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American Recovery and Reinvestment
Act of 2009
Today, February 17,
2009, President Obama signed the American Recovery
and Reinvestment Act of 2009. The new law is
a massive piece of legislation that makes over 300 changes to the
Internal Revenue Code. The nearly $800 billion stimulus package
includes nearly $300 billion in tax relief, $280 billion of which is
concentrated in the next two years.
The tax incentives in the stimulus
package can be broken down into two broad categories: individuals
and business. We have provided a
summary of each below.
Individual Incentives
Making Work Pay Credit
Starting later this year, eligible
wage earners will see an increase in their take-home pay. The new
law provides a credit against income tax in an amount equal to the
lesser of 6.2 percent of the individual's earned income or $400
($800 for married couples filing jointly). However, income
limitations apply so the credit is unavailable to higher income wage
earners. The credit applies in
full for individuals whose modified adjusted gross income does not
exceed $75,000 or $150,000 in the case of married couples filing
jointly. The credit is phased out at a two percent rate above that limit. The Making Work Pay credit will be applied retroactively to
January 1, 2009 and prospectively to December 31, 2010. One delay in
getting the credit to wage earners is the need for the IRS to revise
the payroll tax withholding tables. Some observers predict that the
IRS will not be able to revise the tables until June. We will keep
you posted of developments.
$250
Economic Recovery Payment
The agreement provides a one-time payment of $250 to individuals on
a fixed income (primarily Social Security recipients, railroad
retirees and disabled veterans). If the individual also qualifies for the
Making Work pay credit, his or her credit will be reduced by the
$250 payment.
AMT Patch
Every year, bills are introduced in
Congress to abolish the alternative minimum tax (AMT). This year is
no different; however, because the federal budget deficit, Congress cannot
eliminate the AMT without finding an equivalent source of revenue.
However, there is some good news. The new law increases the AMT
exemption amounts and allows taxpayers to take most personal credits
to reduce AMT liability for 2009. The 2009 exemption amount is raised to $70,950 for joint
filers.
First-Time Homebuyer Tax
Credit
In 2008, Congress enacted the
first-time homebuyer tax credit. Unlike other credits, this one had
to be repaid, making it unattractive to many taxpayers. The new law
removes the repayment requirement for homes purchased by first-time
buyers between January 1, 2009 and December 1, 2009. The enhanced
credit equals ten percent of the purchase price of a home up to
$8,000 ($4,000 for married individuals filing separately). There are
income limitations, which preclude higher-income individuals and
couples from taking advantage of the credit.
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New Car Deduction
Automobile sales, like new home
sales, have plummeted in recent months. In response, Congress has
created this deduction.
Purchasers of new vehicles in 2009 are allowed an above-the-line
deduction for state and local sales taxes or excise taxes paid on
the purchase. There are two limits on this deduction:
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Deductible
sales or excise taxes cannot exceed the portion of the tax
attributable to the first $49,500 of the purchase price of any one
vehicle, and
-
Any
deduction will be phased out for any tax year in which the purchaser
has adjusted gross income exceeding $250,000 for joint returns.
Any newly
purchased vehicle first used by the taxpayer that weighs no more
than 8,500 pounds generally qualifies. Motor homes also qualify.
Both domestic
and foreign made vehicles qualify. However, sales tax paid on a
lease agreement does not qualify. This provision will be in effect
only on purchases on or after the date of enactment.
Transit
Benefits
Individuals who take public transportation to work or van
pool may benefit from enhanced transit incentives in the new law.
Congress increased the income exclusion amount for transit passes
and van pooling from $120 per month to $230 per month for 2009
(starting in March 2009) and through 2010 with an inflation
adjustment. However, these benefits must be offered by your employer
to take advantage of them.
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Child
Tax Credit
The current $1,000 child tax credit is one of the most popular
incentives in the Tax Code. The new law increases the refundable
portion of the child tax credit for 2009 and 2010. Taxpayers are
eligible for a refundable credit equal to 15 percent of their earned
income in excess of $3,000 subject to certain restrictions and
phase-outs.
