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H.R. 5140
The Recovery Rebates and Economic
Stimulus for the American Act of 2008
BUSINESS PROVISIONS
A. Increased
Section 179 Expensing - Under
current law, taxpayers can expense up to $128,000 for 2008.
This annual expensing limit is reduced by the amount by which the
cost of qualifying property placed in service during 2008 exceeds
$510,000. For tax years beginning in 2008, the $128,000
expensing limit will be increased to $250,000 and the overall
investment limit will be increased from $510,000 to $800,000.
The $250,000 and $800,000 amounts are not indexed for inflation.
B. Bonus
Depreciation - Businesses will be
allowed to take a bonus depreciation deduction of 50% of the adjusted
basis of qualified property placed in service after December 31, 2007
and before January 1, 2009. Bonus depreciation will be elective
and will apply for AMT as well as for regular tax purposes.
C. Luxury Vehicle Cap
- The other wise applicable "luxury vehicle" cap on first year
depreciation is increased by $8,000 for vehicles that qualify. The
2008 luxury vehicle cap has not been announced as of February 11, 2008,
but based on the 2007 caps, first year deprecation on under 6,000 GVWR
vehicles would be $11,060 for cars and $11,260 for trucks and vans. |
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TECHNICAL EXPLANATION OF THE REVENUE
PROVISIONS
OF H.R. 5140, THE
"RECOVERY REBATES AND ECONOMIC STIMULUS FOR
THE AMERICAN PEOPLE ACT OF 2008"
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
January 28, 2008
JCX-5-08
CONTENTS
Page
INTRODUCTION
..........................................................................................................................
1
A. Recovery Rebates for Individual
Taxpayers.................................................................................
2
B. Temporary Increase in Limitations on Expensing of Certain
Depreciable Business Assets .......... 7
C. Special Depreciation Allowance for Certain
Property..................................................................
9
INTRODUCTION
This document
prepared by the staff of the Joint
Committee on Taxation, provides a
technical explanation of H.R. 5140, the revenue provisions of the
Recovery Rebates and
Economic Stimulus for the American People Act of 2008.
A. Recovery Rebates for Individual
Taxpayers
Present Law
In general
Under the Federal individual income tax system, an
individual who is a citizen or a
resident of the United States generally is subject to tax on
worldwide taxable income. Taxable
income is total gross income less certain exclusions, exemptions,
and deductions. An individual
may claim either a standard deduction or itemized deductions.
An individual’s income tax liability is determined by computing his
or her regular
income tax liability and, if applicable, alternative minimum tax
liability.
Income tax liability
Regular income tax liability is determined by applying the regular
income tax rate
schedules (or tax tables) to the individual’s taxable income (sec.
1). This tax liability is then
reduced by any applicable tax credits. The regular income tax rate
schedules are divided into
several ranges of income, known as income brackets, and the marginal
tax rate increases as the
individual’s income increases. The income bracket amounts are
adjusted annually for inflation.
Separate rate schedules apply based on filing status: single
individuals (other than heads of
households and surviving spouses), heads of households, married
individuals filing joint returns
(including surviving spouses), married individuals filing separate
returns, and estates and trusts.
Lower rates may apply to capital gains.
A taxpayer may also be subject to an alternative minimum tax.
Child tax credit
For taxable year 2008, an individual may claim a tax
credit of $1,000 for each qualifying
child under the age of 17 (sec. 24). Generally, a qualifying child
must have the same principal
place of abode as the taxpayer for more than one-half the taxable
year and satisfy a relationship
test. To satisfy the relationship test, the child must be the
taxpayer’s son, daughter, stepson,
stepdaughter, brother, sister, stepbrother, stepsister, or
descendant of any such individual. A
child who is not a citizen, national, or resident of the United
States may not be a qualifying child.
Explanation of Provision
The provision includes a recovery rebate credit for
2008 which is refundable. The credit
mechanism (and the issuance of checks described below) is intended
to deliver an expedited
fiscal stimulus to the economy.
The credit is computed with two components in the following manner.
Basic credit
Eligible individuals receive a basic credit (for the
first taxable year beginning) in 2008
equal to the greater of the following:
• Net income tax liability not
to exceed $600 ($1,200 in the case of a joint return).
•
$300 ($600 in the case of a joint
return) if the individual has: (1) at least $3,000 of
earned income (as defined below); or (2) net income tax liability of
at least $1 and
gross income greater than the sum of the applicable basic standard
deduction amount
and one personal exemption (two personal exemptions for a joint
return).
An eligible individual is any individual other than: (1) a
nonresident alien; (2) an estate or
trust; or (3) a dependent. The determination of this status for the
relevant year is made on the
basis of the information filed on the tax return.
