Tax Law Changes : Tax-Year 2008 Businesses

Pick a topic from the list below to learn about the tax changes:

Depreciation and Section 179 Deduction

Increased section 179 limits. The maximum section 179 deduction you can elect for qualified section 179 property you placed in service in tax years that begin in 2008, has increased to $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. For qualified section 179 Gulf Opportunity (GO) Zone property placed in service in certain counties and parishes of the GO Zone, the maximum deduction is higher than the deduction for most other section 179 property.

The total depreciation deduction (including the section 179 deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2008 is $2,960 ($10,960 for automobiles for which the special depreciation allowances applies). The maximum deduction you can take for a truck or a van you use in your business and first placed in service in 2008 is $3,160 ($11,160 for trucks or vans for which the special depreciation allowance applies).

Caution! These limits are reduced if the business use of the vehicle is less than 100%.

Special depreciation allowance for certain property. You may be able to take an additional first year special depreciation allowance for certain qualified property (defined below). The allowance is an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).

Property that qualifies for this special depreciation allowance includes the following.

  • Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less.
  • Water utility property.
  • Off-the-shelf computer software.
  • Qualified leasehold improvement property.

Qualified property must also meet all of the following tests.

  • You must have acquired qualified property by purchase after 2007 and before 2009. If a binding contract to acquire the property existed before 2008, the property does not qualify.
  • Qualified property must be placed in service after 2007 and before 2009 (before 2010 for certain transportation property and certain property with a long production period).
  • The original use of the property must begin with you after 2007.

Property that does not qualify for the special depreciation allowance includes the following.

  • Property placed in service and disposed of in the same tax year.
  • Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be qualified GO Zone property.
  • Property required to be depreciated under the alternative depreciation system (ADS).
  • Property included in a class of property for which you elected not to claim the special depreciation allowance.

Fiscal year taxpayers with a tax year beginning in 2007 and ending in 2008 should use Form 4562-FY, Depreciation and Amortization, to claim the special depreciation allowance.

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Meal Expenses When Subject to "Hours of Service" Limits

In general, you can deduct only 50% of your business-related meal expenses. However, for 2008 and later years, you can deduct 80% of meal expenses while traveling away from your tax home for business purposes if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Business meal expenses are covered in chapter 1 of Publication 463. Reimbursements for employee meal expenses are covered in chapter 11 of Publication 535.

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Self-Employment Tax

The maximum amount of net earnings subject to the social security part of the self-employment tax for tax years beginning in 2008 is $102,000. All net earnings of at least $400 are subject to the Medicare part of the tax.

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Social Security and Medicare Taxes

The maximum amount of wages subject to the social security tax for 2008 is $102,000. There is no limit on the amount of wages subject to the Medicare tax.

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Federal Unemployment Tax Act (FUTA) Tax Rate

The 6.2% FUTA tax rate has been extended through calendar year 2008. It was scheduled to decrease to 6.0% after 2007.

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Maximum Automobile Value for Using the Cents-Per-Mile Valuation Rule

For 2008, an employer providing a passenger automobile for the first time for the personal use by an employee may determine the value of the personal use by using the vehicle cents-per-mile value rule if the vehicle's fair market value on the date it is first made available to the employee does not exceed $15,000 for a passenger automobile other than a truck or van, or $15,900 for a truck or van. For more information, see Cents-Per-Mile Rule on page 20 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

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Fringe Benefit Parking Exclusion and Commuter Transportation Benefit

You can generally exclude a limited amount of the value of qualified parking and commuter highway vehicle transportation and transit passes you provide to an employee from the employee's wages. For 2008, the monthly exclusion for qualified parking increases to $220 and the monthly exclusion for commuter highway vehicle transportation and transit passes increases to $115. See Qualified Transportation Benefits on page 17 of Publication 15-B.

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Health Savings Accounts

Eligibility. For 2008, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,100 for self-only coverage or $2,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,600 for self-only coverage and $11,200 for family coverage.

Employer contributions. Up to specified dollar limits, you can generally exclude your contributions (must be in cash) to the health savings account (HSA) of a qualified individual (determined monthly) from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2008, you can contribute up to the following amounts to a qualified individual's HSA.

  • $2,900 for self-only coverage or $5,800 for family coverage.
  • $3,800 for self-only coverage or $6,700 for family coverage for qualified individuals who are age 55 or older at any time during the year.

Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.

For more information, see Health Savings Accounts on page 12 of Publication 15-B.

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Nonqualified Deferred Compensation Plans

Generally, all amounts deferred under a nonqualified deferred compensation plan for the tax year and all preceding tax years are included in your employees' wages in the current year, unless the plan meets certain requirements. These requirements were stated in Notice 2005-1. However, portions of that notice were obsoleted and replaced by final regulations that were effective for tax years beginning after 2007. For more information, see Treasury Decision (T.D.) 9321, 2007-19 I.R.B. 1123, available at www.irs.gov/irb/2007-19_IRB/ar02.html.

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Penalty for Late Filing of a Partnership Return

For returns required to be filed for tax years beginning in 2008, the penalty is increased to $86 for each month or part of a month (up to 12 months) the return is late or does not contain the required information, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due.

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Expired Tax Benefits

In addition to certain provisions discussed earlier, the following tax benefits expired as shown below.

  • Credit for increasing research activities (research credit) (for amounts paid or incurred after 2007).
  • Indian employment credit (for tax years beginning after 2007).
  • Railroad track maintenance credit (for tax years beginning after 2007).
  • Eligibility of certain biomass and synthetic fuels produced at certain qualified facilities for the nonconventional source fuel credit (for sales after 2007).
  • Energy efficient appliance credit (for appliances produced after 2007).
  • Shorter recovery periods for qualified Indian reservation property (for property placed in service after 2007).
  • Fifteen-year property classification for qualified leasehold improvements and restaurant property (for property placed in service after 2007).
  • Seven-year property classification for a qualified motorsports entertainment complex (for property placed in service after 2007).
  • Suspension of the 100% taxable income limit on percentage depletion for oil and natural gas from marginal properties (for tax years beginning after 2007).
  • Special rules for contributions of food and book inventories (for contributions made after 2007).
  • Special rule for corporate contributions of computer technology or equipment for educational purposes (for contributions made in tax years beginning after 2007).
  • Environmental cleanup (remediation) costs deduction (for costs paid or incurred after 2007).
  • Reforestation expense deduction increase for certain small timber producers (for expenses paid or incurred after 2007).
  • Shareholder basis adjustment for stock of S corporations making charitable contributions of property (for tax years beginning after 2007).
  • Certain tax incentives based on the designation of the District of Columbia Enterprise Zone (for any period after 2007).
  • American Samoa economic development credit (for tax years beginning after 2007).
  • Deduction for domestic production activities in Puerto Rico (for tax years beginning after 2007).

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