On February 17, 2009 U.S. President Barack Obama signed
into law the "American Recovery and Reinvestment Act of
2009" – a package of spending provisions and tax
incentives with an estimated cost of US$787 billion. While many of
the provisions are targeted to relieving the tax burden on
individuals and small businesses and providing incentives for
renewable energy, infrastructure and state and municipal bonds, the
legislation includes several significant changes to the U.S. tax
regime generally applicable to U.S. businesses.
Tax Incentives for Business
Elective deferral of income from cancellation of
The legislation permits taxpayers to elect to defer income from
cancellation of indebtedness (COD) recognized as a result of a
repurchase (or deemed repurchase) of the taxpayer's
indebtedness by the taxpayer or a related person. The taxpayer
electing deferral will generally be able to defer tax on the COD
income until 2014 and recognize the COD income rateably over the
following five taxable years. The provision applies only to
repurchases of debt that occur in 2009 or 2010. Unlike some earlier
drafts of the provision, there is no requirement that the debt
repurchase be made with cash; the provision explicitly applies to
COD income arising from debt-for-debt or debt-for-equity exchanges,
as well as deemed repurchases resulting from a "significant
modification" of debt.
The election can be made by taxpayers on a debt-by-debt basis.
Electing taxpayers are required to forego any future exclusion of
COD income that would potentially be available under certain other
provisions (for example, the exclusion of COD income for insolvent
debtors). Any deferred COD income is accelerated in certain
circumstances, including on a liquidation of the taxpayer or the
sale of substantially all of its assets. Each eligible taxpayer
with COD income will need to carefully consider the advisability of
electing deferral based on its particular circumstances.
Suspending the application of the applicable high yield debt
obligation rules to certain debt exchanges
The applicable high yield debt obligation (AHYDO) rules generally
limit the deductibility of original issue discount on high-yield
debt instruments maturing in more than five years that are issued
at a significant discount. The legislation suspends the application
of these rules to debt issued (or deemed issued) in exchange for
debt that was not previously subject to the AHYDO rules, if the
exchange occurred or will occur between September 1, 2008 and
December 31, 2009. The suspension does not apply to debt
obligations issued to a related person. This provision provides
needed relief for taxpayers who had COD income following a debt
restructuring but had been denied current interest deductions under
the AHYDO rules.
Limiting IRS Notice 2008-83, which exempted U.S. banks from
certain Section 382 limitations Generally, when a target corporation is acquired or otherwise
undergoes an "ownership change," the use of built-in
losses of the target corporation are subject to limitations under
Section 382. In September of 2008, the IRS issued Notice 2008-83,
which effectively exempted U.S. banks from the limitations under
Section 382 for built-in losses of target corporations attributable
to loans or bad debts. The legislation limits this favourable
exemption provided to U.S. banks to transactions completed or
subject to a binding contract before January 16, 2009.
Miscellaneous Tax Provisions
The package also includes, among other provisions, a one-year
extension of the expiring bonus depreciation provision (allowing
businesses to depreciate up to 50 percent of the cost of new
equipment in the year of purchase) and a temporary reduction in the
recognition period for S corporation built-in gains from ten to
seven years. The extension of the current two-year limitation on
carrying back net operating losses contained in both the House and
Senate versions of the legislation was significantly scaled back as
part of the conference committee negotiations. While the extension
still exists in the final legislation, it is limited to small
businesses with US$15 million or less in annual gross receipts.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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