The American Recovery and Reinvestment Tax Act of 2009 (“Act”) is a $288 billion tax package that Congress, the President and the American people hope will rejuvenate the flagging economy. This tax act is part of the larger, nearly $800 billion stimulus package, a historic piece of legislation expected to be signed by the President tomorrow, less than one month into the Obama administration. Although the cost of the package is unprecedented, almost two-thirds of the total is in spending programs. Changes to existing tax law are relatively modest, but there are numerous incentives that will help businesses and individuals alike.
The following is an overview and explanation of the tax provisions in the new law that we believe you will find most relevant and helpful. In keeping with the recent trend, many changes have retroactive effective dates, while others are prospective only; some apply only to 2009, while others apply through 2010 or beyond. Make sure to check the effective dates carefully while planning to take full advantage of any changes that affect you. Your local CBIZ MHM tax advisor stands ready to assist you in answering any questions you may have regarding the new law.
Business Tax Relief & Incentives
Small businesses received the biggest benefits under the new Act, including the extension of several popular incentives that had lapsed, liberalization of loss utilization and other rules intended to generate cash quickly, expansion of credits, and other tax breaks targeted to stimulate research and development of green products.
Bonus depreciation. The popular first-year 50% bonus depreciation has been extended through 2009 for most property and through 2010 for certain longer-lived property and specific types of transportation property. Eligible property generally includes new depreciable property with a recovery period of 20 years or less, computer software and qualified leasehold improvements. The provision also extends the $8,000 increase in luxury auto depreciation limits on property eligible for bonus depreciation.
Enhanced expensing of depreciable property. The increased expensing limits for depreciable property that expired at the end of 2008 have also been extended through 2009. This provision allows businesses with active trade or business income to immediately expense up to $250,000 of tangible personal property placed into service during the year. The maximum amount of the deduction begins to phase out when total eligible purchases exceeds $800,000.
|Planning Point: The tax benefits from leveraging these two provisions can be tremendous. If a qualifying company buys and starts using $500,000 of equipment that is normally depreciated over five years, the company can immediately deduct 80% of the cost - $400,000. Both the increased expensing and bonus depreciation also apply for Alternative Minimum Tax (AMT) purposes. These provisions are great opportunities to quickly recover the cost of major asset purchases, but they may not be around for long. Consider whether you should move up your timetable for making major equipment investments so that you can accelerate your deductions.|
|Tax Trap: Many states do not conform to the federal rules with respect to bonus depreciation and the enhanced expensing election. As you should with any federal tax incentives, do not assume that you will enjoy the benefits on your state income tax returns.|
Election to forgo bonus depreciation and increase credit limitations. A corporation can continue through 2009 to elect the use of accumulated research or minimum tax credits in lieu of claiming bonus depreciation for eligible qualified property placed into service after March 31, 2008. The computation of the allowable credit is complex, but the election may be useful, for example, when a business is already in a loss position for the year and would not benefit from claiming the additional depreciation.
Net operating loss (NOL) carryback. Businesses with average revenues that do not exceed $15 million can elect a longer period for carrying back NOLs, in lieu of the current two-year carryback period. This election allows eligible businesses to carry back 2008 losses to 2003, 2004 or 2005. Fiscal year-end corporations can choose to carry back losses generated in either the tax year beginning in 2008 or ending in 2008. Individuals with NOLs resulting from losses from eligible pass-through entities or a sole proprietorship will also qualify for the extended carryback period. The 20-year carryover period for unused losses remains unchanged, as does the AMT limitation permitting only 90% of the loss to be used for AMT purposes.
