Just moments ago, President Obama signed the American Recovery and Reinvestment Act of 2009 (the Act). The Recovery Act is to stimulate the economy and save or generate approximately 3.5 million jobs with an estimated total cost of $789.5 billion through a variety of individual and business tax cuts, investing in infrastructure, investing in clean renewable energy, investing in sciences and technology, and assisting Americans hurt by the recession. Below is a summary of the major tax provisions that were included in the Act:
Tax Provisions Affecting Individuals
"Making Work Pay" Tax Credit - For 2009 and 2010, the Act provides a refundable tax credit equal to the lesser of 6.2% of the earned income of the taxpayer or $400 for individuals ($800 for a joint return). For taxpayers with modified adjusted gross income in excess of $75,000 ($150,000 for a joint return) the benefit begins phasing out. Thus taxpayers with modified adjusted gross income in excess of $95,000 ($190,000 for a joint return) will not be eligible for the credit. Earned income shall not include earnings that are subject to self employment tax, therefore Schedule C income and guaranteed payments from partnerships would not be eligible for this credit.
Economic Recovery Payment - Individuals with no earned income would not be entitled to the "Making Work Pay" tax credit, so in lieu of the credit the Act provides a one time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. In addition, certain government retirees who are not eligible for Social Security benefits will be eligible for the $250 payment. The one-time payment is a reduction to any allowable Making Work Pay credit.
Increase Eligibility for the Refundable Portion of Child Credit - Currently, to the extent that the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit equal to 15% of the earned income in excess of $8,500. For 2009 and 2010 the earned income limit was to increase to $12,550. The Act reduces this floor for 2009 and 2010 to $3,000.
"American Opportunity" Education Tax Credit - The Act modifies the HOPE credit (and renames it to the "American Opportunity Tax Credit") to provide an increased credit for educational expenses. The credit is available for the students first 4 years of post secondary education. For 2009 and 2010, the Act provides for a tax credit of up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Taxpayers will receive a 100% credit for the first $2,000 of tuition and related expenses (including books) paid during the taxable year and twenty-five percent (25%) of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent (40%) of the credit would be refundable. This tax credit will be subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for a joint return).
Eligible Expenses for Section 529 Education Plans - For 2009 and 2010, the Act expands the definition of qualified education expenses eligible for reimbursement from a Section 529 Education Plans to include computers and computer technology in addition to the previous eligible expenses of tuition, room & board, mandatory fees and books.
Refundable First-time Home Buyer Credit - In 2008, Congress provided first time home buyers with an interest free loan via a refundable tax credit equal to 10 percent of the purchase price of a home, with the credit being limited to $7,500. The credit was to be repaid back to the government over 15 years in equal installments, or, if earlier, when the home is sold. Eligible taxpayers must have purchased their home on or after April 9, 2008 and before July 1, 2009. 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 makes the home buyer credit a true credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009 and extends the term of the credit to homes purchased before December 1, 2009. In addition the Act increases the maximum value of the credit to $8,000. For a home that is purchased on or after January 1, 2009 and before December 1, 2009, if the home is sold after a 3 year period, the Act eliminates the credit recapture provisions. For any home sold during that 3 year period, the credit would be subject to recapture.
Motor Vehicle Sales Tax Deduction - To encourage the purchase of new vehicles, the Act provides all taxpayers with an itemized deduction for the state and local sales and excise taxes paid on the purchase of new cars, light truck (gross vehicle rating of not more than 8,500 pounds), recreational vehicles, and motorcycles for 2009. The deduction is limited to the taxes on the purchase price of the vehicle not to exceed $49,500. To the extent the vehicle is more than $49,500, the excess taxes are not deductible. This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return). The motor vehicle sales tax deduction is not an additional deduction to those individuals that already elect to deduct sales tax (which includes the sales tax on vehicles) in lieu of their income taxes when they itemize. For individuals that do not itemize, they are entitled to an increased standard deduction by the amount of motor vehicle sales tax deduction that they would have received had they itemized.
