American Recovery and Reinvestment Act of 2009
The recently enacted “American Recovery and Reinvestment Act of 2009” (part of the 2009 economic stimulus package) contains tax relief for wage earners, individuals and businesses. To follow is an overview of the more widely applicable changes affecting businesses and individuals.
For Businesses
Extension of bonus depreciation. Last year, businesses were allowed to immediately write off 50 percent of the cost of depreciable property acquired in 2008 for use in the United States. The new law extends this temporary benefit through 2009.
Extension of enhanced small business expensing (Section 179). Last year the amount that small businesses could write off for capital expenditures incurred in 2008 was increased to $250,000 and the phase-out threshold for 2008 was increased to $800,000. The new law extends these temporary increases for 2009.
Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding 20 years after the year that the loss arises. For 2008 and 2009, 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.
Incentives to hire unemployed veterans and disconnected youth. Businesses can claim a work opportunity tax credit for two new targeted groups: unemployed veterans and disconnected youth.
Extension of trade-in of bonus depreciation in exchange for stale AMT and R&D credits. The new law extends the provision through 2009.
Delayed recognition of certain cancellation of debt income. To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income (“CODI”) 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 percent 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 for 2009 and 2010.
For Individuals
“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit begins to phase out at adjusted gross income (AGI) greater than $75,000 and $150,000 for married couples filing jointly.
Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals, Social Security beneficiaries, SSI recipients, 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 now allows a minimum AGI of $3,000 to be eligible for the refundable child tax credit in 2009 and 2010 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 percent of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25 percent of the next $2,000 of tuition and related expenses paid during the tax year. This credit begins to phase out for individuals with AGI in excess of $80,000 and $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 education expenses in 529 education plans for tax years beginning in 2009 and 2010.
Expanded first-time 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 percent of the purchase (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 the government any amount received under this provision over 15 years in equal installments (or earlier if the home was sold). This begins to phase out for those with AGI in excess of $75,000 and $150,000 in the case of a joint return. The new law eliminates the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.
Tax break for new car purchasers. The new law allows taxpayers to deduct state and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break starts to phase out for taxpayers earning $125,000 per year and $250,000 for joint returns. The deduction is allowed to both those who itemize and those who do not. However, the deduction cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes.
Alternative minimum tax (AMT) patch. 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.
We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to contact Dale Ruther, CPA, CIT, tax partner, at 330.762.9785 or by email.
Unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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