The 2009 Stimulus Bill: Unveiling the Tax Breaks
The American Recovery and Reinvestment Act of 2009, popularly known as “the Stimulus Bill” or some variation thereof, was signed into law by President Obama on February 17, 2009. The fiscal floodgates are now open as the American economy awaits a $787 billion deluge of federal stimulation, including a variety of tax breaks for individuals, businesses, and clean energy. Most individuals will find some relief, among other provisions, in the form of the “making work pay” credit, the homeownership credit, and an improved higher education credit. Ailing businesses will gladly welcome provisions for extended bonus depreciation, accelerated cost expensing, and longer net operating loss carrybacks. There are many more tax cuts provided under the Stimulus Bill than highlighted here which will benefit a wide spectrum of taxpayers. How stimulating is the Stimulus Bill? Keep reading…
TAX RELIEF FOR INDIVIDUALS AND FAMILIES
“Making Work Pay” Income Tax Credit
Available in 2009 and 2010, this credit for working individuals and families is equal to the lesser of: 1) 6.2% of earned income; or 2) $400 ($800 for joint filers). It can be claimed as a reduction in the amount of income tax that is withheld from a paycheck or through a credit on an annual income tax return. The credit is also completely refundable so, if the credit is greater than the tax liability, the excess can be received as a tax refund. The credit begins to phase out for taxpayers with modified adjusted gross incomes in excess of $75,000 ($150,000 for joint filers) and is unavailable to taxpayers with modified adjusted gross incomes exceeding $95,000 ($190,000 for joint filers).
American Opportunity Tax Credit
Available in 2009 and 2010, this credit serves as a temporary amendment to the Hope Education Credit. While the Hope Education Credit was applicable to expenses incurred during the first two years of higher education, the new American Opportunity Tax Credit extends eligibility to the first four years of higher education. Taxpayers are allowed a tax credit of up to $2,500 for the cost of tuition and related expenses (including books) paid during the taxable year. The credit is calculated as 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of tuition and related expenses. Only 40% of this education tax credit is refundable. The credit begins to phase out for individual taxpayers with modified adjusted gross incomes in excess of $80,000 ($160,000 for joint filers) and is unavailable to individual taxpayers with modified adjusted gross incomes exceeding $90,000 ($180,000 for joint filers).
First-time Homebuyer Credit
First-time homebuyers who purchase a principal residence between January 1 and December 1, 2009 are eligible for a completely refundable tax credit equal to the lesser of: 1) 10% of the purchase price of the home; or 2) $8,000. The credit begins to phase out for taxpayers with modified adjusted gross incomes in excess of $75,000 ($150,000 for joint filers), and is unavailable to taxpayers with modified adjusted gross incomes exceeding $95,000 ($170,000 for joint filers). Interestingly, a taxpayer is considered a “first-time homebuyer” if he or his spouse had no present ownership interest in a principal residence in the U.S. during the three-year period ending on the date of purchase. Thus, it is possible for a taxpayer who already owns a vacation home, and uses rental property as his principal residence, to be eligible for the credit. If the residence upon which the credit was claimed is not used as the taxpayer’s principal residence for at least 36 months, the credit must be repaid to the government on the tax return for the year in which the residence ceased being used as the taxpayer’s principal residence. The credit repayment amount cannot exceed the amount of gain from the sale of the home to an unrelated person.
Temporary Suspension of Taxation of Unemployment Benefits
Normally, all federal unemployment benefits are subject to federal taxation. In 2009, however, federal income tax on the first $2,400 of unemployment benefits per recipient is temporarily suspended. Unemployment benefits over $2,400 will be subject to federal income tax. On a related note, the Stimulus Bill also increases weekly unemployment benefits by an additional $25 through 2009 and provides up to 33 weeks of extended unemployment benefits to workers who have exhausted their regular benefits.
Alternative Minimum Tax Patch
For the 2009 tax year, the Alternative Minimum Tax (AMT) exemption amounts are substantially increased, but the phase out rules remain unchanged. Individuals are allowed a $46,700 AMT exemption which is phased out by subtracting 25% of alternative minimum taxable income (AMTI) exceeding $112,500 from the exemption. The exemption is unavailable when AMTI reaches $299,300. Joint filers are allowed an AMT exemption of $70,900 which is phased out by subtracting 25% of AMTI exceeding $150,000 from the exemption. The exemption is unavailable to joint filers with AMTI of $433,800 or more. While these AMT exemption increases are expected to provide AMT relief to millions of individuals and families in 2009, it is only a temporary fix. In 2010, absent legislative action, AMT exemptions will revert to the amounts prevailing in the year 2000.