Temporary Suspension of Taxation of Unemployment Benefits - Historically, all federal unemployment benefits are subject to tax. For 2009, the Act exempts the first $2,400 of unemployment benefits per recipient from taxation. Any unemployment benefits over $2,400 will be subject to federal income tax.
AMT Relief for 2009 - For 2009, Congress didn't wait until the last minute to give AMT relief to millions of taxpayers. Prior to the passage of the Act, the exemption amounts for 2009 were scheduled to be $33,750 for single filers, $45,000 for married filing jointly and $22,500 for married filing separately. The Act raises the exemption amounts for 2009 to $46,700 for single filers, $70,950 for married filing jointly, and $35, 475 for married filing separately.
Small Business Capital Gains - Subject to certain limitations, Section 1202 provides individuals with a fifty percent (50%) exclusion of the gain on the sale of certain small business stock held for more than five years. The non-excluded portion of Section 1202 gain is taxed at the lesser of ordinary income rates or 28 percent, instead of the lower capital gains rates for individuals. The Act increases the amount of gain on the sale of certain small business eligible for exclusion to seventy-five percent (75%) on certain small business stock held for more than five years. This change is for stock issued after the date of enactment and before January 1, 2011.
Temporary Estimated Tax Payment Relief - For 2009, the Act reduces the required estimated tax payments for qualifying individuals that have certain small businesses. If an individual had less than $500,000 in adjusted gross income in 2008 and more than 50% of that income was from a small business, then for the required 2009 estimated tax payments the individual only needs to pay 90% of the previous year tax or 90% of current year tax. For purposes of this rule, a small business is defined as a trade or business that employs no more than 500 persons.
Tax Provisions Affecting Businesses
Bonus Depreciation - For assets purchased in 2008, businesses were allowed to deduct 50% of the cost of qualifying new assets purchased. The Act extends the eligibility of the 50% bonus depreciation to qualifying new assets purchased in 2009.
Acceleration of Historic AMT/R&D Credits - In 2008, businesses were allowed to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of taking the bonus depreciation on their qualifying new asset purchases. The amount that taxpayers could accelerate was calculated based on the amount that each taxpayer invests in property that would otherwise qualify for bonus depreciation. The amount of the accelerated credit is capped to the lesser of six percent (6%) of historic AMT and R&D credits or $30 million. The Act extends this benefit through 2009.
Immediate Expense Deduction - In 2008, Congress increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold in 2008 to $800,000. For 2009 and 2010, the immediate expense deduction was scheduled to decrease to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation). The Act increases the immediate expense deduction to the level that it was in 2008, $250,000 and the phase out threshold to $800,000 for assets acquired in 2009.
Net Operating Loss Carryback for Small Businesses - Currently net operating losses ("NOLs") may be carried back to the two taxable years before the year that the loss arises and carried forward to each of the succeeding twenty taxable years. For eligible small businesses that incur an NOL for a year ending in 2008, the business can elect to carry the NOL back to the 3rd, 4th or 5th preceding year to recapture tax dollars. Under the Act an eligible small business is defined as business that has average gross receipts of $15 million or less for the years ending in 2006, 2007 and 2008.
Deferred Recognition of Certain Cancellation of Debt Income - Generally when a taxpayer, or a person related to the taxpayer, reacquires debt at a discount, the taxpayer has cancellation of debt (COD) income to the extent of the discount in the year of reacquisition. The Act modifies the period that the taxpayer will have to recognize the income from debt that is reacquired in 2009 and 2010. Under the Act, for debt reacquired in 2009, the taxpayer will recognize the COD income ratably over a five year period beginning the 5th tax year following the year that the reacquisition occurs. For debt reacquired in 2010 the taxpayer will recognize the COD income ratably over a five year period beginning the 4th tax year following the year that the reacquisition occurs.
Incentives to Hire 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 in 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. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.