For these purposes, "net income tax liability" means the excess of
the sum of the
individual’s regular tax liability and alternative minimum tax over
the sum of all nonrefundable
credits (other than the child credit). Net income tax liability as
determined for these purposes is
not reduced by the credit added by this provision or any credit
which is refundable under present
law. The definition of earned income has the same meaning as used in
the earned income credit
except that it includes certain combat pay and does not include net
earnings from selfemployment
which are not taken into account in computing taxable income.
Qualifying child credit
If an individual is eligible for any amount of the
basic credit the individual also may be
eligible for a qualifying child credit. The qualifying child credit
equals $300 for each qualifying
child of such individual. For these purposes, the child credit
definition of qualifying child will
apply.
Limitation based on adjusted gross income
The amount of the credit (including both the basic
credit and the qualifying child credit)
is phased out at a rate of five percent of adjusted gross income
above certain income levels. The
beginning point of this phase-out range is $75,000 of adjusted gross
income ($150,000 in the
case of joint returns).
Rebate checks
Most taxpayers will receive this credit in the form
of a check issued by the Department of
the Treasury. 2
The amount of the payment will
be computed in the same manner as the credit,
except that it will be done on the basis of tax returns filed for
2007 (instead of 2008). It is
anticipated that the Department of the Treasury will make every
effort to issue all payments as
rapidly as possible to taxpayers who timely filed their 2007 tax
returns. (Taxpayers who file late
or pursuant to extensions will receive their payments later.)
Taxpayers will reconcile the amount of the credit with the payment
they receive in the
following manner. They would complete a worksheet calculating the
amount of the credit based
on their 2008 tax return. They would then subtract from the credit
the amount of the payment
they received. For many taxpayers, these two amounts would be the
same. If, however, the
result is a positive number (because, for example, the taxpayer paid
no tax in 2007 but is paying
tax in 2008), the taxpayer may claim that amount as a credit against
2008 tax liability. If,
however, the result is negative (because, for example, the taxpayer
paid tax in 2007 but owes no
tax for 2008), the taxpayer is not required to repay that amount to
the Treasury. Otherwise, the
checks have no effect on tax returns filed in 2009; the amount is
not includible in gross income
and it does not otherwise reduce the amount of withholding.
In no event may the Department of the Treasury issue checks after
December 31, 2008.
This is designed to prevent errors by taxpayers who might claim the
full amount of the credit on
their 2008 tax returns and file those returns early in 2009, at the
same time the Treasury check
might be mailed to them. Payment of the credit (or the check) is
treated, for all purposes of the
Code, as a payment of tax. Any resulting overpayment under this
provision is subject to the
refund offset provisions, such as those applicable to past-due child
support under section 6402 of
the Code.
Examples of rebate determination
The following examples show the rebate amounts as
calculated from the taxpayer’s 2007
tax return.
Example 1.–A head of household taxpayer has $4,000 in earned income,
one qualifying
child, and no net tax liability prior to the application of
refundable credits and the child credit.
Such taxpayer would receive a rebate of $600, comprising $300 for
meeting the earned income
test, and $300 per child.
Example 2.–A married taxpayer filing jointly has $4,000 in earned
income, one
qualifying child, and no net tax liability prior to the application
of refundable credits and the
child credit. Such taxpayer would receive a rebate of $900,
comprising $600 for meeting the
earned income test, and $300 per child.
Example 3.–A married taxpayer filing jointly has $2,000 in earned
income, one
qualifying child, and $1,100 in net tax liability (resulting from
other unearned income) prior to
the application of refundable credits and the child credit (the
taxpayer’s actual liability after the
child credit is $100). The earned income test is not met, but the
taxpayer has net tax liability for
purposes of determining the rebate of $1,100. Such taxpayer would
receive a rebate of $1,400,
comprising $1,100 of net tax liability, and $300 per child.
Example 4.–A married taxpayer filing jointly has $40,000 in earned
income, two
qualifying children, and a net tax liability of $1,573 prior to the
application of refundable credits
and child credits (the taxpayer’s actual tax liability after the
child credit is -$427). The taxpayer
meets the earned income test and the net tax liability test. Such
taxpayer would receive a rebate
of $1,800, comprising $1,200 (greater of $600 or net tax liability
not to exceed $1,200), and
$300 per child.
Example 5.–A married taxpayer filing jointly has $175,000 in earned
income, two
qualifying children, and a net tax liability of $31,189 (the
taxpayer’s actual liability after the
child credit also is $31,189 as their income is too high to
qualify). The taxpayer meets the
earned income test and the net tax liability test. Such taxpayer
would, in the absence of the
rebate phaseout provision, receive a rebate of $1,800, comprising
$1,200 (greater of $600 or net
tax liability not to exceed $1,200), and $300 per child. The
phaseout provision reduces the total
rebate amount by five percent of the amount of the taxpayer’s
adjusted gross income as exceeds
$150,000. Five percent of $25,000 ($175,000 minus $150,000) equals
$1,250. The taxpayer’s
rebate is thus $1,800 minus $1,250, or $550.
