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Economic Stimulus Package Becomes Law
Issue Four days after the U.S. Congress passed a $789 billion economic stimulus plan on Feb. 13, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Tax Act of 2009 (ARRTA). ARRTA is designed to provide tax relief to businesses and individuals through provisions that encourage job preservation and creation, investments in infrastructure and energy-efficient property, and assistance to the unemployed. Of the $789 billion economic stimulus plan, more than 35 percent of the cost of the bill is allocated to tax relief.
Taxpayers Potentially Affected Tax Provisions of ARRTA In addition, businesses reporting their financial results in accordance with U.S. generally accepted accounting principles (GAAP) need to be aware of the impact some of the business provisions of ARRTA will have on their effective tax rate. Many times, tax and accounting treatments are different, which can affect how tax expense for U.S. GAAP is calculated. Discuss such changes with a financial statement auditor. Business taxpayers should also be aware that several of the provisions could have an effect on employers. This includes changes to the income tax withholding rules, changes to certain incentives that employers might be required to report to the Internal Revenue Service (IRS), and changes to benefits that might need to be communicated to current and former employees. Many procedural changes were left for the IRS to address, so expect further guidance to be forthcoming. Tax Relief for Individuals and Family Making Work Pay Credit The Making Work Pay credit is a refundable tax credit equal to 6.2 percent of an individual’s earned income, limited to $400 per working individual ($800 for married couples filing jointly). The credit can be applied either as a reduction in income tax withheld from paychecks or as an income tax credit on a tax return.
One-time Payments to Certain Individuals ARRTA provides a one-time payment of $250 to individuals receiving benefits from the Social Security Administration, Railroad Retirement Board, and U.S. Department of Veterans Affairs. To qualify, the taxpayer is required to have been eligible for one of the benefits listed above for any month during the period beginning Nov. 1, 2008, and ending Jan. 31, 2009. The one-time payment reduces by $250 any allowable Making Work Pay credit. The commissioner of the Social Security Administration, the commissioner of the Railroad Retirement Board, and the secretary of Veterans Affairs will provide the secretary of the Treasury with the names and information needed to disburse the one-time payment. ARRTA also provides a one-time payment of $250 to government retirees who have no earned income and are not eligible for the recovery payment listed above. American Opportunity Tax Credit The American Opportunity Tax Credit replaces and expands the Hope Credit for 2009 and 2010. Under the Hope Credit, taxpayers and their dependents enrolled in post-secondary education for the first time were eligible for a tax credit, up to $1,800 per student, for qualified tuition and related expenses. Under the American Opportunity Tax Credit, taxpayers are eligible for a maximum $2,500 tax credit for tuition and related expenses paid during 2009 and 2010. Individuals can receive a 100 percent credit for the first $2,000 spent on tuition and related expenses and a 25 percent credit for the next $2,000 spent on tuition and related expenses. Taxpayers may claim the American Opportunity Tax Credit for expenses incurred during the first four years of post-secondary education. The credit can be claimed for expenses of the taxpayers and their dependents. It is claimed on a per-student basis and may be used against the alternative minimum tax (AMT). If an individual does not owe taxes for 2009 or 2010, 40 percent of the credit is refundable to the individual. The Lifetime Learning Credit, a per-family credit of up to $2,000, is not modified by the American Opportunity Tax Credit.
Qualified Education Expenses Under Section 529 Plans ARRTA provides that for 2009 and 2010, computers and related computer technology, including monthly charges for Internet access, are considered qualified education expenses under Section 529 plans. To qualify, the technology, equipment, or services must be used by the student named in the 529 plan while enrolled at college. Modifications to First-time Homebuyer Credit The Housing Assistance Tax Act of 2008 (HATA) created a refundable tax credit equal to 10 percent of the purchase price of a principal residence, limited to $7,500, for first-time homebuyers. A first-time homebuyer is defined as someone who had not owned a home in the three-year period preceding the date of purchase. To qualify for the credit, the home must be purchased after April 8, 2008, and before July 1, 2009. Taxpayers who received this credit were required to repay the amount received over a 15-year period. ARRTA increases the amount of the first-time homebuyer credit from $7,500 to $8,000 and extends the credit to homes purchased before Dec. 1, 2009. In addition, taxpayers who purchase principal residences between Dec. 31, 2008, and Dec. 1, 2009, are not required to repay the credit received, unless the home is resold or ceases to be a principal residence within 36 months of the purchase. A home ceases to be a principal residence when it becomes a rental property or a vacation home.