To qualify, a business cannot average more than $15 million in gross receipts for the three-year period preceding the loss year. Certain related businesses will be combined for purposes of the three-year average revenue test, and businesses less than three years old may have to take into account the revenues of a predecessor company.
|Planning Point: The new NOL provision is a great way to generate cash by claiming refunds of taxes paid in previous years, when your profits may have been greater. If you anticipate 2008 losses, you may want to file your 2008 tax return early so you can file amended returns for the earlier years and claim your refunds. What if you do not have losses to carry back in 2008? Corporations may still be able to get quick cash by filing Form 4466, Application for Quick Refund of Overpayment of Estimated Tax. Though not part of the new law, this can be a great help to corporations that made estimated tax payments when projections indicated a stronger 2008, but realize they need the money now, before they are ready to file their tax returns. Form 4466 must be filed by March 15 for calendar year corporations.|
Shortened Built-in Gain holding period for S Corporations. An S corporation can sell built-in gain property during 2009 or 2010 without paying a corporate level tax, as long as the corporation has held the property for seven years. The prior rule required that the property be held for 10 years. This means that C corporations that filed Subchapter S elections prior to 2003 (or 2004 for 2010 sales) can sell built-in gain property without paying the built-in gains corporate level tax.
Deferral of debt cancellation income. Businesses, including individuals in an active trade or business, can completely defer cancellation of indebtedness income for four or five years, and then include the income ratably over the succeeding five years, by repurchasing their own debt at a discount. The repurchase must occur before 2011, with 2009 repurchases qualifying for the five-year initial deferral, and 2010 repurchases the four-year initial deferral. The debt can be reacquired for cash, stock, partnership interests, contributions to capital or complete forgiveness. Debt for debt exchanges will also qualify in certain circumstances. Partners are allocated their share of deferred income from a partnership in the same percentages as if the partnership had recognized the income at the time of the repurchase.
Exclusion of Gain on Sale of Qualified Small Business Stock. The Act increases the amount an individual can exclude from gain on the sale of certain small business stock held for more than five years from 50 to 75 percent. The provision applies to stock issued after the enactment date and before 2011. The balance is still taxed at the lesser of ordinary income rates or 28 percent. The stock must be original issue stock held by a non-corporate investor in a C corporation, the gross assets of the corporation may not exceed $50 million at the time of issue, and the corporation must actively conduct a trade or business.
|Planning Point: Although not a tax planning point for businesses, as the exclusion only applies to stock held by individuals, this presents an opportunity for start-up businesses to raise capital from sources that might not otherwise be available. The lower tax rates upon exit may make your business a more attractive investment opportunity.|
Work opportunity tax credit (WOTC). The WOTC for 2009 and 2010 is expanded to include two new targeted groups: unemployed veterans and disconnected youth. An unemployed veteran is one discharged or released from active duty from the Armed Forces during the five-year period prior to hiring, and who received unemployment compensation for more than four weeks during the year before being hired. Disconnected youths are those between the ages of 16 and 25 who have not been regularly employed or attended school in the past six months.
Repeal of the IRS bank acquisition NOL rule. The Act prospectively repeals Notice 2008-83, the controversial IRS guidance which provided relief from the Section 382 loss limitation rules on acquisitions of troubled banks. This affects recognition of losses from the disposition of a loan or a bad debt deduction under the specific charge-off or reserve methods of accounting after a change in ownership. Notice 2008-83 will still apply to acquisitions after January 16, 2009 that were announced publicly or in a filing with the SEC, or if the acquisition occurs pursuant to a contract entered into on or before January 16, 2009.
Individual Tax Relief & Incentives
Much of the relief offered in the individual tax provisions is unavailable to most upper income taxpayers because of the phase out rules that limit their deductions. While the Act offers much needed relief to countless families, wage earners, parents of college students and the unemployed, many upper income taxpayers will only see minimal tax relief through the AMT patch.
AMT patch. A patch to the alternative minimum tax (AMT) for 2009, designed to keep more middle-income taxpayers from falling into the AMT trap, raises the AMT exemption amounts slightly compared to 2008 and continues to allow most personal credits to offset or reduce AMT liability. The 2009 AMT exemption amounts are $46,700 for singles and $70,950 for joint filers.