Education Credit
The Tax Code includes a number of
incentives to help bring down the cost of education. The new law
expands the current Hope education credit (and renames it the
American Opportunity Tax Credit). More individuals will be able to
take advantage of this credit because of expanded income phase-outs.
The new law also raises the maximum credit, extends it over four
years of post-secondary school education and makes 40 percent of
the credit refundable. In a related development, the new law also
permits beneficiaries of qualified tuition plans (known as "529"
plans) to use tax-free distributions to pay for computers and
computer technology.
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Unemployment Compensation
Many individuals are surprised to
learn that unemployment benefits are taxable. The new law excludes
up to $2,400 in unemployment compensation from a recipient's gross
income in 2009.
Energy Incentives
The new law enhances several energy tax incentives that reward
taxpayers for installing energy-efficient property and alternative
sources of energy in their homes. Among the types of
energy-efficient property that may qualify for a tax break are
certain heat pumps, furnaces, windows and doors. There's also a tax
break for purchasers of plug-in electric vehicles.
Residential
Energy Efficient Property Credit
The annual maximum limits applicable to the residential
alternative energy credit are eliminated for solar hot water
heaters, wind turbine property and geothermal heat pumps.
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Plug-In Electric
Drive Motor Vehicles
The qualified plug-in electric drive motor vehicle credit is
overhauled and made permanent. A new credit applies to the cost of
converting a vehicle into a plug-in electric vehicle.
Plug-In Electric Vehicles
A new credit applies to two-wheeled, three-wheeled and low-speed
plug-in electric vehicles acquired before 2012.
Alternative
Vehicles and Refueling Property
For 2009, the alternative motor vehicle credit can be claimed
against the alternative minimum tax. The alternative fuel vehicle
refueling property credit is increased for 2009 and 2010.
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Business Incentives
Bonus Depreciation
Bonus depreciation is one of
Congress' favorite mechanisms (along with Code Sec. 179 expensing)
to encourage business spending. The new law extends 50 percent bonus
depreciation that expired at the end of 2008. Businesses can take
advantage of bonus depreciation throughout 2009 (and longer for
certain types of property). Bonus depreciation is taken on top of
regular depreciation. While it can be valuable in the short term,
keep in mind that a large current depreciation deduction results in
smaller future deductions. Also good news in applying bonus
depreciation to vehicles, the new law raises the first-year
depreciation cap limits by $8,000. The new law also allows eligible
businesses to monetize accumulated AMT and research tax credits in
lieu of taking bonus depreciation for 2009.
Section 179
Expensing
Like bonus depreciation, increased
Code Section 179 expensing expired at the end of 2008. The new law
revives it for 2009. Under the new law, Code Section 179 expensing for
2009 is $250,000, and the threshold for reducing the deduction is
$800,000.
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Net Operating Loss (NOL)
Carrybacks
Because of the economic downturn,
many businesses are in a loss position. The Tax Code generally
allows eligible taxpayers to carry back net operating losses (NOLs)
two years with some exceptions. The new law increases the carryback
period to five years for small businesses (which the new law defines
as businesses with average gross receipts of $15 million or less).
The businesses can choose to
carryback three, four or five years. The treatment is also temporary, applying only to 2008 NOLs.
Businesses that qualifying can apply for an immediate refund of
taxes paid during the extended carryback period.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit rewards employers that hire
individuals from targeted groups, such as veterans and young people.
The new law modifies the definitions of eligible veterans and
disconnected youth for purposes of the credit.
Cancellation of Indebtedness
Eligible businesses will be able to
recognize cancellation of certain indebtedness over five years,
beginning in 2014, under the new law. This treatment applies to
specified types of business debt repurchased or forgiven by the
business after December 31, 2008 and before January 1, 2011. An
applicable debt instrument under the conference agreement means a
bond, debenture, note, certificate or any other instrument
constituting indebtedness issued by a C corporation or any other
person in connection with the conduct of a trade or business by such
person.