Sales Tax Deduction for Vehicle Purchases ARRTA provides qualified taxpayers with a standard deduction for state and local sales taxes and excise taxes paid on the purchase of new cars, light trucks, recreational vehicles, and motorcycles through 2009. The deduction is available only for the taxes paid on the first $49,500 of a vehicle’s purchase price.
Extension of AMT Relief for 2009 ARRTA provides individuals subject to the AMT with temporary relief in 2009 by extending the ability to use nonrefundable personal credits (the child tax credit, the higher education credit, and the first-time homebuyers credit) to offset the AMT and by increasing the AMT exemption amount to $46,700 for individuals ($70,950 for married couples filing jointly). Prior to ARRTA, the AMT exemption amount for the 2009 tax year was $33,750 for individuals ($45,000 for married couples filing jointly). For the 2008 tax year, the AMT exemption amount was $46,200 for individuals ($69,950 for married couples filing jointly). Increase of Refundable Portion of Child Credit Taxpayers with one or more children may be entitled to a child tax credit of $1,000 per child. The child tax credit is refundable to the extent that the taxpayer’s AGI exceeds an earned income threshold amount, multiplied by 15 percent. For 2008, the earned income threshold amount was $8,500. ARRTA modifies this amount for 2009 and 2010 to $3,000. Prior to ARRTA, the earned income threshold amount for 2009 would have been $12,550.
Earned Income Tax Credit ARRTA temporarily increases the earned income tax credit (EITC) for qualifying families with three or more children. Under prior law, the EITC was equal to 40 percent of the first $12,570 of earned income. ARRTA increases the credit to 45 percent of the first $12,570 of earned income. The EITC is phased out on a percentage basis for income over a certain threshold. ARRTA increases the phase-out thresholds of the EITC. Under prior law, the EITC begins to phase out for AGIs between $10,590 and $19,540 for a joint return, depending on the number of dependent children claimed by the taxpayer. ARRTA increases the phase-out range for all married couples filing jointly by $1,880 for 2009 and 2010.
Taxation of Unemployment Benefits ARRTA temporarily suspends federal taxation on the first $2,400 of unemployment benefits received during 2009. COBRA Coverage for Unemployed Workers ARRTA provides a 65 percent subsidy for the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation premiums for up to nine months. To qualify for the COBRA premium assistance, a worker must be involuntarily terminated after Aug. 31, 2008, and before Jan. 1, 2010. Workers involuntarily terminated after Aug. 31, 2008, and before Feb. 18, 2009, who failed to initially elect COBRA because of the cost, have another 60 days to elect COBRA and receive the subsidy.
Small Business Capital Gains Current law provides taxpayers with a 50 percent exclusion for the gain from the sale of stock in a qualified small business held for more than five years. A qualified small business is a domestic C corporation with aggregate gross assets less than $50 million immediately before the stock is issued. Current law also provides a 60 percent exclusion for otherwise qualifying stock investments in empowerment zone businesses. To qualify for either exclusion, the taxpayer is generally required to have acquired the stock at original issue. The amount of gain eligible for the exclusion is limited to the greater of:
ARRTA increases the exclusion to 75 percent for stock issued after Feb. 17, 2009, and before Jan. 1, 2011. Due to the AMT addbacks required for the gain exclusion, the overall tax benefit of the exclusion may be limited.
Private Activity Bonds Under current law, interest on tax-exempt private activity bonds generally is subject to AMT. ARRTA exempts private activity bonds issued in 2009 and 2010 from the AMT.
Tax Incentives for Businesses Carryback of Net Operating Losses Small businesses with average annual gross receipts of less than $15 million are able to carry back net operating losses for three, four, or five years instead of two. Average annual gross receipts are defined as the average gross receipts over the last three consecutive years. Taxpayers may elect this treatment for net operating losses occurring in tax years that end in 2008. Therefore, calendar-year taxpayers are allowed to carry back only net operating losses that occurred in 2008. Fiscal-year taxpayers alternatively may elect to carry back losses generated in a fiscal year beginning in 2008.