Temporary Reduction of S Corporation Built-In Gains Holding Period - When a C corporation elects S status, the corporation is subject to a built in gains tax on any appreciated property that was held at the time of the conversion and sold within a 10 year period following the conversion. Pursuant to the Act, for 2009 and 2010, if the S corporation is in the 8th, 9th or 10th year of the recognition period, the corporation will not be subject to any built in gain tax that they may otherwise have been subject to due to the disposition of an asset.
Bank Net Operating Losses - When there is a change of ownership of more than 50% in an entity, Code Section 382 potentially limits the deductibility of any losses that were in existence at the time of the change in ownership. Last year, the IRS issued guidance which liberalized rules under Section 382, specifically allowing banks the ability to fully deduct losses on loans, bad debts or additions to bad debt reserves subsequent to the change in ownership. The Act provides that the IRS was not authorized to provide the exemption to the Section 382 rules, thereby revoking the IRS guidance prospectively.
Energy Provisions
Increase Eligibility for Energy Credits - The legislation extends the placed-in-service date for wind facilities for three years (through December 31, 2012) to be eligible for the electricity production credit. It also extends the placed-in-service date through December 31, 2013 for certain other qualifying facilities that are eligible for the electricity production credit: closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities.
Election to Claim the Investment Tax Credit in lieu of the Production Tax Credit - Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit which is payable over a ten-year period. The Act provides a temporary election to claim the investment tax credit in lieu of the production tax credit. This election is generally effective for facilities placed in service after December 31, 2008 and before January 1, 2014 (2013 for wind facilities).
Renewable Energy Grants - The Act authorizes the Treasury to provide grants to taxpayers that places in service property that is either an electricity production facility that would be eligible for the renewable electricity production credit or property that would be eligible for the energy credit. The provision of the grant would be in lieu of the credit that the taxpayer would otherwise be eligible to receive. This provision is in essence allowing the Treasury to buy these credits from taxpayers that may not be immediately utilized, thus providing up front financing for renewable energy projects. Subject to exceptions, the project must be placed in service during 2009 or 2010.
Business Energy Credit - The Act increases the credit available for small wind property by eliminating the $4,000 cap on the credit. The Act also eliminates the requirement to reduce the basis of the property for purposes of claiming the credit if the property is financed in whole or in part by subsidized energy financing or proceeds from private activity bonds.
Energy-efficient Existing Homes - The Act extends the tax credits for improvements to energy-efficient existing homes through 2010. For 2009 and 2010, the amount of the tax credit is increased from 10% to 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the tax year. Qualified energy efficiency improvements would include such things as windows, doors, advanced main air circulating fans, qualified natural gas, propane or oil furnaces, propane or oil hot water boilers, heat pumps, water heaters and central air conditioners. The previous property-by-property dollar caps on the tax credit are also eliminated, and an aggregate $1,500 cap applies to all property qualifying for the credit.
Increased Credits for Residential Energy Property - The new law removes the dollar limitations on certain energy credits, e.g., for qualified small wind energy property ($4,000 cap); for qualified solar water heating property ($2,000 cap); and qualified geothermal heat pumps ($2,000). The credit remains 30% of the qualifying expenses, just that there is no cap on the expenditures or the amount of the credit.
Credit for Alternative Fuel Pumps - For 2009 and 2010, the Act increases the tax credit available for installing qualified alternative fuel vehicle (QAFV) refueling property which is used in the taxpayer's trade or business or at the taxpayer's principal residence. The available credit for any QAFV refueling property that is not related to hydrogen is 50% of the cost (increased from 30%) of the property placed in service. The maximum amount of credit that can be claimed is $50,000 (increased from $30,000) for property placed in service at the taxpayer's trade or business or $2,000 (increased from $1,000) at the taxpayer's residence.
