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The 2008 Year in Taxes

Code changes will benefit some, but not all, taxpayers.
By Mark E. Battersby

As the deadline for filing tax returns fast approaches, and regardless of whether professional tax assistance is use, every pet-store retailer should be aware of the many changes to U.S. tax laws, changes that affect the tax bill for 2008—and for many years to come.

Stimulating the Economy
Earlier in year, the Economic Stimulus Act of 2008 was signed into law, complete with rebates and business incentives. While the media focused primarily on the Recovery Rebates (up to $600 for individuals and $1,200 for married couples, depending upon income), the new law also included $44.8 billion in business incentives.

Although few pet-product retailers acquire large amounts of equipment, every owner and manager should be aware the new law almost doubled Section 179—immediate write-off for newly acquired equipment—to $250,000, but only for 2008. Thus, up to $250,000 of the cost of equipment acquired and placed in service in 2008 can be treated as a business expense and fully deducted on the tax returns for the 2008 tax year. Should newly acquired equipment costs total more than $800,000 for 2008, the $250,000 Section 179 write-off must be reduced, dollar-for-dollar, for the excess above the $800,000 ceiling.

Another provision in the stimulus package allowed businesses to claim a 50-percent bonus depreciation allowance for newly acquired equipment. To qualify, the equipment must be eligible for depreciation and have a useful life longer than 20 years. Off-the-shelf computer software and improvements made to leased, business property also qualify for bonus depreciation. Best of all, the 50-percent bonus depreciation applies in both the 2008 and 2009 tax years.

Saving the Economy
Last fall, Congress passed, and the president signed into law, a historic financial-markets rescue bill, the Emergency Economic Stabilization Act (EESA) of 2008. Although the new law’s primary purpose was to solve the credit crunch in the financial markets, it was also one of the largest tax bills in recent years.

Included as part of that bill were nearly 300 changes to our tax laws, tax breaks expected to save all taxpayers (corporate, small-business, individual, etc.) a whopping $150 billion during the next 10 years. Under Congressional rules, tax savings were computed over a 10-year period, the lion’s share of that expected outlay occurring in the 2008 and 2009 tax years.

In addition to tax credits for utilizing solar or alternative energy in the pet-products business, there is also a unique tax deduction available to anyone making a commercial building more energy efficient.

A Bigger Umbrella
Designed specifically for small businesses, business owners and professionals who are, according to our lawmakers, the ones with large amounts of deposits at risk, the bailout bill raised the FDIC and National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000. However, the increased levels are only temporary, expiring after 2009.

Fewer Need Dread the AMT
The bill boosted the Alternative Minimum Tax (AMT) exemption amounts for individuals for 2008, and allowed, at least for 2008, personal nonrefundable credits to offset AMT and regular tax. The bill increased the income threshold where people begin to feel the effects of the AMT.

Although originally designed to prevent the wealthy from avoiding paying taxes, because it was not indexed for inflation, it has affected an increasing number of middle-class taxpayers. Each year, Congress has passed a series of “patches” to boost the threshold. The patch included in the new law raised the AMT exemption amounts for 2008 to $69,950 for married couples filing jointly and $46,200 for single taxpayers. Total savings to taxpayers will be almost $62 billion.

Leasehold Improvements
Earlier tax-law changes shortened the cost-recovery period for improvements made to leased business property from 39 to 15 years. The new law not only extends the faster write-offs for those so-called “leasehold improvements,” until the end of 2009, it allows retail businesses to benefit from the shortened recovery period.

That means that pet-store retailers will share in tax savings estimated to reach $8.7 billion over 10 years. The shorter, 15-year write-off period for more permanent types of improvements to retail locations is good only for the 2009 tax year. On the other hand, the write-offs apply to owner-occupied businesses, as well as leased establishments.

Saving Taxes on Energy Savings
Last fall’s tax-law changes extended a number of energy-tax incentives, many of which apply to pet-product retailers. Quite a few of those extensions go beyond the one- or two-year periods authorized by lawmakers for non-energy extenders.

Among the provisions extended were several energy-efficiency and energy property-tax incentives. An eight-year extension of investment credits for solar energy was, for example, extended as were breaks for wind, geothermal and other alternative sources.

In addition to tax credits for utilizing solar or alternative energy in the pet-products business, there is also a unique tax deduction available to anyone making a commercial building more energy efficient.

Tax deductions for energy-efficient buildings have been extended through Dec. 31, 2013, and are expected to generate tax savings in excess of $890 million over a 10-year period. Rather than a deduction for the cost of equipment or improvements to make a commercial building more energy efficient, the amount deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50-percent energy-savings target. A lesser, flat-rate, deduction is available for achieving smaller energy savings.

Under the tax rules, to qualify, energy savings must be accomplished through energy- and power-cost reductions for the building’s heating, cooling, ventilation, hot water and interior-lighting systems. This opens the door to a number of possibilities. However, as is the case with all of EESA’s provisions, professional guidance is strongly recommended.

The New Markets, Tax Credit and More
The New Markets Tax Credit is one of the few incentives in the U.S. tax law to encourage taxpayers to invest in or make loans to small businesses in economically distressed areas. Created to increase investment in low-income communities, the total credit equals 39 percent 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, generating an expected tax savings of $1.3 billion over 10 years.

On the Downside of Upside Tax Savings
Although these tax breaks passed with only minimal “offsets” or “revenue enhancers,” there are a few provisions designed to offset the loss to the U.S. Treasury. Approximately $44 billion in offsets mean tax increases for some taxpayers. The Federal Unemployment Tax Act (FUTA) surtax is one such increase.

FUTA imposes a 6.2-percent gross tax rate on the first $7,000 paid annually by employers. In 1976, Congress passed a temporary surtax of 0.2 percent of taxable wages to be added to the permanent FUTA tax rate. The temporary surtax subsequently has been extended through 2008. This bill extends the surtax for one year only—at an estimated cost to employers of $1,474 billion over 10 years.

Obviously, not all of the tax breaks that were a part of the 2008 law changes will affect all pet-product businesses—or their owners. In fact, many of the provisions contained in U.S. tax laws, both new and existing, might be better ignored.

A retailer might, for example, have acquired an expensive new point-of-sale computer system in 2008. The expenditure for that computer system would qualify as a Section 179 expensing deduction, small enough not to trigger the ceiling. However, with little in the way of profits, a depreciation write-off over a number of years, when profits will—hopefully—be greater and the tax bracket more onerous, might be more advantageous.

Consequently, professional advice takes on a special urgency for every pet-product retailer as well as every pet-product business owner and manager. It is not too late to take full advantage of the new and, in many cases, temporary, tax breaks. Nor is it too late to develop a strategy that will reduce taxes for the 2008 tax year—and for many years to come.  <HOME>

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