Tax Breaks for Businesses and Individuals in American Recovery and Reinvestment Act of 2009
February 23, 2009
It’s official – on February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. This Act, more commonly referred to as the “Stimulus Package,” contains a number of temporary tax incentives and changes. It’s important to understand changes made by the Act and some anticipated changes that were not included. For example, the Act did not fix the current federal estate tax problem looming in 2010 and beyond and did not address tax rates on capital gains or dividends (currently at 15%), leaving items for Congress to consider at a later date.
Here are the highlights of tax changes made by the Act:
Tax Breaks for Business
Depreciation. Businesses may continue claiming bonus depreciation of up to 50% of the cost of depreciable assets placed in service during 2009. In addition, increased expensing for small businesses under Section 179 has been continued through 2009. In 2009, a small business may expense up to $250,000 of the cost of depreciable assets instead of depreciating these assets over time.
Net Operating Losses. The Act increases the number of years a net operating loss (NOL) may be carried back into previous tax years. Prior law allowed an NOL to be carried back two years before the loss year and any remaining loss to be carried forward for up to twenty years. For an NOL arising in 2008, the Act allows a five-year carryback period for businesses with gross receipts of $15 million or less.
S Corporation Built-in-Gain Period. C corporations making an election to be taxed as an S corporation are subject to a “built-in-gain” tax on assets held on the date of election that are sold within a ten-year period. The Act shortens the built-in-gain period from ten years to seven years. The change applies to the 2009 and 2010 tax years.
Credits in lieu of Bonus Depreciation. The Act extends a provision from the Foreclosure Prevention Act of 2008 allowing AMT and loss taxpayers in 2009 to receive 20% of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets qualifying for bonus depreciation.
Incentives for Hiring Unemployed Veterans and Disconnected Youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The Act expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. A “disconnected youth” is an individual between the ages of 16 and 25 who has not been regularly employed or attended school in the past 6 months.
Delay in Recognizing Cancellation of Debt Income. To benefit certain businesses buying their own debt at a discount, the Act allows businesses to recognize cancellation of debt income (“COD income”) over 10 years by deferring any tax on the COD income during the first four or five years and recognizing this income ratably over the remaining five tax years. This change applies to certain types of business debt repurchased by a business in 2009 or 2010.
Qualified small business stock. The Act increases the current exclusion of taxable gain arising from the sale of certain small business stock held for more than five years from 50% to 75%. The increased exclusion applies to stock issued after the enactment date (February 17, 2009) and before 2011.
Tax Breaks for Individuals
The Act also contains tax relief for low and moderate-income taxpayers with tax incentives tied to AMT, educational expenses, and auto and home purchases.
Making Work Pay Tax Credit. The largest single tax incentive in the Act, at a cost of $115 billion, is the “Making Work Pay” tax credit of up to $400 per year for individuals, or $800 per year for couples.
Alternative Minimum Tax (AMT) Patch. The Act attempts to minimize the number of taxpayers subject to AMT by increasing the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allowing personal credits against the AMT.
Unemployment Compensation Exclusion. The Act temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.
Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).
Expanded and revised higher education tax credit. The Act creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.
Computers as an Education Expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.
First-Time Home Buyer Tax Credit. Last year, Congress provided a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The Act enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.
Tax break for new car purchasers. The Act allows taxpayers to deduct state and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). Taxpayers need not itemize deductions to benefit from this deduction. The deduction is not available for taxpayers electing to deduct state and local sales taxes in lieu of state and local income taxes.
Energy Incentives.
The Act provides a three-year extension of the production tax credit for electricity derived from wind (through 2012) and for electricity derived from biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine facilities (through 2013), extension through 2010 and expansion of tax credits for home energy efficiency for purchases such as new furnaces, energy-efficient windows and doors, or insulation, a tax credit of up to $5,000 for families that purchase plug-in hybrid vehicles and a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.
To learn more, you can contact the Taft attorneys listed in this bulletin.
Here are the highlights of tax changes made by the Act:
Tax Breaks for Business
Depreciation. Businesses may continue claiming bonus depreciation of up to 50% of the cost of depreciable assets placed in service during 2009. In addition, increased expensing for small businesses under Section 179 has been continued through 2009. In 2009, a small business may expense up to $250,000 of the cost of depreciable assets instead of depreciating these assets over time.
