This Week in the iNews:

▲ 2008 STABILIZATION ACT

▲ FOCUS ON FRAUD: 2008 REPORT TO THE NATION ON OCCUPATIONAL FRAUD AND ABUSE © ACFE – Part 11

▲ LUNCH & LEARN SERIES PROGRAM #4 – PART 1 – YEAR END TAX PLANNING

▲ 2008 Stabilization Act

The crisis in the financial markets, the housing slump and the credit crunch are straining our fragile economy. On October 3, the President signed into law a $850 billion financial markets rescue package, the Emergency Economic Stabilization Act of 2008 with more than $150 billion in tax incentives.

Troubled Assets Relief Program. Congress gave the Treasury Department sweeping powers to purchase "troubled assets" from banks and other institutions. Many of these troubled assets are linked to home mortgages. However, the housing slump has sent millions of homeowners into foreclosure, making these assets much less valuable.

If a bank or other institution seeks to participate in the rescue program, it must agree to new curbs on executive compensation. In some situations, the Treasury Department can set limits on the compensation of an entity's executives. In other cases, the Treasury Department can limit how much the company deducts for executive compensation. Congress also authorized the Treasury Department to prohibit or limit golden parachute payments.

Tax cuts. Originally, the rescue package did not include the "extenders," energy incentives and disaster relief. Only after the House defeated the original rescue package on September 30 did the Senate add these "sweeteners" to win more support for the rescue plan. The Senate's strategy worked. On October 3, the House passed the Senate's version of the rescue plan including the tax incentives. President Bush signed the bill into law later that day.

Many of the tax incentives in the rescue are commonly known as extenders. These are popular but temporary tax breaks which expire every year or two years unless Congress extends them. Some of these temporary tax cuts have been extended so many times that individuals and businesses mistakenly believe they are permanent when, in reality, they are still temporary. The temporary nature of these incentives makes tax planning challenging because you may be able to take a credit or deduction in one year but not in a future year. Fortunately, the extenders under the new law have been passed soon enough to enable use of year-end tax planning strategies that can maximize 2008 tax savings retroactively to the start of 2008, as well as 2009 tax breaks right from the start of the new year.

Individual incentives. Many of individual incentives are familiar. The new law extends the state and local sales tax deduction (which you can take in lieu of deducting state and local income taxes); higher education tuition deduction, teachers' classroom expense deduction, and tax-free distributions from IRAs for charitable purposes. In all, more than a dozen important tax breaks have been given new life by being extended. These incentives are now available for 2008 and 2009.

The rescue package includes good news for individuals who pay alternative minimum tax (AMT). Congress has authorized an AMT "patch" for 2008 to help keep middle-income individuals out of the reach of the AMT by giving them higher exemption amounts and allowing taxpayers to take nonrefundable personal credits to reduce their AMT liability. The 2008 exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household and $34,975 for married couples filing separately for 2008.

New to the AMT patch for 2008 is targeted help for individuals with worthless stock options. At the height of the dot.com boom, many individuals received incentive stock options (ISOs) that were valuable at that time but became worthless after the dot.com bubble burst. The rescue plan abates AMT liability stemming from the exercise of incentive ISOs along with interest and penalties on the unpaid amounts. Additionally, all individuals, including those who paid their ISO AMT liabilities, may accelerate the refund of the minimum tax credit that has not been used.

Earlier this year, Congress created new tax incentives to help homeowners: the first-time homebuyer's tax credit and the additional standard deduction for real property taxes. Individuals who do not itemize their deductions may be eligible for the additional standard deduction for real property taxes. This deduction was originally available only for 2008. The rescue package extends the deduction through 2009. However, the rescue package does not extend the first-time homebuyer's tax credit.

When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage and forgives all or part of the excess mortgage debt, the Tax Code treats the cancelled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act , enacted in late 2007, excludes from federal tax those discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

Additionally, the rescue package enhances the child tax credit. Before the new law, the child tax credit was refundable to the extent of 15 percent of the taxpayer's earned income in excess of approximately $12,050 (reflecting inflation adjustments from the original floor of $10,000). Under the new law, the floor falls to $8,500. Additionally, the rescue plan changes the definition of a "qualifying child" with respect to age and joint returns, clarifies certain tiebreaker rules and ties the child tax credit to the child dependency exemption.

If you install qualifying energy conservation property, such as exterior windows and doors, in your home you may be eligible to a tax break. The new law extends a number of energy conservation tax incentives and creates a new tax credit for individuals who purchase a plug-in electric vehicle. Solar power, too, has been given a tremendous boost. Both the availability of an unlimited credit for its installation and extensive tax breaks for the solar industry as a whole will drive down energy costs for everyone but especially those with homes that "go solar," at least in part.

Business tax incentives. The business tax incentives in the rescue package are extensive. The largest business extender is the research tax credit. This credit is available for qualifying research expenses, including wages. The rescue package extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also increases the alternative simplified research credit to 14 percent start next year, a tremendous incentive now for smaller firms to finally use the research credit to grow their businesses.

Many businesses remodel or otherwise make improvements to their facilities on a regular schedule. These improvements are usually depreciated over 39 years. The rescue package shortens that period to 15 years for qualifying leasehold, restaurant and retail improvements. However, this special treatment is temporary, so timing these improvements becomes critical.

