The American Recovery and Reinvestment Act of 2009 (better known as the 2009 Economic Stimulus Bill or the "Stimulus Bill" as referenced herein), signed into law on February 17, 2009, includes many significant tax law changes. While the changes garnering the most press coverage affect individuals, several significant amendments also affect businesses. In this article, we'll highlight a few of the individual changes and then move to our real purpose - to summarize the new tax provisions that may affect your business in 2009 and beyond.
Tax Changes for Individuals
The Stimulus Bill includes a refundable tax credit of up to $400 per "eligible individual," defined as any individual except for (1) a nonresident alien; (2) an individual who can be claimed as a dependent by another taxpayer; or (3) an estate or trust. Couples filing jointly may claim up to $800. The refundable tax credit phases out at a rate of 2% of the eligible individual's modified adjusted gross income between $75,000 and $95,000 ($150,000 and $190,000 for couples filing jointly), meaning that the amount allowable as a credit for the tax year is reduced by 2% of so much of the taxpayer's modified adjusted gross income as exceeds $75,000 ($150,000 for couples filing jointly), but no credit is available to taxpayers with modified adjusted gross income equal to or exceeding $95,000 ($190,000 for couples filing jointly). It also allows for a one-time $250 payment to recipients of social security, SSI, railroad retirement, and veteran's disability or pension benefits. The tax credit for first-time homebuyers has increased from $3,750 ($7,500 for couples filing jointly) to $4,000 ($8,000 for couples filing jointly), and the former recapture requirement (whereby generally the amount of the credit had to be repaid ratably over a 15 year period as an additional income tax) is waived, unless the residence is sold or ceases to be a principal residence within 36 months of purchase.
The Stimulus Bill also sets forth a new tax credit for higher education, whereby purchases of computer technology and equipment, and Internet access and related services, qualify as higher education expenses for purposes of the credit. The Hope credit, which previously allowed up to $1,800 per eligible student for qualified tuition and related expenses paid for the first two years of the student's post-secondary education, is re-named the American Opportunity Tax Credit and is increased and expanded for 2009 and 2010. The Stimulus Bill further includes a tax deduction for state sales and excise taxes resulting from the purchase of most new vehicles purchases between February 17, 2009 and January 1, 2010. Finally, it establishes eased child tax credit and earned income tax credit rules and increases the refundable health coverage tax credit from 65% to 80% for eligible individual's health insurance costs through December 31, 2010.
Tax Changes for Businesses
Extension of 50% bonus depreciation. Businesses are generally allowed to depreciate the cost of capital expenditures over time. Last year, Congress temporarily allowed businesses to recover the cost of capital expenditures made in 2008 more quickly by permitting them to immediately write off 50% of the cost of depreciable property acquired before 2009 for use in the United States. The Stimulus Bill extends this benefit for qualifying property (including most types of tangible property other than buildings and their structural components, improvements to certain types of leased property, and most software) acquired and placed in service in 2009. The placed in service deadline for certain types of property with a long life, and certain types of aircraft, is December 31, 2010. The Stimulus Bill also raises the otherwise allowable first-year depreciation deduction for business autos first placed in service in 2009 by $8,000, from $2,960 to $10,960.
Businesses are generally allowed to depreciate the cost of capital expenditures over time. Last year, Congress temporarily allowed businesses to recover the cost of capital expenditures made in 2008 more quickly by permitting them to immediately write off 50% of the cost of depreciable property acquired before 2009 for use in the United States. The Stimulus Bill extends this benefit for qualifying property (including most types of tangible property other than buildings and their structural components, improvements to certain types of leased property, and most software) acquired and placed in service in 2009. The placed in service deadline for certain types of property with a long life, and certain types of aircraft, is December 31, 2010. The Stimulus Bill also raises the otherwise allowable first-year depreciation deduction for business autos first placed in service in 2009 by $8,000, from $2,960 to $10,960.
Extension of enhanced small business expensing. Generally, small business taxpayers may recover the entire cost of certain capital expenditures in the year of acquisition instead of recovering such costs over time through depreciation by electing to write off the costs under Section 179 of the Internal Revenue Code (the "Code"). Last year, Congress temporarily increased the amount that small businesses could write off for qualifying capital expenditures incurred in 2008 from $125,000 to $250,000 and increased the phase-out threshold for 2008 from $500,000 to $800,000. The Stimulus Bill extends theses temporary dollar limit increases for capital expenditures incurred in 2009.
Increased carryback period for net operating losses of electing small businesses. Section 172 of the Code generally provides that net operating losses ("NOLs") may be carried back two years and carried forward 20 years. Different rules apply for certain types of losses. The Stimulus Bill provides that for NOLs arising in a tax year beginning or ending in 2008, the maximum NOL carryback period will be five years for small businesses with gross receipts of $15 million or less. Therefore, qualifying small businesses may now elect to increase the NOL carryback period from two years to three, four, or five years. With a longer NOL carryback period, such businesses can get refunds of income taxes paid in earlier years.
Incentives to hire unemployed veterans and disconnected youth. Section 51(d)(14) of the Code sets forth a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees in one of nine targeted groups. The stimulus Bill expands this tax credit and makes more workers eligible by creating two new targeted groups: (1) unemployed veterans, and (2) disconnected youth who begin work for the employer in 2009 or 2010. Individuals qualify as "unemployed veterans" under the Stimulus Bill 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. Individuals qualify as "disconnected youth" under the Stimulus Bill if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past six months.
