2. In addition, there is a $20 credit per ton for CO2 captured and stored in a geologic formation as long as at least 500,000 metric tons are captured each year.
• Carbon Audit:The Act authorizes a comprehensive review of the tax code to determine which provisions have the most effect on carbon and other greenhouse gas emissions.

Transportation Equipment and Domestic Fuel

• Heavy Truck Tax for Idling Reduction Units and Advanced Insulation:The Act exempts from the heavy vehicle excise tax, both the cost of idling reduction units, such as auxiliary power units, and the installation of advanced insulation in those vehicles carrying refrigerated cargo.
• Cellulosic Biofuels Property: The Act allows taxpayers to deduct 50% of the cost of facilities producing cellulosic biofuels ethanol for those facilities placed in service before January 1, 2013.
• Credits for Biodiesel and Renewable Diesel: The Act extends the $1 per gallon production tax credit for biodiesel and 10 cents a gallon credit for small biodiesel producers through 2009. It also makes the credit available for any diesel fuel created from biomass, regardless of the process used. In addition, diesel fuel created by processing biomass with other raw materials such as petroleum will qualify for a 50 cents per gallon tax credit for alternative fuels.
• Percentage Depletion for Marginal Wells: The Act extends the suspension of the taxable income limit for depreciating a marginal oil or gas well, through 2009.
• Refinery Property: The Act extends the temporary expensing contract requirement and the placed-in-service date requirement on qualifying refinery property for two years.

Energy Conservation

• Qualified Energy Conservation Bonds: There is a new category of tax credit bonds to finance state and local government initiatives to reduce greenhouse emissions, effective after October 3, 2008.
• Energy-Efficient Buildings Deduction: The Act extends for five years, through 2013, the deduction for the cost of installing energy-efficient property in commercial buildings under IRS Code Section 179D.
• Energy-Efficiency Improvements to New Homes: The Act extends the tax credit for contractors for building energy-efficient new homes through 2009.
• Energy-Efficient Appliance Credit: The Act extends and modifies the tax credit for manufactures of energy-efficient dishwashers, clothes washers and refrigerators. It extends the credit through 2010 and increases the credit amounts based on higher standards.
• Qualified Green Building and Sustainable Design Project Bond: The Act extends the authority for issuing qualified green building and sustainable design project bonds through 2012. It also clarifies the rules for the reserve accounts and multiple bond issuances.

Miscellaneous Tax Provisions

The Act contains the following miscellaneous provisions:

• Excise Tax Exemption for Wooden Children’s Practice Arrows: The Act exempts from excise taxes certain wooden practice arrows used by children and that are first sold after October 3, 2008.
• Income Averaging for Exxon Valdez Litigation Amounts: The Act allows commercial fishermen, and other taxpayers who were negatively impacted by the 1989 Exxon Valdez oil spill, to use 3-year income averaging for settlement income they receive.

Tax Relief for Midwest Disaster Victims

The Act provides tax relief for victims of the Midwestern disasters in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin. These proposals apply to taxpayers affected by floods, severe storms, and tornadoes that occurred in these states and that were declared to be major disaster areas by the President on or after May 20, 2008, and before August 1, 2008. There are two categories of relief given to these taxpayers: the first is for taxpayers located in all counties of these ten states and the other category is for the victims in the hardest hit areas in these ten states. Most of the provisions affecting businesses are in this second category.

• CATEGORY 1: RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR ASSISTANCE
• Extension of Replacement Period for Lost Property: The Act extends to five years (it was two) the replacement period for business property that was damaged or destroyed within the Midwest disaster area as long as the replacement property is located in the same county.
• CATEGORY 2: RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR INDIVIDUAL ASSISTANCE OR INDIVIDUAL AND PUBLIC ASSISTANCE
• Employee Retention Credit:The Act provides for a tax credit of 40% of the qualified wages for each employee up to $6,000, if paid after the date of the disaster and before January 1, 2009 and if the employer had 200 or fewer employees before the disaster. Furthermore, the employers must have continued to pay their employees while their business was inoperable.
• Clean-up and Remediation Costs: The Act allows businesses to expense 50% of demolition and cleanup costs (rather than capitalizing them) relating to the site. This applies to expenses paid or incurred from the date of the disaster through 2010. The Act also allows businesses to expense qualified environmental remediation costs that were due to the disaster for the same time period.
• Rehabilitation Credit: The Act increases the rehabilitation credit from 10% to 13% of qualified expenses for the rehabilitation of a building other than a certified historic structure. It also increases the rehabilitation credit from 20% to 26% for certified historic structures.
• Net Operating Loss Carryback for Certain Amounts: The Act extends the NOL carryback from 2 to 5 years for NOLs relating to new investment and repair in the Midwest disaster area; for business casualty losses; and for moving and temporary housing expenses of employees working in the disaster area.
• Charitable Contribution Limitation: The Act temporarily waives, for 2008, the limitation for charitable deductions for cash donations that exceed 10% of a corporation’s taxable income, as long as they are used for the Midwest disaster area.

Tax Relief for Victims of Federally-Declared Disasters

The Act provides the following tax relief for businesses that are victims of any federally-declared disaster that occurs after December 31, 2007 and before January 1, 2010:

• Disaster Expenses: The Act allows disaster victims to expense (versus capitalize) demolition, cleanup and repair, and environmental remediation costs.
• Net Operating Losses: The Act allows a 5-year carryback period for NOLs to the extent of a qualified disaster loss.

Revenue Provisions

• Section 199 Deduction: The Act holds the Section 199 deduction for income attributable to domestic production activities to 6% (rather than the planned increase to 9%) for gross receipts from the sale, exchange, or other disposition of oil, natural gas, or primary product of such.
• Reporting by Brokers on Sales of Stock: The Act requires that brokers handling publicly traded securities file an information return that must include the customer’s adjusted basis in the security and whether the gain or loss is short or long term.
• FUTA Surtax: The Act extends the temporary surtax of 0.2% of taxable wages being added to the 6% FUTA tax rate through 2009.
• Combines FOGEI and FORI: The Act combines the concepts of foreign oil and gas extraction income (FOGEI) and foreign oil related income (FORI) for tax years beginning after 2008 and applies the existing FOGEI limitation to this newly created foreign oil "basket." Previously there were separate foreign tax credit limitations for FOGEI and FORI under IRS Code Section 907.
• Oil Spill Liability Trust Fund: The Act increases and extends the Oil Spill Liability Trust Fund through 2017. It increases the oil spill tax from 5 to 8 cents per barrel in 2009 through 2016 and to 9 cents per barrel in 2017.