Additionally, all otherwise allowable nonrefundable personal credits may offset AMT as well as regular tax in 2009. This change benefits middle income individuals who: (a) have low taxable income because of a large number of personal exemptions; (b) are subject to the AMT because personal exemptions (as well as the standard deduction and certain itemized deductions) generally are not allowed in computing the AMT; and (c) have substantial nonrefundable personal credits such as the child tax credit.
TAX INCENTIVES FOR BUSINESSES
Extension of Bonus Depreciation
In general, businesses are allowed to recover the cost of capital expenditures over a period of time according to a depreciation schedule. In 2008, Congress temporarily provided for “bonus depreciation” so that businesses could recover the costs of capital expenditures faster than ordinary depreciation methods allow. Under the Stimulus Bill, bonus depreciation for qualified property (machinery, equipment, solar panels, computers, etc.) is now extended to property placed in service before January 1, 2010. In the year an asset is placed in service (2008 or 2009), a business may opt to immediately deduct as bonus depreciation 50% of the cost. In that same year, the business may claim the regular depreciation according to applicable methods for the remaining 50% of the cost of the asset.
One-Year Extension of Optional Election to Monetize Accumulated AMT and R&D Credits in Lieu of Bonus Depreciation
This provision allows businesses to forego bonus and accelerated depreciation on certain property in favor of present use, as a refundable tax credit, of a portion of historic AMT or research and development credits. The amount of these otherwise deferred credits that taxpayers may accelerate is limited to 20% of the bonus depreciation on qualified property to which the taxpayer would otherwise be entitled. This benefit was applicable in 2008 under the Foreclosure Prevention Act of 2008. The provision in the Stimulus Bill extends the temporary benefit through 2009.
Enhanced Business Expensing
In general, business taxpayers may elect to deduct some of the cost of capital expenses in the year of acquisition in lieu of recovering such costs over time through depreciation. For capital expenditures incurred in 2008 or 2009, business taxpayers are allowed to immediately write-off up to $250,000 of the cost subject to a phase-out when such costs exceed $800,000. In 2010, the deductible expense cannot exceed $125,000 and the phase-out begins when costs exceed $500,000.
Five-Year Carryback of Net Operating Losses
Normally, net operating losses (NOLs) may be carried back to the two taxable years preceding the year that the loss arises and carried forward to each of the next twenty taxable years following the loss year. The Stimulus Bill extends the maximum carryback period from two years to five years for businesses with three-year average annual gross receipts of $15 million or less. Only NOLs arising in a taxable year that begins or ends in 2008 are eligible for the extended five year carryback period. This temporary extension provides businesses that are experiencing current losses with the ability to obtain refunds of income taxes paid in earlier years.
Delayed Recognition of Certain Debt Cancellation Income
The Stimulus Bill allows businesses to recognize income from certain discharges of their indebtedness over a period of ten years. Tax on such income can be deferred for the first four or five years (depending on circumstances) with the income recognized ratably over the following five taxable years. The provision applies to the reacquisition of a debt instrument by a taxpayer who is the issuer of the debt instrument, the obligor under the debt instrument or any person related to the debtor. This benefit applies only to acquisitions made during 2009 or 2010.
Increased Exclusion of Gain on Sale of Certain Small Business Stock
Individuals are allowed an income exclusion for 75% of the gain from the sale of qualified small business stock held for more than five years. The amount of gain eligible for exclusion is limited to the greater of: 1) 10 times the taxpayer’s basis in the stock; or 2) $10 million less the total amount of eligible gain taken into account by the taxpayer on dispositions of qualified small business stock issued by the corporation in all prior tax years. The portion of the gain includible in taxable income is taxed at the lesser of ordinary income rates or 28%, instead of the lower capital gains rates for individuals. This enhanced 75% exclusion is applicable only to stock acquired after February 17, 2009 and before January 1, 2011.