First-time homebuyer credit. Last year, Congress provided first-time home buyers a refundable tax credit up to 10% of the purchase price of their homes, with a maximum of $7,500. This provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009, and had to be repaid over 15 years in equal installments, or, when the home was sold, if earlier. The new law eliminates the repayment obligation for first-time buyers who purchase homes after December 31, 2008, increases the maximum value of the credit to $8,000 and extends the availability of the credit to homes purchased before December 1, 2009. The credit must still be repaid if the house is sold within three years of purchase, and it phases out for taxpayers with adjusted gross income that exceeds $75,000 ($150,000 in the case of a joint return).
|Planning Point: This can be a tremendous break for first time homebuyers who can buy a home during the effective dates of this provision. Potential homebuyers may get help with mortgage payments by adjusting their income tax withholding in anticipation of the credit, along with the mortgage interest and real property tax deductions, to free up more monthly cash. The credit will be taken on their 2009 tax returns, thereby reducing their overall tax liability for the year.|
|Tax Trap: Note that the new law does not remove the repayment obligation on eligible homes purchased during 2008, for which the credit still must be recaptured ratably over 15 years beginning in 2010.|
Sales tax deduction for new car purchases. New car buyers can deduct state and local sales and excise taxes for cars purchased during 2009 and after the date of enactment. For those who do not itemize deductions, the amount is added to the standard deduction. Otherwise, the amount is added to the buyer’s state and local income and property tax deductions. The provision does not apply to those who elect to deduct sales taxes in lieu of state and local income taxes. In that case, the existing rules limiting the vehicle sales and excise tax rates to the general sales tax rates still govern. The new benefit applies only to taxes on the first $49,500 of the purchase price and is phased out for taxpayers with AGI above $125,000 ($250,000 for joint returns).
Estimated tax relief for small business owners. Taxpayers who report income from a small business on their personal tax returns may receive a break on the amount of estimated taxes required to be paid to avoid underpayment penalties. For tax years beginning in 2009, individuals with more than 50% of their adjusted gross income (AGI) coming from a small business will only be required to pay 90% of their prior year’s tax to avoid penalties (as opposed to 100% or 110% depending on AGI). This provision applies to taxpayers with prior year AGI of less than $500,000. A small business for this purpose is defined as any business that employed no more than 500 persons, on average, during the preceding year.
Making Work Pay credit. A key tax cut in President Obama’s campaign platform was a new refundable tax credit for the employed. Though originally introduced at higher amounts, the new law offers a credit of up to $400 for working individuals and $800 for married couples. For many workers, this tax relief will be implemented by lower tax withholdings on wages. The credit can be claimed as a reduction in the amount of income tax withholding on your paycheck, or you can wait and claim the credit on your tax return. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly) and is calculated based upon 6.2% of earned income up to the applicable credit limit .
AMT relief on tax exempt bonds. While interest income from municipal bonds is generally tax-free, certain private activity bond interest is taxable for AMT purposes. To encourage investment in these types of bonds, tax-exempt interest on private activity bonds issued in 2009 or 2010 will not be subject to the AMT.
Expanded child tax credit. Eligibility for the refundable child tax credit in 2009 and 2010 is increased by cutting the earned income threshold to $3,000. Eligible recipients would receive a refund of the lesser of $1,000 or 15% of earned income above the threshold amount. Your tax liability must be less than the otherwise allowable child tax credit for any portion of it to be refundable.
Expanded earned income tax credit (EITC). The EITC for 2009 and 2010 is increased to 45% of the family's first $12,570 of earned income for families with three or more children. The credit begins to phase out at differing income levels, depending on the number of qualifying children. The range is increased by $5,000 for married couples in each circumstance. For example, a couple who files a joint return and who have one qualifying child will start to lose the credit if their combined earnings exceed $21,420.
American Opportunity Tax Credit. Up to $2,500 of the cost of post-secondary tuition and related expenses paid in 2009 and 2010 are eligible for the new American Opportunity Tax Credit. The credit is based on 100% of the first $2,000 of eligible costs and 25% of the next $2,000. This credit replaces the HOPE credit and is subject to a phase-out for taxpayers whose AGI exceeds $80,000 ($160,000 for married couples filing jointly). The American Opportunity Tax Credit is available during the first four years of post-secondary education (as opposed to two years for the HOPE credit). Eligible expenses now include textbooks, and 40% of the credit is refundable unless the taxpayer is subject to the “kiddie tax” (under 18, or students under age 24, who do not provide at least half of his own support).
|Planning Point: With unemployment at record highs, this may be a good time to invest in a college education, which could include training for a new career. Congress makes this investment a little easier by expanding the education credit. If you already have a four-year degree, the Lifetime Learning Credit, while not refundable, may also be available. We can help you determine how to maximize your credits.|
Computers as an education expense. Computer technology and equipment acquired in 2009 and 2010 are qualified education expenses for purposes of Section 529 plans. These expenses do not qualify for any of the education tax credits or the above-the-line tuition and fees deduction.
