Tax-law changes in 2008 that can help you now
With the season for filing 2008 tax returns well under way, all veterinarians should be aware of changes to the laws.
With the season for filing 2008 tax returns well under way, all veterinarians, regardless of whether they use professional tax assistance, should be aware of many changes in the laws that will affect their tax bill for 2008 and for years to come. Here's a capsule look at key measures Congress passed in 2008 that affect practices and other businesses:
Early in the year, the Economic Stimulus Act of 2008 was signed into law. While it was most notable for rebates mailed to individuals and couples, the law also included $44.8 billion in business incentives.
If your practice acquired new equipment, the law almost doubles the Section 179, first-year write-off for new equipment placed in service to a maximum of $250,000 — but only for 2008. It can be treated as a business expense and fully deducted on 2008 returns.
If new equipment costs exceeded $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 allows practices to claim a 50 percent bonus depreciation allowance for new equipment. To qualify, the equipment must be eligible for depreciation and have a useful life of more than 20 years. Off-the-shelf computer software and improvements made to leased practice property also qualify for bonus depreciation. The bonus applies in both the 2008 and the 2009 tax years.
The bailout bill
Last fall, the Emergency Economic Stabilization Act of 2008 was passed and signed into law. Its main purpose was to solve the credit crunch in the financial markets, but it also became one of the largest tax bills in recent years.
It included almost 300 changes in laws that aim to save taxpayers $150 billion.
One of them noteworthy for veterinary practices and other small businesses raises the FDIC and National Credit Union Share Insurance Fund deposit insurance limit from $100,000 per account to $250,000. But those increased levels are only temporary, expiring after 2009.
Fewer need dread the AMT
The bill boosted the Alternative Minimum Tax (AMT) exemption for individuals 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 taxes, because it was not indexed for inflation the AMT has affected an increasing number of middle-class taxpayers. Each year, Congress 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 to $46,200 for single taxpayers. Total savings to taxpayers will be almost $62 billion.
Earlier tax-law changes shortened the cost recovery period for improvements to leased practice property from 39 to 15 years. The new law not only extends the faster write-offs for "leasehold improvements" until the end of 2009, it allows retailers and restaurants to benefit from similar shortened recovery periods.
That means that veterinary practices 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 is good only for the 2009 tax year, however. On the other hand, the restaurant and retail property write-offs apply to improvements of owner-occupied businesses as well as leased establishments.
Energy savings rewarded
The law extends a number of energy-tax incentives, many of which apply to veterinary practices. Quite a few go beyond the one-or two-year periods for non-energy provisions. Several tax incentives promote energy efficiency. An eight-year extension of investment credits for using solar energy was, for example, extended, as were breaks for wind, geothermal and other alternative sources of energy.
In addition to tax credits for using solar or alternative energy in a practice facility, there is a unique tax deduction available to anyone making a commercial building more energy-efficient.
Deductions for energy-efficient buildings were extended through 2013 and are expected to generate more than $890 million in tax savings. However, rather than a deduction for the actual cost of equipment or improvements needed to make a commercial building more energy-efficient, the amount deductible is a flat $1.80 per square foot of building floor area, at least for buildings achieving a 50 percent energy-savings target. A lesser flat-rate deduction is available for achieving smaller energy savings.
To qualify, energy savings must be accomplished via energy and power cost reductions for heating, cooling, ventilation, hot water and interior lighting systems.
New markets tax credit
The New Markets Tax Credit is one of the few incentives that encourage investment in or loans to small businesses and professional practices in economically distressed areas. The credit equals 39 percent of the investment over seven years. It was to expire at the end of 2008, but was extended through December 2009.
Other new tax provisions that might be of benefit to some veterinarians include:
- Enhanced charitable deductions for qualified computer contributions to schools.
- Investments in recycling: Businesses can claim accelerated depreciation for purchases of equipment used to collect, distribute or recycle a variety of commodities.
- Bicycle commuters. Employers are allowed to provide employees who commute to work by bicycle limited fringe benefits to offset the costs of such commuting (e.g., storage).
Several of the new tax breaks are designed to offset the loss of some $44 billion to the U.S. Treasury. That means tax increases for some.
The FUTA surtax is one example. The Federal Unemployment Tax Act (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. That has been extended through 2008.
Obviously, not all of the tax breaks will affect all veterinarians or their practices. In fact, many of the provisions are better ignored.
A veterinarian might, for example, have acquired needed equipment in 2008 that would qualify as a Section 179 expensing deduction. But, if profits are down, taking a depreciation write-off over a number of years when profits might be greater and the tax bracket more onerous could make sense.
Practices might want to seek professional advice in making such decisions.
It is not too late to take full advantage of the new and, in many cases, temporary, tax breaks that became a reality during 2008.
Nor is it too late to develop a strategy that will help reduce your taxes in 2009 and beyond.
Battersby is a tax consultant in Ardmore, Pa.