Temporary Reduction of S Corporation Built-In Gain Holding Period
When a C corporation elects to become an S corporation and disposes of certain assets within 10 years of the date which it made the election, gain from the disposition is taxed at 35%. Assets covered by this provision are those whose value at the time of election are greater than their tax cost. The Stimulus Bill reduces this ten-year period to seven years for dispositions that occur in 2009 or 2010. This change will affect corporations making the election in 2002 or before with appreciated assets at the time of election.
Grants in Lieu of Tax Credits for Low-Income Housing
Under current law, owners of certain low-income rental property may claim a low-income housing tax credit with respect to a portion of their investment. Under the present system, each state receives an allocation of credits based upon population figures, which may then be allocated to eligible property owners. Under the Stimulus Bill, the Department of the Treasury will make grants to state housing credit agencies in lieu of the tax credits. Grant money will be awarded by the housing credit agencies to finance the acquisition, construction and rehabilitation of qualified low-income buildings as defined under existing law. These cash grants may be used regardless of whether a project has received an allocation of low-income housing credits, subject to additional testing for a project that has not received a credit allocation. Grant recipients must satisfy the low-income housing credit rules, and grants received under the provision do not reduce the building’s tax basis.
Increased Eligibility for Industrial Development Bonds
The Stimulus Bill expands eligibility for industrial development bonds. Such bonds are now available with respect to any facility used in manufacturing, creating, or producing: 1) tangible property; or 2) any patent, copyright, formula, process, design, pattern, know-how, format, or other similar item. The Stimulus Bill also clarifies the definition of “ancillary” physical components of a manufacturing facility. This clarification is important because of a 25% limitation on the amount of bond issuance that can be used to build or re-construct such ancillary components.
Executive Compensation Oversight
The Emergency Economic Stabilization Act of 2008 imposed non-tax-related rules with respect to compensation paid by Troubled Assets Relief Program (TARP) recipients. Provisions in the Stimulus Bill modify and expand those rules by:
- Expanding the government’s right to recover certain types of incentive compensation based on statements found to be materially inaccurate. Previously, this right encompassed only senior executive officers (the top five most highly compensated executives). It now applies to the next twenty most highly compensated employees of a TARP recipient as well.
- Expanding the prohibition on golden parachute payments made by TARP recipients. The prohibition now applies not only to senior executives, but also to the next five most highly compensated employees. Additionally, the legislation defines the term “golden parachute payment” to include “any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.”
- Phasing in a prohibition preventing TARP recipients from paying or accruing incentive compensation (including bonuses and retention awards but not restricted stock) to the 25 most highly compensated employees of the TARP recipient. The phase-in feature is based on the level of assistance the entity receives from TARP.
- Prohibiting TARP recipients from implementing compensation plans that encourage manipulation of reported earnings in order to enhance compensation.
- Addressing the adoption of policies regarding luxury expenditures, providing rules for executive compensation committees, and providing that TARP assistance is not deemed outstanding while the government only holds warrants to purchase stock in the recipient.
Incentives to Hire Unemployed Veterans and Disconnected Youth
Under the Work Opportunity Tax Credit, businesses are eligible to claim a tax credit equal to 40% of the first $6,000 of wages paid to employees who are members of certain targeted groups. The Stimulus Bill expands this credit to include two new groups: 1) unemployed veterans, who were discharged or released from active duty during the five-year period prior to their hiring and who received unemployment compensation for more than four weeks during the year before being hired; and 2) individuals between the ages of 16 and 25 who within the six months prior to hiring neither had attended school, nor been regularly employed.
Uncapped Business Energy Tax Credits
Under current law, businesses are allowed to claim a tax credit equal to the lesser of: 1) 30% of the cost of qualified small wind energy property; or 2) $4,000. The Stimulus Bill repeals the $4,000 cap on this credit. As a result, businesses are now eligible for an unlimited 30% tax credit on the cost of qualified small wind energy property placed in service after December 31, 2008.
Tax Credits for Alternative Fuel Pumps
Gas stations and other businesses that install alternative fuel pumps which dispense E85 fuel, electricity, hydrogen, and natural gas are eligible for this tax credit. Alternative refueling property (except hydrogen-related property) placed in service in tax years beginning after December 31, 2008 and before January 1, 2011 qualifies for a tax credit equal to the lesser of: 1) 50% of the cost of the property; or 2) $50,000. Hydrogen refueling pumps are eligible for a 30% credit that is capped at $200,000.
IRS Circular 230 Notice: To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.