Extension of monetization of accumulated AMT and R&D credits in lieu of bonus depreciation. The Code generally provides "bonus depreciation" breaks for corporations, as described in part above under the section relating to the extension of 50% bonus depreciation. In 2008 Congress gave corporations an alterative tax break, pursuant to which corporations otherwise eligible for bonus depreciation for qualifying assets placed in service in 2008 (or 2009 for certain longer lived assets) could instead elect to accelerate recognition of 20% of their accumulated pre-2006 research and development ("R&D") tax credits or certain alternative minimum tax ("AMT") credits. The Stimulus Bill extends the 2008 law to property placed in service in 2009 (or 2010 for certain longer lived assets). Taxpayers may accept or decline this extension at their election.
Delayed recognition of certain COD income. Businesses that repurchase their own debt for less than the outstanding amount of the debt generally incur cancellation of debt ("COD") income. To benefit these businesses, the Stimulus Bill permits them to include their COD income for debt repurchased in 2009 or 2010 ratably over a period of five tax years. Inclusion begins with the fifth tax year following the tax year in which the COD reacquisition occurs for reacquisitions in 2009, and the fourth tax year for reacquisitions in 2010. This treatment under the new provision allows businesses to defer tax owed on COD income for the first four or five years and then recognize the income ratably over the following five tax years, beginning in 2014. If an eligible taxpayer elects to defer COD income under this provision, the sections of the Code that would otherwise have permitted the taxpayer to exclude some or all of the COD income (e.g., in the case of discharges in bankruptcy, insolvency and with respect to qualified real property business indebtedness) will not apply to the COD income for the tax year of the election or any later tax year. As a result, an insolvent taxpayer would have to choose between deferring COD income into later years under the new provision, or excluding that income in the current year, and reducing a corresponding amount of tax attributes (such as NOLs and depreciable basis) as required under current law.
Greater exclusion for sale of qualified small business stock. Prior to the Stimulus Bill, Section 1202(a)(3) of the Code permitted individuals to exclude 50% of any gain realized on the sale or exchange of qualified small business stock held for at least five years (60% for certain empowerment zone businesses). The Stimulus Bill increases the exclusion for gain from 50% to 75% for stock issued after the enactment date and prior to January 1, 2011.
Shortened S corporation built-in gain holding period. While an S corporation is generally not subject to tax, under the Code, if a business that was formed as a C corporation elects to become an S corporation, it is taxed at the highest corporate rate (currently 35%) on all gains that are "built-in" at the time of the election and for the next ten years, known as the "recognition period." The Stimulus Bill temporarily shortens the recognition period from ten to seven years for gains built-in at the time of an S corporation election made for 2009 and 2010 tax years.
Repeal of IRS's built-in loss rules. Section 382 of the Code generally limits the rate at which losses may be used to offset income generated after an ownership change, which can occur as a result of acquisitions, certain capital infusions, or other changes in corporate ownership. Last year, in conjunction with the bank bailout legislation that was passed in October 2008, the Treasury Department issued Notice 2008-83, which provided that if a bank recognized a loss from the disposition of a loan or took a bad debt deduction under the specific charge-off or reserve methods of accounting after a change in ownership, that loss or deduction would not be treated as a built-in loss attributable to the pre-acquisition period. The Stimulus Bill prospectively repeals this Notice and provides, under Section 382(m) of the Code, that the IRS is not authorized to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.
Decreased required estimated tax payments in 2009 for individuals with small businesses. Under the Code, to the extent that tax is not collected through withholding, taxpayers must generally make an annual payment for individual estimated income, which is the lesser of: (1) 90% of the tax shown on the return, or (2) 100% of the tax shown on the preceding year's return. For tax years beginning in 2009 only, the Stimulus Bill reduces the annual estimated payment for individuals with small businesses, providing that it is the lesser of: (1) 90% of the tax shown on the return, or (2) 90% of the tax shown on the preceding year's return. For the purposes of this special rule, "individuals with small businesses" include only those whose adjusted gross income on the preceding year's return is less than $500,0000 ($250,000 if married filing separately), with at least 50% of such amount deriving from a trade or business that employed no more than 500 people, on average, during the preceding tax year.
Raised new markets tax credit national limit. Section 45D of the Code provides a new markets tax credit for qualified equity investments in a qualified community development entity. A "qualified equity investment" is any equity investment in a qualified community development receiving an allocation from the IRS where the development uses substantially all of the cash from the investment to make qualified low-income community investments. Prior to the Stimulus Bill, the credit was subject to a nationwide credit limitation for each calendar year, including $3.5 million for 2008 and 2009. The Stimulus Bill raises this limitation to $5 million for 2008 and 2009.
Incentives to invest in renewable energy. Finally, the Stimulus Bill provides several incentives for investment in renewable energy. Some of these provisions directly apply to individual taxpayers, but others are applicable to business taxpayers. Specifically, the Stimulus Bill eliminates the $4,000 annual limitation on the business energy tax credit for qualified small wind energy property, allows a 30% credit for investment in qualified property used in a qualified advanced energy manufacturing project, and provides other tax incentives to encourage development of renewable energy facilities.
While much of the Stimulus Bill is directed at individual taxpayers, many important provisions affect businesses, especially small businesses. It is important to be aware of these tax changes so that you and your business can take maximum advantage of these beneficial changes. The tax lawyers at Sheehan Phinney are familiar with the new law and are prepared to provide you with thorough guidance regarding any of the tax provisions of the 2009 Stimulus Bill.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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