Treatment of the U.S. possessions
Mirror-Code possessions 3
Each mirror-Code possession will receive an amount equal to the loss
to that possession
by reason of the recovery rebate credit. This amount will be
determined by the Treasury
Secretary based on information provided by the government of the
respective possession. For
these purposes, a possession is a mirror-Code possession if the
income tax liability of residents
of the possession under that possession’s income tax system is
determined by reference to the
U.S. income tax laws as if the possession were the United States.
Non mirror-Code possessions 4
To each possession that does not have a mirror code tax system, the
Treasury Secretary
will make a payment in an amount estimated by the Secretary as being
equal to the aggregate
benefits that would have been provided to residents of that
possession if a mirror code tax system
had been in effect in that possession. This payment will not be made
to any U.S. possession
unless that possession has a plan that has been approved by the
Secretary under which the
possession will promptly distribute the payment to its residents.
General rules
For purposes of the rebate credit payment, the Commonwealth of
Puerto Rico and the
Commonwealth of the Northern Mariana Islands are considered
possessions of the United States.
It is intended that the Secretary will undertake appropriate
measures to ensure that the
amount of any payment to a possession does not include any amounts
of refund credits claimed
from the United States under the provision by residents of that
possession.
For purposes of the rule permitting the Treasury Secretary to
disburse appropriated
amounts for refunds due from certain credit provisions of the
Internal Revenue Code of 1986, the
payments required to be made to possessions under the provision are
treated in the same manner
as a refund due from the recovery rebate credit.
Effective Date
The provision applies to taxable years beginning
after December 31, 2007.
B. Temporary Increase in Limitations on Expensing
of Certain Depreciable Business Assets
Present Law
A taxpayer that satisfies limitations on annual investment may elect
under section 179 to
deduct (or "expense") the cost of qualifying property, rather than
to recover such costs through
depreciation deductions.5
For 2008, the maximum amount
that a taxpayer may expense is
$128,000 of the cost of qualifying property placed in service for
the taxable year. The $128,000
amount is reduced (but not below zero) by the amount by which the
cost of qualifying property
placed in service during the taxable year exceeds $510,000.6
In general, qualifying
property is
defined as depreciable tangible personal property that is purchased
for use in the active conduct
of a trade or business. Off-the-shelf computer software placed in
service in taxable years
beginning before 2010 is treated as qualifying property.
The amount eligible to be expensed for a taxable year may not exceed
the taxable income
for a taxable year that is derived from the active conduct of a
trade or business (determined
without regard to this provision). Any amount that is not allowed as
a deduction because of the
taxable income limitation may be carried forward to succeeding
taxable years (subject to similar
limitations). No general business credit under section 38 is allowed
with respect to any amount
for which a deduction is allowed under section 179. An expensing
election is made under rules
prescribed by the Secretary.7
For taxable years beginning in
2011 and thereafter, other rules
apply. 8
Explanation of Provision
The provision increases the $128,000 and $510,000
amounts under section 179 for 2008
to $250,000 and $800,000, respectively. The $250,000 and $800,000
amounts are not indexed
for inflation.
Effective Date
The provision is effective for taxable years
beginning after December 31, 2007.
C. Special Depreciation Allowance for Certain
Property
Present Law
A taxpayer is allowed to recover through annual
depreciation deductions the cost of
certain property used in a trade or business or for the production
of income. The amount of the
depreciation deduction allowed with respect to tangible property for
a taxable year is determined
under the modified accelerated cost recovery system ("MACRS"). Under
MACRS, different
types of property generally are assigned applicable recovery periods
and depreciation methods.
The recovery periods applicable to most tangible personal property
range from 3 to 25 years. The
depreciation methods generally applicable to tangible personal
property are the 200-percent and
150-percent declining balance methods, switching to the
straight-line method for the taxable year
in which the taxpayer’s depreciation deduction would be maximized.
Section 280F limits the annual depreciation deductions with respect
to passenger
automobiles to specified dollar amounts, indexed for inflation.
Section 167(f)(1) provides that capitalized computer software costs,
other than computer
software to which section 197 applies, are recovered ratably over 36
months.
A taxpayer that satisfies limitations on annual investment may elect
under section 179 to
deduct (or "expense") the cost of qualifying property, rather than
to recover such costs through
depreciation deductions. 9
For 2008, the maximum amount
that a taxpayer may expense is
$128,000 of the cost of qualifying property placed in service for
the taxable year. The $128,000
amount is reduced (but not below zero) by the amount by which the
cost of qualifying property
placed in service during the taxable year exceeds $510,000.10
In general, qualifying
property is
defined as depreciable tangible personal property that is purchased
for use in the active conduct
of a trade or business. Off-the-shelf computer software placed in
service in taxable years
beginning before 2010 is treated as qualifying property. For taxable
years beginning in 2011 and
thereafter, other rules apply.