Net Operating Losses. The Act increases the number of years a net operating loss (NOL) may be carried back into previous tax years. Prior law allowed an NOL to be carried back two years before the loss year and any remaining loss to be carried forward for up to twenty years. For an NOL arising in 2008, the Act allows a five-year carryback period for businesses with gross receipts of $15 million or less.
S Corporation Built-in-Gain Period. C corporations making an election to be taxed as an S corporation are subject to a “built-in-gain” tax on assets held on the date of election that are sold within a ten-year period. The Act shortens the built-in-gain period from ten years to seven years. The change applies to the 2009 and 2010 tax years.
Credits in lieu of Bonus Depreciation. The Act extends a provision from the Foreclosure Prevention Act of 2008 allowing AMT and loss taxpayers in 2009 to receive 20% of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets qualifying for bonus depreciation.
Incentives for Hiring Unemployed Veterans and Disconnected Youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The Act expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. A “disconnected youth” is an individual between the ages of 16 and 25 who has not been regularly employed or attended school in the past 6 months.
Delay in Recognizing Cancellation of Debt Income. To benefit certain businesses buying their own debt at a discount, the Act allows businesses to recognize cancellation of debt income (“COD income”) over 10 years by deferring any tax on the COD income during the first four or five years and recognizing this income ratably over the remaining five tax years. This change applies to certain types of business debt repurchased by a business in 2009 or 2010.
Qualified small business stock. The Act increases the current exclusion of taxable gain arising from the sale of certain small business stock held for more than five years from 50% to 75%. The increased exclusion applies to stock issued after the enactment date (February 17, 2009) and before 2011.
Tax Breaks for Individuals
The Act also contains tax relief for low and moderate-income taxpayers with tax incentives tied to AMT, educational expenses, and auto and home purchases.
Making Work Pay Tax Credit. The largest single tax incentive in the Act, at a cost of $115 billion, is the “Making Work Pay” tax credit of up to $400 per year for individuals, or $800 per year for couples.
- Eligible individuals will receive an income tax credit for two years (2009 and 2010). The credit will reduce tax liability on a dollar-for-dollar basis. Wage earners who don't earn enough to pay income taxes will be able to claim the difference as a tax refund (refundable credit).
- The new credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 in the case of a joint return). In other words, for individuals with earned income above roughly $6,451 ($12,902 for couples), the credit maxes out at $400 ($800 for couples). For the last half of 2009, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. That reduction goes down to about $9 per week next year.
- Nonresident aliens do not qualify for this credit. Neither do estates, trusts, or individuals who can be claimed as a dependent on someone else's return.
- The credit is available in full only if AGI (adjusted gross income, with some modifications for highly specialized income) doesn't exceed $75,000 for an individual ($150,000 if you file a joint return). The credit is phased out at a rate of two percent of the eligible individual's AGI above $75,000 ($150,000 in the case of a joint return). So no credit is allowed for individuals with AGI of $100,000 or more, or for joint filers with AGI of $200,000 or more.
- Unlike the $600 per worker lump-sum rebates issued last year, the credit can be received as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return.
- Since the credit is based on taxable wages and thus unavailable to many retired people and other whose income does not come from wages, the new law includes a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit. Similarly, a one-time refundable tax credit of $250 is provided in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.
Alternative Minimum Tax (AMT) Patch. The Act attempts to minimize the number of taxpayers subject to AMT by increasing the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allowing personal credits against the AMT.
Unemployment Compensation Exclusion. The Act temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.
Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).
Expanded and revised higher education tax credit. The Act creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.
Computers as an Education Expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.
First-Time Home Buyer Tax Credit. Last year, Congress provided a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The Act enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.
Tax break for new car purchasers. The Act allows taxpayers to deduct state and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). Taxpayers need not itemize deductions to benefit from this deduction. The deduction is not available for taxpayers electing to deduct state and local sales taxes in lieu of state and local income taxes.
Energy Incentives.
The Act provides a three-year extension of the production tax credit for electricity derived from wind (through 2012) and for electricity derived from biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine facilities (through 2013), extension through 2010 and expansion of tax credits for home energy efficiency for purchases such as new furnaces, energy-efficient windows and doors, or insulation, a tax credit of up to $5,000 for families that purchase plug-in hybrid vehicles and a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.
To learn more, you can contact the Taft attorneys listed in this bulletin.
