On Friday, October 3, 2008 President Bush signed into law a historic $700 billion bailout of the financial services industry, promising to move swiftly to use his sweeping new authority to unlock frozen credit markets to get the economy moving again.  Earlier that day the House approved the Senate-passed version of the bill by a vote of 263-171.  The Senate passed the bill two days earlier by a vote of 74-25.

The 400+ page financial bailout package, technically known as the “Emergency Economic Stabilization Act of 2008,” includes a number of tax provisions and a provision that temporarily increases the amount of federal insurance for bank deposits from $100,000 to $250,000. The new law also includes mental health parity. The tax provisions in the new law include an AMT patch, extenders, energy incentives, and disaster tax relief came from H.R. 6049, the Renewable Energy and Job Creation Act of 2008, as amended, which passed the Senate by a vote of 93-2, on September 23.

Tthe new law also contains an extension for home mortgage debt forgiveness relief, tax relief for community banks that had invested in Fannie Mae and Freddie Mac preferred stock, and a tax crackdown on compensation and severance pay for certain financial executives.

• Debt Forgiveness Relief. The package would provide assistance to homeowners who have been caught up in the current mortgage crisis and are trying to save their homes. The “Mortgage Forgiveness Debt Relief Act of 2007,” P.L. 110-42, excludes debt forgiven before the end of 2009 from taxable income. The package would extend this treatment for 3 years, through 2012. It would not extend the relief to home equity loans.
  
  
• Tax Relief for Community Banks.  Ordinary loss treatment for losses on sales of Fannie Mae and Freddie Mac preferred stock by financial institutions or financial institution holding companies as ordinary losses. This would apply to any preferred stock that was owned on September 6, 2008 or sold between January 1 and September 6, 2008. This would allow banks to obtain the tax benefit of the loss on the preferred stock and therefore reduce the need to obtain additional capital. This should also prevent some community banks from becoming insolvent.
  
  
• Golden Parachute Limits. For participants in the legislation's Troubled Asset Relief Program who sell $300 million in assets, or whose combined assistance from direct purchases and auctions reaches $300 million, limits on golden parachutes and the tax deductibility of executive compensation. Specifically, executive compensation in excess of $500,000 would not be deductible, and the definition of executive compensation would be expanded to include performance pay and stock options.
  
  The current golden parachute tax regime would be expanded to apply to existing employee contracts—a 20% excise tax would apply to parachute payments a (normal 3 times salary rule) triggered by termination other than by retirement of the employee, including involuntary termination of the employee, change in control or bankruptcy of the company. The employer would lose the corresponding deduction on the parachute payment. Golden parachutes would be prohibited prospectively for the top 5 executives in the case of termination, or in the case of bankruptcy, insolvency, or receivership of the financial institution.

The centerpiece of H.R. 1424 is, of course, the financial bailout package, but it also includes a host of tax changes affecting individuals, corporations, and businesses in general, including the following:

• Financial Bailout-related Tax Changes. Emergency economic stabilization related tax measures consist of a three-year extension for home mortgage debt forgiveness relief under Code Sec. 108 , tax relief for community banks by permitting them to treat losses on Fannie Mae and Freddie Mac preferred stock holdings as ordinary losses, and a tax crackdown on compensation and severance pay for certain financial executives.
  
  
• AMT Relief for Individuals. The 2008 Act boosts AMT exemption amounts for individuals for 2008 to $46,200 (individuals) and $69,950 (married filing jointly) for 2008., provides that for 2008, personal nonrefundable credits may offset AMT and regular tax and liberalizes the AMT refundable credit amount rules. 
  
  
• Relaxed Tax Return Preparer Penalty Standards.  The 2008 Act reduces the standards for imposition of the tax return preparer penalty for undisclosed positions from "more likely than not" to “substantial authority”.
  
  
• Extended Tax Breaks.  More than 30 tax breaks that either expired at the end of 2007 or are soon to expire have been extended by the 2008 Act. For example, all of the following tax breaks are retroactively revived to apply for the 2008 tax year and are extended to apply to the 2009 tax year as well:
  
  • the 1040 election to deduct state and local general sales tax,
  • the 1 040 above the line deduction for higher education expenses,
  • the standard deduction for real property taxes for nonitemizers, the $250 above the line deduction for educator expenses,
• the ability of taxpayers age 70 1/2; or older to make nontaxable IRA transfers directly to eligible charities, the research credit through 2009, plus an increase in alternative simplified credit from 12% to 14% for the 2009 tax year; the alternative incremental research credit would be repealed for the 2009 tax year, the 15-year writeoff for qualified leasehold improvements and qualified restaurant property (which is also liberalized), enhanced deductions for certain charitable contributions (which is also liberalized for farmers),the provision allowing a Code Sec. 199 domestic production activities deduction for activities in Puerto Rico, and
• the expensing option for brownfields environmental remediation.
  
  
• New Tax Relief Measures. These include:
  
  • relaxed writeoff rules for film and TV productions,
  • quick 5-year depreciation for many types of farm property,
  • modified rules for the penalty on understatement of a taxpayer's liability by a tax return preparer,
  • mental health parity rules, and
  • liberalized rules for the refundable child tax credit. 
    
    
• Energy Incentives. These include:
  
•  extensions for the alternative energy credit,
• the residential energy efficient property credit,
• the energy efficient buildings deduction,
• the credit for energy efficient improvements to new homes,
• a new credit for plug in electric vehicles and
• there are many other tax incentives for alternative energy creation that are either extended or created. 
  

• Disaster relief.  The 2008 Act provides a host of tax relief measures for disaster victims (both individuals and businesses) in ten Midwestern states (Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin) and a new tax relief package for victims of all Federally-declared disasters occurring after Dec. 31, 2007 and before Jan. 1, 2010.  
  
  This relief includes:
  
  • eased loss deduction rules for individuals,
  • fast writeoffs for business cleanup expenses,
  • a 5-year carryback for NOLs attributable to qualified disaster expenses,
  • bonus 50% first year depreciation for property placed in service through Dec. 31, 2011 (Dec. 31, 2012 for real property), and
  • increased expensing dollar limits.
  
  
  

Revenue Raisers. The combined cost for all measures picked up from H.R. 6049, as amended by the Senate—energy, AMT, extenders, and other provisions—is $150.496 billion, and the offsets in the package total $43.504 billion. Energy provisions are completely offset, and extenders and other provisions are partially offset. Of the total cost, $64.1 billion is unoffset

The revenue raisers in the 2008 Act include:

• broker reporting of customers' basis in securities transactions,
• an extension of the 0.2% FUTA surcharge,
• a limited Code Sec. 199 domestic production activities deduction for the oil and gas industry,
• new rules for nonqualified deferred compensation from certain tax-indifferent parties',
• a tightening of the rules by which oil and gas companies pay taxes on income earned overseas,
• making general fund monies available with increased payments into the oil spill liability trust fund as new drilling is considered, and
• a provision requiring hedge fund managers and others to account for deferred compensation (income held in offshore accounts and other corporate structures) as it accrues, rather than avoiding appropriate and timely income taxes.