Continuation of Accelerated Depreciation on Certain Business Assets Prior law allowed taxpayers to claim an additional first-year depreciation deduction equal to 50 percent of an investment for qualified property acquired and placed into service after Dec. 31, 2007, and before Jan. 1, 2009. ARRTA extends the provision to apply to qualified property placed into service after Dec. 31, 2008, and before Jan. 1, 2010. Qualified property includes 1) tangible property with a recovery period of less than 20 years; 2) purchased computer software; 3) water utility property; and 4) qualified leasehold improvement property.
The deduction is computed after the application of any allowable small business expensing. It is not affected by short tax years, and is allowed for AMT purposes.
Small Business Expensing ARRTA extends the increased small-business expensing election. For tax years beginning in 2009, qualified taxpayers are allowed to expense up to $250,000 of qualified property placed in service during the 2009 tax year. To qualify, the property must be tangible Section 1245 property (generally, personal property), depreciable under the modified accelerated cost recovery system, and purchased for use in an active trade or business. The expensing amount is reduced dollar for dollar if the total value of eligible property exceeds $800,000, so that no benefit exists under this provision when total qualified expenditures exceed $1.05 million. This increase in the expensing limits expires for property placed in service in tax years beginning in 2010. Acceleration of AMT and Research Credits HATA allowed taxpayers to accelerate the recognition of research and minimum tax credit carryforwards instead of using the bonus first-year depreciation allowed under the Emergency Economic Stabilization Act of 2008. Under HATA, carryforward research or minimum tax credits are limited to 20 percent of the additional bonus depreciation that would have been allowed for tax years ending in 2008. This amount is capped at the lesser of $30 million or 6 percent of AMT and research credits accumulated from tax years beginning before Jan. 1, 2006. ARRTA extends this temporary benefit through 2009. High-yield Discount Obligations Original issue discount (OID) on debt instruments is generally deductible by the borrower. However, OID on high-yield discount obligations (HYDO) is limited such that a portion of the OID is deductible only when paid, with the remaining OID treated as a return on equity (which may qualify for a dividends-received deduction). A debt instrument is a HYDO if: 1) its maturity date is more than five years from the issue date; 2) the yield to maturity equals or exceeds the sum of the applicable federal rate (AFR) in effect for the calendar month the obligation is issued plus 5 percentage points; and 3) it has significant OID. ARRTA provides that the HYDO rules do not apply to any debt instrument issued after Aug. 31, 2008, and before Jan. 1, 2010. While the bill provides that the exclusion from the HYDO rules expires on Dec. 31, 2009, it gives the IRS the ability to extend the exclusion if it is determined that an extension is appropriate in light of distressed conditions in the debt capital markets. In lieu of extending the exemption from the HYDO rules beginning on Jan. 1, 2010, the IRS has the authority to modify the rate (currently AFR plus 5 percentage points) used to determine if a HYDO exists.
Delayed Recognition of Certain Cancellation of Debt Income Taxpayers generally are required to recognize cancellation of debt income (CODI) in the following cases: 1) the acquisition of its own debt for cash; 2) the exchange of one debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument); 3) the exchange of a debt instrument for corporate stock or a partnership interest; 4) the contribution of a debt instrument to capital; and 5) the complete forgiveness of a debt. ARRTA allows taxpayers to elect to defer the recognition of CODI from such transactions that take place after Dec. 31, 2008, and before Jan. 1, 2011. If the election is made, the income is deferred and recognized ratably over a five-year period beginning with the fifth subsequent tax year for CODI realized during the 2009 calendar year, and the fourth subsequent tax year for CODI realized during calendar year 2010. The recognition of the deferred income is accelerated upon the cessation of business or in similar circumstances such as a bankruptcy filing. In the case of partnerships and S corporations, the sale or exchange of an interest in the pass-through entity or the redemption of a partner or shareholder in the entity accelerate recognition of the CODI.
Work Opportunity Tax Credit ARRTA creates two new targeted groups for 2009 and 2010: unemployed veterans and disconnected youth. Unemployed veterans are defined as any veteran discharged or released from active duty at any time during the five-year period ending on the hiring date and who received unemployment compensation for at least four weeks during the year prior to the hiring date. Disconnected youths are defined as individuals ages 16 to 24 who have not been employed or regularly attended secondary, technical, or post-secondary school during the six-month period preceding the hiring date, and are not readily employable because they lack a sufficient number of basic skills. S Corporation Built-in Gains Holding Period Under prior law, S corporations were required to pay additional tax on any built-in gain that existed on assets held prior to their conversion from a C corporation to an S corporation if those assets were sold within 10 years after the S election. ARRTA temporarily reduces the S corporation built-in gains tax holding period to seven years from 10 years, which applies to realized property gains that occur in 2009 and 2010.