Businesses that donate food to charitable organizations and books and computers to schools may be eligible for a tax deduction. The rescue package extends these tax breaks through 2009.

Employees may exclude certain employer-paid transportation fringe benefits from their incomes. The rescue package adds commuting by bicycle to types of commuting eligible for the exclusion.

Producers of alternative energy, such as electricity from solar power, biomass and wind facilities also benefit under the rescue package. Congress extended and enhanced various alternative energy tax incentives. Tax breaks for energy efficient improvements to commercial buildings and energy efficient appliances likewise are extended and in some cases enhanced. With the price of heating and air conditioning steadily rising, these tax breaks should considerably reduce the pay-back time for these improvements.

Other business incentives in the rescue package include extensions of the New Markets Tax Credit, enhanced depreciation of leasehold, restaurant and retail improvements, brownfield remediation, Indian employment credit, subpart F active financing, look-through treatment of payments between related controlled foreign corporations (CFCs), and enhanced expensing for U.S. film and television production.

The business incentives in the rescue package are not only targeted, however they are also complex. Please contact our office if you have any questions.

Disaster relief. The rescue package helps individuals and businesses recovering from storms and tornadoes that hit the Mid-West earlier this year. Individuals in 10 Mid-West states may be eligible for special tax incentives, such as enhanced casualty loss deductions, expensing and depreciation. The rescue plan also includes more limited tax incentives to help victims of Hurricane Ike in Louisiana and Texas along with temporary national disaster relief.

Revenue raisers. To pay for a portion of these tax incentives, Congress included several revenue raisers in the rescue package. For those affected, they also are being referred to as "tax increases."

One of the most wide-reaching is broker basis reporting. The rescue package requires brokers to report the adjusted basis of publicly-traded securities and indicate whether gain is long-term or short-term. Securities subject to the new reporting requirement include stocks, bonds, debentures, commodities, derivatives, and other financial instruments designated by Treasury. The reporting requirement takes effect for stocks acquired on or after January 1, 2011, mutual funds acquired on or after January 1, 2012, and other securities acquired on or after January 1, 2013.

Another revenue raiser targets foreign deferred compensation. It closes a loophole through which nonqualified deferred compensation plans maintained by foreign corporations will generally become taxable, unless the compensation is deferred 12 months or less after the end of the year that the compensation vests. Deferred compensation would be taxable when the amount is determinable. If the compensation is not determinable when it was deferred, the individual must pay a 20 percent surtax, plus interest, when the amount is determinable. The provision does not apply to an entity whose income is taxable in the U.S. or subject to a "comprehensive foreign income tax."

The rescue package also caps the Code Sec. 199 domestic production activities deduction for oil and gas companies. Additionally, it tightens the rules that oil and gas companies have to pay taxes on overseas income. Two special taxes, the oil spill tax and the FUTA surtax, are extended under the new law.

Time for planning. The Emergency Economic Stabilization Act of 2008 is one of the largest tax laws in recent years. You may be able to take advantage of one or more the tax incentives. There is still time in 2008 to utilize these incentives in your strategic tax planning. Planning to take maximum advantage of these incentives in 2009 also should start now. Please call or email our office so we can discuss these opportunities in more detail.

▲ FOCUS ON FRAUD: 2008 REPORT TO THE NATION ON OCCUPATIONAL FRAUD AND ABUSE © ACFE – Part 11

This study is based on data compiled from 959 cases of occupational fraud that were investigated between January 2006 and February 2008 and published by the Association of Certified Fraud Examiners. All information was provided by the Certified Fraud Examiners (CFEs) who investigated those cases.

Executive Summary – Part 11 – The Perpetrators and Collusion, Age and Tenure

The survey collected information about the individuals responsible for occupational fraud in order to better understand the characteristics of those who commit fraud and to see how certain types of fraud are related to different job types or positions of authority.

Impact of Collusion

In nearly two-thirds of the fraud schemes covered by the study, the perpetrator acted alone, a proportion that was consistent with the last study in 2006.

Perpetrator’s Age

More than half of the fraud cases studied involved a fraudster over the age of 40, and over one-third of the schemes were perpetrated by individuals between the ages of 41 and 50. The distribution of ages was very similar to that from the 2006 study.

Tenure of Perpetrator

There was no strong correlation in the study between the amount of time an individual had worked for an organization and when that person was likely to begin committing fraud. Approximately 48% of perpetrators had worked at the organization for five years or less, while about 52% had been with their organization for more than five years. However, it was found that, generally speaking, longer-term employees tend to commit much larger frauds, which was consistent with previous studies.

Next time:

Executive Summary – Part 12 – The Perpetrators and Other Key Characteristic

▲ Lunch & Learn Series Program # 4 – Part 1 - Year End Tax Planning

Please join us for the fourth program of our Lunch & Learn Series at noon on Tuesday, November 18, 2008 in the Prangley Marks, LLP lunch/conference room. It is the first in a two part series on year end tax planning for individuals, corporations and for the new Michigan Business Tax.

Please contact mripley@pmcpa.com or call (616) 774-9004 to reserve your spot.

Complimentary lunch, program and parking provided.

Seating is limited.