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S Corporation Built-In Gains
The holding period for assets subject to the built-in gains tax
imposed after a C corporation elects to become an S corporation is temporarily
shortened from ten years to seven years. The reduction will apply to
C corporations that convert to S corporations in tax years beginning in 2009 and
2010.
COBRA
Benefits
COBRA coverage is
temporarily enhanced. Laid-off workers would pay a portion of the
COBRA premium (40 percent), and the former employer would pay the
remaining portion (60 percent).
Energy Incentives
The new law extends and enhances many
energy tax incentives for developers and producers of alternative
and renewable energy. Examples are wind, biomass and solar power.
The incentives are temporary and are intended to boost production of
energy from renewable sources.
Renewable
Energy Grants
Certain electricity production facilities and other property
eligible for the energy credit can qualify for federal grants worth
up to 30 percent of the basis of the property.
Renewable
Electricity Production Credit
The placed-in-service date for property to qualify for the
electricity production credit is generally extended through 2013
(2012 for wind facilities).
Withholding on
Government Contractors
The three percent withholding on government contractors is delayed
to December 31, 2011.
Excludable Gain on
Small Business Stock
Individuals can exclude up to 75 percent of their gain on the sale
of qualified small business stock they acquire after the date of
enactment and before 2011.
Bank
Acquisitions
The Treasury Department's controversial Notice 2008-83, which
exempts banks from the Code Section 382 limitations on certain built-in
losses following an ownership change, is revoked after January 16,
2009.
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Corporate Restructurings
The loss limitation rules are not triggered by ownership changes
occurring under certain restructuring plans required by loan
agreements or line of credit commitments with the Treasury
Department under the Emergency Economic Stabilization Act of 2008.
Corporate
Original Issue Discount (OID)
Rules limiting corporate deductions of OID on high-yield discount obligations are suspended for
certain obligations issued in a debt-for-debt exchange, including an
exchange resulting from a significant modification of a debt
instrument, after August 31, 2008, and before January 1, 2010.
Exempt Interest Expenses
For 2009 and 2010, financial institutions can deduct certain
tax-exempt interest expenses. The small-issuer exception to the
normal disallowance of the deduction is also expanded.
Troubled Asset Relief
Program (TARP) Limits on Executive Pay
The $500,000 deduction limitation on executive
compensation applies to all entities that take troubled asset relief
program (TARP) assistance.
Individual Estimated
Tax Payments
For certain individuals with qualified small business
income, estimated tax payments for tax years beginning in 2009 may
be based on 90 percent of the prior year's tax liability.
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Large
Corporation Estimated Tax Payments
Corporations with at least $1 billion in assets must increase
their estimated tax payments for July, August and September of 2013
to 120.25 percent of the amount otherwise due.
Accelerated Credits
A corporation that elects to claim an accelerated alternative
minimum tax credit or research credit in lieu of bonus depreciation
may increase its credit limitation by the amount of bonus
depreciation claimed with respect to certain extension property
placed in service in 2009.
New Markets Credit
The new markets credit is expanded and modified for 2009 and 2010.
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The scope of the American Recovery
and Reinvestment Act of 2009 is broad. Please
contact us
to discuss how the tax incentives in the new law may benefit you.
Please visit our new
blog,
Successful Tax Strategies, for more tax information as it
becomes available.
Tax
Times is provided by the
Tax
Team of Somerset CPAs for our clients and other
interested persons upon request. Since technical information is
presented in generalized fashion, no final conclusion on these
topics should be made without further review. For additional
information on the issues discussed, please contact your Somerset
advisor or a member of our Tax Team. This document is not intended
or written to be used, and cannot be used, for the purpose of
avoiding tax penalties that may be imposed on the taxpayer.
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