Tax Provisions of The American Recovery and Reinvestment Act of 2009
Tax Law Update 02/17/09 Terrence W. Stein
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the "Act") into law. The Act provides approximately $280 billion in tax relief for individuals and businesses. This update presents an overview of some of the Act's more than 300 changes to the Internal Revenue Code.
Incentives For Businesses
The Act provides over $75 billion in tax benefits for businesses in 2009 and 2010. Most of the Act's business incentives are retroactive to January 1, 2009.
Extension of Bonus Depreciation: The Act extends through 2009 the 50% first-year bonus depreciation allowed under the 2008 Emergency Economic Stimulus Act ("EESA"). The Act also extends, through 2010, the additional year of bonus depreciation for property with a recovery period of 10 years or longer as well as for certain aircraft and transportation property.
Extension of Small Business Expensing: Until 2010, small business taxpayers may generally elect, under Code Section 179, to write-off $250,000 of capital expenditures in lieu of bonus depreciation for new or used property.
Accelerate Recognition of Credits in Lieu of Bonus Depreciation: The Act extends the ability of businesses to accelerate recognition of a portion of their historic AMT or R&D credits in lieu of bonus depreciation through 2009. A business may accelerate an amount equal to the amount the taxpayer invested in property that would have qualified for the bonus depreciation. Businesses that made an election for 2008 may change their election for 2009.
Net Operating Loss Carryback: Businesses with average gross receipts of $15 million or less may elect to extend their NOL carryback period to three, four or five years for NOLs arising in a tax year beginning or ending in 2008. The normal NOL carryback period of two years for all businesses is reinstated for NOLs incurred in 2009.
Deferral of Debt Cancellation Income: The Act allows a business to defer, until 2014, cancellation of indebtedness income arising in 2009 or 2010 from a repurchase, for cash, of a debt instrument that was issued by the taxpayer. After the deferral period, the business must recognize the deferred income ratably over the next five years.
S Corp Built-in Gain Period: The S corporation built-in gains holding period is reduced from 10 years to seven years, for gains recognized in the 2009 or 2010 taxable year by an S corporation that previously converted from C corporation status.
Repeal of the IRS's Special Built-in Loss Rules for Banks: The Act repeals Notice 2008-83, which had provided banks with favorable rules for determining whether losses are restricted following an ownership change.
Work Opportunity Tax Credit: The Work Opportunity Tax Credit allows businesses to claim a credit equal to 40% of the first $6,000 in wages paid to employees in targeted groups. The Act specifies "unemployed veterans" and "disconnected youths" as targeted groups.
Low-Income Housing Credit: To encourage more private capital to invest in low-income housing, the Act allows taxpayers to receive grants from the Treasury Department in lieu of tax credits.
New Markets Tax Credit: The Act increases the amount of credits available for 2008 and 2009.
Withholding on Government Contractors: The Act delays until 2012 the 3% withholding requirement for payments made by the federal, state and local governments to persons providing property or services.
The Act contains energy tax incentives targeted at both individuals and businesses.
Energy Bonds: The Act authorizes $1.6 billion of Clean Renewable Energy Bonds. One-third of the bonds will be available for qualifying projects of state/local/tribal governments, one-third will be available for qualifying projects of public power providers and the remaining bonds will be available for qualifying projects of electric cooperatives. The Act also authorizes an additional $3.2 billion of Qualified Energy Conservation Bonds.
Energy Tax Credits: The Act enhances (1) residential energy property credits under Code Section 25C, (2) residential energy efficient property credits under Code Section 25D, (3) alternative fuel pump tax credits under Code Section 30C, (4) plug-in electric vehicle credits under Code Section 30D, (5) renewable electricity production credits under Code Section 45 and (6) energy investment credits under Code Section 48.
CO2 Capture Tax Credit: The Act requires that anyone claiming the existing $10-per-ton credit for carbon dioxide captured and transported for use in a geologic formation must also ensure that such carbon dioxide is permanently stored in a geologic formation.
Transit Benefits: The Act increases qualified transportation fringe benefits for transit passes and van pooling to $230 per month for the remainder of 2009 and 2010.
The Act provides fiscal relief for states and local governments through various bond-related tax incentives.
AMT Limits on New Private Activity Bonds: The Act excludes all private activity bonds issued in 2009 and 2010 from the AMT preference, making private activity bonds more marketable. The Act also allows AMT relief for private activity bonds issued after 2003 and refunded during 2009 and 2010.