Economic recovery payment. Retirees, disabled veterans, Social Security recipients and government retirees not eligible for Social Security benefits will be eligible for a one-time refundable credit of $250, but the credit reduces any available Making Work Pay credit.
Unemployment compensation exclusion. The first $2,400 of unemployment benefits received in 2009 will be tax free.
Energy Tax Incentives
The Act includes more than $20 billion in tax incentives for investment in renewable energy projects and energy efficient technologies. Some of these incentives are available for individual taxpayers who upgrade the energy efficiency of their homes. More tax breaks are available for qualifying businesses, including the expansion of some existing incentives.
Enhanced Investment Credit. For tax years beginning in 2009 and 2010, a 30% investment tax credit is available for facilities engaged in the manufacture of advanced energy property, including renewable energy, energy storage, energy conservation, efficient transmission and distribution of electricity and carbon capture and sequestration. The facility must be placed in service after 2008 and be certified by the Treasury pursuant to guidelines to be issued within six months of enactment.
Residential Energy Property Credit. The new law extends the tax credit for energy-efficient improvements to existing homes through 2010. For 2009 and 2010, the amount of the tax credit is increased from 10% to 30% of the amount of qualified energy efficiency improvements during the tax year. An aggregate $1,500 cap applies to all property qualifying for the credit. This eliminates the property-by-property dollar caps that were previously in place.
Residential Energy Efficient Property Credit. The new law removes the dollar limitations on certain energy credits, such as the $4,000 cap on qualified small wind energy property, the $2,000 cap on qualified solar water heating property and the $2,000 cap on qualified geothermal heat pumps.
|Planning Point With percentages going up and caps coming off, you may get some real benefit from these residential energy incentives. Consider whether now is the time for improvements such as insulation, windows, doors, furnaces, stoves, air conditioners or other qualifying property. If you are planning any improvements or upgrades, contact us to get the details on what property is eligible for credits.|
Alternative Fuel Pump Tax Credit. For 2009 and 2010, the credit available to businesses that install alternative fuel pumps that dispense such fuels as electricity, hydrogen and natural gas is increased from 30% (capped at $30,000) to 50% (capped at $50,000).
Energy Bonds. Additional funds are authorized for new clean renewable energy bonds and qualified energy conservation bonds.
Renewable Electricity Production Credit. The renewable energy production tax credit is expanded by extending the placed-in-service date for wind facilities through December 31, 2012, and for certain other qualifying facilities (e.g., hydropower, geothermal, landfill gas, and waste-to-energy) through December 31, 2013.
Investment Credit Election. Taxpayers eligible for the production tax credit can now claim the investment tax credit instead. This change eliminates the uncertainty historically associated with utilizing the production tax credit, which was required to be spread over 10 years.
Energy Investment Credit. The caps on credits available for small wind property, solar water heating property and qualified geothermal property have been eliminated.
The new law also makes changes that provide incentives in more circumscribed ways. These include changes to tax credit bonds issued by state and local governments, energy conservation bonds, recovery zone bonds and qualified academy bonds, as well as enhancements to the New Markets tax credit. If you have questions about how you, or your business, may be affected by the new law, please contact your CBIZ MHM tax advisor .
Yet to Come
Looking once again to find a quick fix for the economy, Congress has (for the most part) given us more of the same. We hope that in the near future we will see more substantive tax legislation which addresses critical issues such as AMT, estate tax and true tax reform. The Act should not be a reason to defer tax planning associated with the phase out in 2010 of numerous tax provisions passed in 2001 -- currently slated to sunset to their prior provisions – including estate tax rates and exemptions, long term capital gains and dividend rates. Look for action on these issues before they expire. We will continue to monitor activity on Capitol Hill and will help you navigate through the uncertain economy and changing tax landscape.
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