Advanced Energy Facilities Credit - The Act establishes 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, plug in and electric vehicles, and other innovative next-generation green technologies. The credit will be equivalent to 30% of the qualified investments into the project. The IRS is to establish a program to awards certifications for the projects that will be eligible for the credit. The total amount of credits that can be allocated under the program can not exceed $2.3 billion.
Plug-in Vehicle Credits - For qualifying plug-in electric drive motor vehicles (QPEDMV) purchased after December 31, 2009, the Act provides for a tax credit for ranging from $2,500 to $7,500 depending on battery capacity. In addition, the Act provides for a credit equal to 10% percent of the cost of any qualified plug-in electric vehicle (QPEV), with the credit not to exceed $2,500 per vehicle. The QPEV credit is available for vehicles purchased through December 31, 2011. The difference between a QPEDMV and a QPEV is that a QPEV is a low speed vehicle that has 2 or 3 wheels. The Act also adds a plug-in conversion credit to the list of alternative motor vehicle credits that are available. The credit equals 10% of the cost to convert a vehicle to a qualified plug in electric drive motor vehicle, with the credit not to exceed $4,000. Unlike the previous two credits, the conversion credit is not limited to new vehicles, so a conversion of an existing vehicle to a plug in vehicle will qualify for the credit.
Other Key Items of Interest
Restrictions on Compensation - The Act places restrictions on the maximum compensation that can be deducted by company receiving assistance under the Troubled Assets Relief Program (TARP). Generally, a TARP recipient is subject to a $500,000 compensation deduction for any period in which there is an outstanding TARP obligation.
Transportation Fringes - Prior to enactment, an employer could exclude from an employee's income up to $120 a month of qualified transportation benefits that the employer provides through transit passes and vanpooling. The Act raises the amount eligible for exclusion to the same level as the exclusion for employer provided parking which is currently at $230 per month.
Government Contractors Withholding - The Act delays the required 3% withholding on certain payments made by the federal government, state government, political subdivision of a state and instrumentality of a state or state subdivision to a person providing property or services to the respective governmental unit. The Act delays the withholding requirement to payments made after December 31, 2011 (previously December 31, 2010).
Financing - There are a number of provisions included in the Act that deal with financing infrastructure within the U.S. Included in the Act is a new "Build America Bond" which is a taxable bond that will not only pay the holder a set interest rate but also give the holder a tax credit equivalent to 35% of the interest received. Not only is the interest included in the income of the holder, but so is the credit. According to the committee reports it is expected that the issuer of these bonds will take into consideration the tax credit and discount the interest rate accordingly, thus giving the holder the same yield that they would otherwise have on other taxable bonds.
Among the other financing provisions is the expansion of the definition of manufacturing facilities for the purpose of issuing industrial development bonds. The Act expands the definition of facility to include any facility that is used in the manufacturing, creation or production of intangible property. Intangible property means any patent, copyright, formula, process, design, know-how, or format, computer software and intellectual property associated with bio-tech and pharmaceuticals. This expansion of the definition is only applicable to bonds issued between now and before January 1, 2011.
COBRA Assistance - For those individuals that have lost their jobs due to this recession, maintaining health coverage for them and their families can be difficult. To help people maintain health coverage, the Act provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. To qualify for premium assistance, a worker must be involuntarily terminated between September 1, 2008 and December 31, 2009. The subsidy would terminate upon offer of any new employer-sponsored health care coverage or Medicare eligibility. Workers who were involuntarily terminated between September 1, 2008 and the date of enactment of this Act, but failed to initially elect COBRA because it was unaffordable, would be given an additional 60 days to elect COBRA and receive the subsidy. To be eligible for this benefit, the participant must attest that their same year income will not exceed $125,000 for individuals and $250,000 for families.
To inform all Americans where the estimated $789.5 billion is projected to be spent, the White House has created a website entitled "Your Money at Work" (www.recovery.gov).
As always, please contact your professional at UHY Advisors with any questions relating to the American Recovery and Reinvestment Act of 2009 and how it may be affecting you.