New Recovery Zone Bonds: The Act creates two new categories of tax credit bonds, recovery zone economic development bonds and recovery zone facility bonds. These bonds may be issued in 2009 and 2010 and may be used to invest in infrastructure, job training, education and economic development.
Industrial Development Bonds: The Act expands the types of facilities that may be financed with industrial development bonds issued by state and local governments.
Tax-Exempt Interest Paid to Financial Institutions: The Act allows financial institutions to exclude investments in tax-exempt municipal bonds from their interest expense calculations for bonds issued in 2009 and 2010, to the extent these investments constitute less than 2% of the average adjusted bases of all the assets of the financial institution. The Act also modifies the definition of a "qualified small issuer" to include an issuer that reasonably anticipates its tax-exempt obligations will not exceed $30 million for 2009 and 2010.
Qualified School Construction Bonds: The Act creates a category of tax credit bonds for construction, rehabilitation or repair of public school facilities or acquisition of land for building a public school. State and local governments may issue $22 billion of bonds, including up to $11 billion in 2009 and the remainder in 2010. Indian tribal governments may issue $400 million dollars of these bonds, including up to $200 million in 2009 and the rest in 2010.
Qualified Zone Academy Bonds: State and local governments can issue an additional $1.4 billion of these Qualified Zone Academy Bonds.
Tribal Economic Development Bonds: The Act allows tribal governments to issue $2 billion in tax-exempt bonds without having to satisfy the "essential government function" requirement.
High-Speed Rail Exempt Facility Bonds: The Act allows states to issue these bonds to develop rail facilities for trains capable of attaining speeds in excess of 150 miles per hour, rather than for facilities for trains that are expected to operate at speeds in excess of 150 miles per hour.
Incentives For Individuals
Making Work Pay Credit: The Act creates a new refundable tax credit of up to $400 for working individuals and up to $800 for working families, calculated at a rate of 6.2% of earned income. The credit will phase out for individuals with a modified AGI of $75,000 and for married couples filing jointly with a modified AGI of $150,000. This credit will be applied retroactively to January 1, 2009 and will apply through 2010, and it may be claimed as a reduction in the amount of income tax withheld from a paycheck or through a credit on a tax return. Individuals on a fixed income and government retirees who are not eligible for Social Security benefits will receive a payment of $250, which will reduce any allowable Making Work Pay credit.
First-Time Homebuyer Tax Credit: The Act increases to $8,000 the credit for homes purchased by first-time homebuyers after December 31, 2008 for use as a principal residence. The credit begins phasing out for individuals at an AGI of $75,000 and for married couples filing jointly at an AGI of $150,000. The Act eliminates the repayment obligation of the previous credit unless the home is resold within three years of purchase. The Act also eliminates the prohibition on financing by mortgage revenue bond.
Qualified Small Business Stock: The Act allows individuals to exclude 75% of the gain from a sale of qualifying small business stock that is held for more than five years and is issued after January 17, 2009 and before January 1, 2011.
Sales Tax Deduction for Vehicle Purchases: Taxpayers may deduct, above-the-line, state and local sales and excise taxes attributable to the first $49,500 of the purchase price of new cars, light trucks, recreational vehicles and motorcycles through 2009. The deduction phases out at an AGI of $125,000 for individuals and $250,000 for married couples filing jointly.
AMT Patch: The Act includes a one-year patch that allows taxpayers to use most of their personal credits to reduce their AMT liability. The Act also increases the exemption amounts to $70,950 for joint filers and $46,700 for individuals.
COBRA Benefits: Certain individuals who were involuntarily separated from their employment between September 1, 2008 and January 1, 2010 may elect to pay 35% of the cost of COBRA coverage. The former employer will pay the remaining 65% and can credit those amounts against income tax withholding and payroll taxes.
Education Credit: The new American Opportunity Education Tax Credit provides taxpayers with a credit of up to $2,500 for tuition and related expenses incurred during the tax year. The tax credit is subject to a phase-out for taxpayers with an AGI in excess of $80,000 for individuals and $160,000 for married couples filing jointly.
529 Education Plans: The Act allows "529 plans" to make tax-free distributions applied to the payment of computer and Internet access expenses.
Estimated Taxes: The Act allows individuals who earn their income primarily from small businesses to calculate their estimated tax payments based on 90% of their 2008 tax return.
Child Tax Credit: The Act temporarily enhances the child tax credit.
Earned Income Tax Credit: The Act temporarily increases the earned income credit for a taxpayer with three or more qualifying children.
Unemployment Compensation: The Act suspends federal income tax on the first $2,400 of unemployment benefits received in 2009.
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