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American Recovery and Reinvestment Act of 2009
The recently enacted American Recovery and Reinvestment Act of 2009 is a wide-ranging tax package that includes tax relief for low- and moderate-income wage earners, individuals and families with college expenses, a package of tax incentives to encourage investments in renewable energy projects (or more efficient technologies) and some key tax changes affecting businesses. What follows is an overview of the more widely applicable tax changes affecting individuals, families and businesses:
TAX CHANGES AFFECTING INDIVIDUALS AND FAMILIES
Making Work Pay credit. The new law provides an individual tax credit in the amount of 6.2% of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 with full elimination at $95,000 ($150,000 for married couples filing jointly with full elimination at $190,000). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see less withheld from their paychecks. Earnings from self-employment also qualify.
Economic recovery payment. The new law provides for a one-time payment of $250 to: retirees, disabled individuals, Social Security beneficiaries, SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and 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.
Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 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.
Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.
Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.
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 new law 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.
Expanded credit for first-time home buyers. Last year, Congress provided taxpayers with 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 new law applies to purchases of homes on or after January 1, 2009 and enhances the credit by eliminating the repayment obligation for taxpayers after 36 months in the home. It also extends the credit through the end of November 2009, and increases the maximum value of the credit from $7,500 to $8,000.
Tax break for new car purchasers. The new law gives taxpayers a deduction for State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles and motor homes. Deductible sales or excise taxes cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle. In addition, the tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). Interestingly, the deduction only applies to vehicles purchased on or after February 17, 2009 rather than being retroactive to January 1, like many of the provisions herein.
Alternative minimum tax (AMT) patch. In an attempt to hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.
Transit benefits. Qualified transportation fringe benefits, such as transit passes and qualified parking, are not included in an employee's gross income up to specified dollar amounts. Starting in March of 2009 through 2010, the income exclusion amount is increased to $230 per month.
Energy-efficient existing homes. The new law 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. The 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.
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).
Vehicles. The new law provides a tax credit for purchases of plug-in electric drive vehicles ranging from $2,500 to $7,500 depending on battery capacity. The new law also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits.
BUSINESS TAX CHANGES
Extension of bonus depreciation. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off 50% of the cost of depreciable property acquired in 2008 for use in the United States. The new law extends this temporary benefit for qualifying property purchased and placed into service in 2009.
Bonus depreciation on automobiles. Related to the bonus depreciation rules is an extension, for bonus depreciation purposes, of the regular dollar cap for new vehicles placed in service in 2009 (raised by $8,000, effective January 1, 2009). The resultant cap is now $10,960 for autos and $11,160 for light trucks and vans.
Extension of enhanced small business expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to $250,000 and increased the phaseout threshold for 2008 to $800,000. The new law extends these temporary increases for capital expenditures incurred in 2009.
Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) could be carried back to the two years before the year that the loss arose and carried forward to each of the succeeding 20 years after the year that the loss arose. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less. Such a small business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period. A carryback can generate a refund because it allows the business to offset income that has already been taxed. The “applicable NOLs” for which an eligible small business may elect the increased carryback period are NOLs for tax years ending in 2008 (or, for fiscal years, if the taxpayer so elects, NOLs for tax years beginning in 2008). As tax years ending in 2008 have already occurred, the new law provides some transitional relief that may require certain actions to be taken no later than April 19, 2009. Some planning may be appropriate to create or increase the amount of an applicable 2008 NOL, such as the use of accelerated depreciation or expensing of assets acquired in 2008.
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 of one of nine targeted groups. The new law 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 six months.
Delayed recognition of certain cancellation of debt income (CODI). To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five tax years) for specified types of business debt repurchased by the business in 2009 or 2010.
Qualified small business stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50% to 75% for stock issued after the enactment date and before 2011.
S Corporation holding period. The new law temporarily shortens the holding period of assets subject to the built-in gains tax from 10 years to seven years if such year falls within 2009 or 2010. Built-in gains tax planning may be appropriate if a taxpayer's 8th, 9th, or 10th year occurs during 2009 or 2010.
Business energy credit. The new law enhances the business energy credit by eliminating the cap on small wind property and repealing the basis reduction requirement for subsidized energy financing.
Credit for investment in advanced energy facilities. The new law 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 and other innovative next-generation green technologies.
COBRA benefits. Pursuant to an enhanced COBRA provision, workers laid off between September 1, 2008 and December 31, 2009 only pay 35% of the COBRA premium. The former employer would pay the remaining portion (65%) of the premium for up to nine months. The employer would then be able to credit its share of the payment against wage withholdings and payroll taxes.
If you would like more details about how the American Recovery and Reinvestment Act of 2009 may affect you, your family or your business, please do not hesitate to call your Alpern Rosenthal representative at 412.281.2501.
Portions of this article have been reprinted with permission from CCH, a Wolters Kluwer business.