The massive American Recovery and Reinvestment Act of 2009 (ARRA), signed into
law on February 17th, could be one of the most important pieces of
legislation in a generation. Through direct spending on infrastructure and
nearly $300 billion in tax relief, ARRA is intended to be "the first step to
get our economy on the road to recovery and pave the way to long-term growth,"
according to President Obama.
In all, the nearly $800 billion law
makes more than 300 changes to the Internal Revenue Code, providing tax relief
and other benefits to businesses and individuals. Following is a brief summary
of some of the major tax-related provisions.
Tax Incentives for Businesses
Extension of Bonus
Depreciation. Last year’s Economic
Stimulus Act gave businesses the opportunity to recover the costs of
capital expenditures made in 2008 at an accelerated rate. Businesses could
immediately write off 50 percent of the cost of depreciable property
(equipment, computers, etc.) acquired in 2008. ARRA extends the benefit to
capital expenditures incurred in 2009.
Extension of IRC 179
Expensing Limits. Under the old law, small businesses were allowed to write
off up to $125,000 (indexed for inflation) of capital expenditures subject to a
phase-out once capital expenditures exceed $500,000 (indexed for inflation).
Last year, Congress temporarily increased the amount of 2008 write-offs to
$250,000 and increased the phase-out threshold for 2008 to $800,000. The new
law extends these temporary increases for capital expenditures incurred in
2009.
Five-Year Carryback
of Net Operating Losses. Under the previous law, qualified businesses could
carry back net operating losses (NOLs) to the two taxable years before the year
in which the loss arose. Losses could also be carried forward to each of the
succeeding 20 taxable years. The law now allows qualified businesses with gross
receipts of $15 million or less with tax years ending in 2008, or beginning in
2008 with a special taxpayer election, to carry back NOLs for three, four or five
years.
Accelerated Recognition of Historic AMT/R&D Credits.
Businesses have another year to accelerate the recognition of a portion of
their historic alternative minimum tax or research and development credits in
lieu of bonus depreciation. The amount that may be accelerated is based on the
amount that the business invests in property that would otherwise qualify for
bonus depreciation. This amount is capped at the lesser of six percent of
historic AMT and R&D credits, or $30 million. The new law extends this
temporary benefit through 2009.
Work Opportunity Tax Credit. Before ARRA, businesses that
hired employees from one of nine targeted groups were allowed to claim a credit
of 40 percent of the first $6,000 of the employees’ wages. ARRA adds certain unemployed
veterans and disconnected youths to the list of new employees for whom the
business can take credit.
Cancellation of
Debt Income. Under current law, cancellation of certain debt is generally
included as income when the taxpayer cancels or repurchases the debt for an
amount less than its adjusted issue price. The amount of cancellation of debt
income is the excess of the old debt’s adjusted issue price over the repurchase
price. Certain businesses will now be allowed to recognize cancellation of debt
income over five years for specified types of business debt repurchased after
December 31, 2008, and before January 1, 2011.
Small Business
Capital Gains. Old tax law provided a 50 percent exclusion for the gain
from the sale of certain small business stock held for more than five years. The
new law increases the exclusion to 75 percent for stock acquired after February
17, 2009, and before January 1, 2011. To claim the exclusion, the business
cannot have assets over $50 million.
Tax Relief for Individuals and Families
Making Work Pay Credit. This credit allows individuals to claim a
credit against income tax in an amount equal to the lesser of 6.2 percent of
earned income, or $400 ($800 for married couples filing jointly). It applies
retroactively to January 1, 2009, and is extended through 2010.
Individuals with modified
adjusted gross income less than $75,000 ($150,000 for married couples filing
jointly) will be eligible for the full credit, with a two-percent phase-out
rate above that income level. Qualified taxpayers will take the credit through
a reduction in their wage withholding, or in a lump sum when filing tax returns
for the tax year.
Enhanced First-Time
Home Buyer Credit. In 2008, Congress authorized a refundable tax credit of
up to 10 percent of the cost of a home (maximum of $7,500), for first-time
homebuyers who purchased a home between April 9, 2008, and July 1, 2009. The
credit was essentially an interest-free loan that had to be repaid to the
government over 15 years in equal installments. ARRA eliminates the repayment
obligation (except when the home is sold within three years of purchase) for
taxpayers purchasing homes after January 1, 2009. It also increases the maximum
value of the credit to $8,000. Availability of the credit is extended to homes
purchased before December 1, 2009.
2009 AMT Patch. As expected, ARRA includes
an alternative minimum tax (AMT) patch designed to protect nearly 26 million
middle-income taxpayers from the dreaded tax. Exemption amounts are increased
to $70,950 for joint filers and surviving spouses, and $46,700 for singles and
heads of households.
Post-Secondary Education
Credits. For 2009 and 2010, the newly renamed American Opportunity Tax
Credit (formerly the HOPE education credit) will provide a new credit of up to
$2,500 (per eligible student per year) of the cost of tuition and related
expenses paid during the taxable year (up from $1,800 under the HOPE education
credit). The credit will phase out for those with adjusted gross income in
excess of $80,000 ($160,000 for married filing jointly).
Time will tell the full impact
of ARRA on the nation’s economy. Right now, business owners and individuals
need to understand the various provisions of the law and begin planning for how
to take advantage of its benefits.
Mark Dalbey, CPA, is a senior manager in Clifton Gunderson’s Peoria
office. He specializes in tax provision services and compliance.