Temporary Small Business Estimated Tax Payment Relief ARRTA reduces the 2009 required annual estimated tax payments for certain small businesses. Under ARRTA, the required annual estimated tax payments are reduced to the lesser of 1) 90 percent of the tax shown on the return for the taxable year, or 2) 90 percent of the tax shown on the return for the preceding taxable year. Under the prior law, the required annual estimated tax payments was the lesser of 1) 90 percent of the tax shown on the return for the taxable year, or 2) 100 percent of the tax shown on the return for the preceding taxable year. Qualified small businesses include those whose adjusted gross income for the preceding tax year is less then $500,000 and who earned at least 50 percent of gross income attributable to a small business in the preceding tax year. A small business is defined as having, on average, less than 500 employees for the previous year. New Markets Tax Credit The New Markets Tax Credit provides investors with a federal tax credit equal to 39 percent of the amount of capital invested in a qualified community development entity, which in turn must reinvest the proceeds in qualified low-income businesses. The tax credit is earned over a seven-year period. ARRTA increases the total investment authority for which the New Markets Tax Credit is available for 2008 and 2009 to $5 billion from $3.5 billion each year. The tax credits are awarded each year through a competitive application process. The additional $1.5 billion of investment authority for 2008 will be reallocated to prior-year applicants. Tax Incentives for the Investment in Energy-efficient Property Residential Energy Efficient Property Credit Under the Energy Tax Incentives Act of 2005, individual taxpayers are eligible for a lifetime credit of $500 for installing certain energy-efficient property in their principal residence after Dec. 31, 2005. The personal energy property credit consists of two components: 1) building envelope improvements, and 2) purchasing residential energy property expenditures. Under the previous law, the building envelope improvement credit was equal to 10 percent of the improvement costs of the building envelope. The residential energy property expenditure credit was equal to 100 percent of the cost of expenditures of certain energy-saving property. Qualifying property includes advanced main air circulating fans; natural gas, propane, or oil furnaces or hot water heaters; and electric and geothermal heat pumps. Labor costs for on-site preparation, assembly, and original installation of the property were allowed to be added into the cost of the qualifying property in determining the cost of the expenditures. The credit amount limitation for each type of qualifying property purchased ranged from $50 to $300. ARRTA increases the building envelope improvement portion of the credit to 30 percent of the improvement costs of the building envelope. This credit is allowed for certain improvements made to the exterior structure of the building. ARRTA also modifies the residential energy property expenditure credit to 30 percent of the cost of expenditures of certain energy-saving property; however, the limitation for each type of qualifying property purchased is eliminated. ARRTA also eliminates the lifetime limitation for the residential energy efficient property credit for 2009 and 2010. Instead, the aggregate amount of credits for 2009 and 2010 cannot exceed $1,500. Qualified Plug-in Electric-drive Motor Vehicles The Energy Improvement and Extension Act of 2008 created a dollar-for-dollar tax credit for taxpayers purchasing a qualified plug-in electric-drive motor vehicle placed into service after Dec. 31, 2008. ARRTA modifies how the credit is calculated for vehicles acquired after Dec. 31, 2009. Prior to ARRTA, individuals could receive a tax credit in the range of $7,500 to $15,000, for vehicles with a gross weight greater than five tons. Now, the credit is limited to $7,500, regardless of the vehicle’s weight. In addition, the credit was set to phase-out once a total of 250,000 qualified plug-in electric vehicles were sold. ARRTA modifies this phase-out to 200,000 qualified plug-in electric vehicles sold per manufacturer. Transit Benefits Currently, tax-free fringe benefits provided to employees for transit and parking are set at different amounts. ARRTA equalizes these tax-free benefits and sets both the transit and parking benefits at $230 a month for 2009. This amount will be indexed to inflation for 2010. Other Incentives Contact Information If you have any questions, comments, or concerns about the American Recovery and Reinvestment Tax Act of 2009, please contact Crowe Horwath LLP's National Tax Office:
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