11
Explanation of Provision
The provision allows an additional first-year
depreciation deduction equal to 50 percent
of the adjusted basis of qualified property. 12
The additional first-year
depreciation deduction is
allowed for both regular tax and alternative minimum tax purposes
for the taxable year in which
the property is placed in service.13
The basis of the property and
the depreciation allowances in
the year the property is placed in service and later years are
appropriately adjusted to reflect the
additional first-year depreciation deduction. In addition, there are
no adjustments to the
allowable amount of depreciation for purposes of computing a
taxpayer’s alternative minimum
taxable income with respect to property to which the provision
applies. The amount of the
additional first-year depreciation deduction is not affected by a
short taxable year. The taxpayer
may elect out of additional first-year depreciation for any class of
property for any taxable year.
The interaction of the additional first-year depreciation allowance
with the otherwise
applicable depreciation allowance may be illustrated as follows.
Assume that in 2008, a taxpayer
purchases new depreciable property and places it in service.14
The property’s cost is $1,000,
and
it is 5-year property subject to the half-year convention. The
amount of additional first-year
depreciation allowed under the provision is $500. The remaining $500
of the cost of the
property is deductible under the rules applicable to 5-year
property. Thus, 20 percent, or $100, is
also allowed as a depreciation deduction in 2008. The total
depreciation deduction with respect
to the property for 2008 is $600. The remaining $400 cost of the
property is recovered under
otherwise applicable rules for computing depreciation.
In order for property to qualify for the additional first-year
depreciation deduction it must
meet all of the following requirements. First, the property must be
(1) property to which
MACRS applies with an applicable recovery period of 20 years or
less, (2) water utility property
(as defined in section 168(e)(5)), (3) computer software other than
computer software covered by
section 197, or (4) qualified leasehold improvement property (as
defined in section 168(k)(3)).
15
Second, the original use16
of the property must commence
with the taxpayer after December 31,
2007.17
Third, the taxpayer must purchase the
property within the applicable time period.
Finally, the property must be placed in service after December 31,
2007, and before January 1,
2009. An extension of the placed in service date of one year (i.e.,
to January 1, 2010) is provided
for certain property with a recovery period of ten years or longer
and certain transportation
property.18
Transportation property is defined as
tangible personal property used in the trade or
business of transporting persons or property. Special rules,
including an extension of the placed in-
service date of one year (i.e., to January 1, 2010) also applies to
certain aircraft.
The applicable time period for acquired property is (1) after
December 31, 2007, and
before January 1, 2009, but only if no binding written contract for
the acquisition is in effect
before January 1, 2008, or (2) pursuant to a binding written
contract which was entered into after
December 31, 2007, and before January 1, 2009.19
With respect to property that
is
manufactured, constructed, or produced by the taxpayer for use by
the taxpayer, the taxpayer
must begin the manufacture, construction, or production of the
property after December 31,
2007, and before January 1, 2009. Property that is manufactured,
constructed, or produced for
the taxpayer by another person under a contract that is entered into
prior to the manufacture,
construction, or production of the property is considered to be
manufactured, constructed, or
produced by the taxpayer. For property eligible for the extended
placed in service date, a special
rule limits the amount of costs eligible for the additional first
year depreciation. With respect to
such property, only the portion of the basis that is properly
attributable to the costs incurred
before January 1, 2009 ("progress expenditures") is eligible for the
additional first-year
depreciation.
Property does not qualify for the additional first-year depreciation
deduction when the
user of such property (or a related party) would not have been
eligible for the additional firstyear
depreciation deduction if the user (or a related party) were treated
as the owner. For
example, if a taxpayer sells to a related party property that was
under construction prior to
January 1, 2008, the property does not qualify for the additional
first-year depreciation
deduction. Similarly, if a taxpayer sells to a related party
property that was subject to a binding
written contract prior to January 1, 2008, the property does not
qualify for the additional firstyear
depreciation deduction. As a further example, if a taxpayer (the
lessee) sells property in a
sale-leaseback arrangement, and the property otherwise would not
have qualified for the
additional first-year depreciation deduction if it were owned by the
taxpayer-lessee, then the
lessor is not entitled to the additional first-year depreciation
deduction.
The limitation on the amount of depreciation deductions allowed with
respect to certain
passenger automobiles (sec. 280F) is increased in the first year by
$8,000 for automobiles that
qualify (and do not elect out of the increased first year
deduction). The $8,000 increase is not
indexed for inflation.
Effective Date
The provision is effective for property placed in
service after December 31, 2007.
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