The Emergency Economic Stabilization Act of 2008 (EESA) is designed to solve the credit crunch in the financial markets, but it’s also one of the biggest tax bills in recent years.
Many drycleaners will be affected by the rescue bill, thanks to almost 300 changes to the tax laws — including tax breaks expected to save taxpayers a whopping $150 billion.
CONTRIBUTIONS AND S-CORP CHARITABLE DEDUCTIONS
The law gives businesses enhanced deductions for contributions of food to charitable organizations, as well as donations of books and computer equipment to qualifying schools. Shareholders in S corporations are also eligible for special tax treatment when making charitable contributions of qualifying property.
The EESA also extends a special rule allowing S-Corp shareholders to take into account a pro-rata share of charitable deductions, even if the deduction exceeds the shareholder’s adjusted basis in the S Corp. Better still, the tax savings from this EESA provision are expected to be approximately $132 million over 10 years.
THE NEW MARKETS TAX CREDIT
The New Markets Tax Credit is one of a few incentives in the tax law designed to encourage taxpayers to invest in or make loans to small businesses in economically distressed areas. In today’s credit crunch, extension of the New Markets Tax Credit may help many drycleaning businesses secure financing that otherwise might not be available.
The total credit equals 39% of the investment over seven years. Set to expire at the end of 2008, the New Markets Tax Credit has been extended through December 2009, and is expected to generate tax savings of $1.3 billion over 10 years.
PLUG IN TO A SPECIAL TAX CREDIT
For the more adventurous, EESA establishes a unique new tax credit for plug-in electric vehicles; for passenger vehicles and light trucks, it ranges from $2,500 to $7,500. Under the new rules, any business purchasing a plug-in electric vehicle will benefit from tax savings estimated to exceed a total of $758 million over the next 10 years.
If a new plug-in electric vehicle isn’t in the cards, a new fringe benefit for workers who commute might be of interest. Under the new law, employers are allowed to provide employees who commute to work by bicycle limited fringe benefits to offset the costs of such commuting. That means it’s tax-free to the commuter, and tax-deductible for the drycleaning business.
THE UPSIDE OF THE SAVINGS
Although these tax breaks were passed with minimal “offsets” or “revenue enhancers,” there are provisions designed to offset losses in federal tax revenues. About $44 billion in tax offsets mean some taxpayers will see tax increases. The Federal Unemployment Tax Act (FUTA) surtax is one such enhancer.
FUTA imposes a 6.2% gross tax rate on the first $7,000 paid annually by employers. In 1976, Congress passed a temporary surtax of 0.2% of taxable wages to be added to the permanent FUTA tax rate; the temporary surtax was subsequently extended through 2008. EESA extends the surtax for one year only — at an estimated total cost of $1.5 billion over 10 years.
IS THAT ALL THERE IS?
There may be much more legislation on tap. The question remains whether to extend many of the temporary provisions enacted in the Economic Growth & Tax Relief Reconciliation Act of 2001 (EGTRRA), such as lower individual marginal income tax rates and relief of the marriage “penalty.”
EGTRRA also repealed the federal estate tax, but only for 2010. These temporary provisions will expire after 2010. Additionally, lower capital-gains and dividend tax rates will sunset within the next few years.
Under Congressional requirements, the effects of provisions included in the Emergency Economic Stabilization Act of 2008 were estimated over a 10-year period for budgeting purposes, but the lion’s share of the outlays will occur in the 2008 and 2009 tax years. Consequently, tax planning takes on a special urgency this year for every drycleaning business, business owner and professional who wishes to take full advantage of these new — and in many cases, temporary — tax breaks.
Click here for Part 1 of this story!