The recently passed Recovery and Reinvestment Act of 2009 (the Act) contains a variety of tax cuts, changes and incentives for individuals and businesses. In addition, the Act provides for several energy tax and alternative minimum tax provisions. The following list includes short summaries of some of the Act's highlights.
INDIVIDUAL TAX BREAKS
Make Work Pay Credit
The Act provides eligible individuals with a refundable income tax credit for tax years 2009 and 2010. The amount of the credit is the lesser of: (1) 6.2 percent of an individual's earned income; or (2) $400 or $800 for a joint return.
This Credit begins to phase out when the individual's modified adjusted gross income (AGI) exceeds $75,000 or $150,000 for a joint return. The Credit is completely phased out when an individual's modified AGI reaches $95,000, or $190,000 for a joint return.
Increase In Earned Income Tax Credit
The Act increases the Earned Income Tax Credit (EITC) percentage for families with three or more qualifying children to 45 percent for 2009 and 2010. For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45 percent of earnings up to $12,570, which may result in a maximum credit of $5,656.50.
The phase-out threshold was also increased by $1,880 for all married couples filing jointly, regardless of the number of qualifying children.
Refundable Child Credit Eased
Currently, a taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit equal to 15 percent of earned income in excess of a threshold dollar amount. For 2008, the threshold dollar amount was modified by the Emergency Economic Stabilization Act to $8,500.
For tax years beginning in 2009 and 2010, the Act modifies the earned income formula for the determination of the refundable child credit to apply to 15 percent of earned income in excess of $3,000. This new modification potentially provides a larger credit for the taxpayer than would have been available had the threshold dollar amount remained unmodified.
New American Opportunity Tax Credit
The Act modifies the Hope Credit for tax years beginning in 2009 or 2010. The credit is increased to $2,500 from $1,800 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100 percent for the first $2,000 of qualified tuition and related expenses, and 25 percent on the next $2,000. The definition of qualified tuition and related expenses is also expanded to include course materials.
The Credit is phased out ratably for taxpayers with modified AGI between $80,000 and $90,000, and $160,000 and $180,000 for joint filers. The Credit may be claimed against alternative minimum tax (AMT).
Computers As Education Expenses Under 529 Plans
An individual can make nondeductible cash contributions to a qualified tuition program (QTP) on behalf of a designated beneficiary. The earnings on the contributions build up tax-free, and distributions from a QTP are excludable to the extent they are used to pay for qualified higher education expenses.
Under the Act, expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment, or Internet access or related services, qualify as qualified education expenses under QTPs if such technology, equipment or services are to be used by the QTP beneficiary or his family during any of the years the beneficiary is enrolled at an eligible educational institution.
First-Time Homebuyer Credit Eased
Prior to the Act, qualifying purchases of principal residences in the U.S. after April 8, 2008, and before July 1, 2009, by eligible first-time homebuyers could claim a refundable tax credit equal to the lesser of 10 percent of the purchase price of the principal residence or $7,500 ($3,750 for married individuals filing separately). This Credit for new homebuyers would be recaptured ratably over 15 years, without interest, beginning with the second tax year after the year the residence is purchased.
The Act extends this Credit so that it applies to qualified principal residences purchased before December 1, 2009. In addition, the recapture of the credit for qualified principal residence purchased after December 31, 2008, is waived. If, however, the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months after the purchase date, the pre-Act rules for credit recapture will apply. The Act also increases the maximum homebuyer credit to $8,000.
Partial Exclusion Of Unemployment Compensation
Under the Act, up to $2,400 of unemployment compensation benefits received in 2009 are excluded from the recipient's gross income.
New Temporary Increased Standard Deduction For Sales And Excise Taxes On Car Purchases
For tax years beginning after December 31, 2008, the Act adds an increased standard deduction for qualified motor vehicle taxes. Qualified motor vehicle taxes are state or local sales or excise taxes imposed on the purchase of a qualified motor vehicle. Only taxes on the portion of the cost of the qualified motor vehicle not exceeding $49,500 ($24,750 for married person filing separately) may be deducted.
The amount of sales or excise taxes that may be treated as qualified motor vehicle taxes begins to phaseout for taxpayers with modified AGI of $125,000, and $260,000 on a joint return.
New Temporary Subsidy For COBRA Continuation Coverage Of Unemployed Workers
The Act provides a 65 percent subsidy for COBRA continuation premiums for a maximum of nine months for workers and their families. To qualify for the subsidy, the worker must have been involuntarily terminated between September 1, 2008, and December 31, 2009. If a worker was terminated after September 1, 2008, but did not elect COBRA, then the worker will be provided with 60 additional days to elect COBRA and receive the subsidy. The subsidy is not taxable if the worker's modified AGI does not exceed $125,000 for individuals and $250,000 for families.
AMT PROVISIONS
The Act increases the exemption amount for purposes of determining the extent to which an individual's income will be subject to the alternative minimum tax (AMT). For 2008, the exemption is $46,200 for unmarried individuals, $69,950 for married couples filing jointly and surviving spouses, and $34,975 for married individuals filing separately. These amounts are increased by $500, $1,000 and $500 respectively for 2009. However, in 2010 the exemption amounts are scheduled to revert to their pre-2008 levels.
The Act also makes changes to the manner in which nonrefundable personal credits are handled with respect to the AMT. The Act provides that the aggregate amount of nonrefundable personal credits cannot exceed the sum of a taxpayer's regular tax liability for the taxable year (less foreign tax credits) and the AMT. In contrast, pre- Act law allowed the credits only to the extent that their aggregate amount did not exceed the difference between the regular tax liability and the tentative minimum tax (not considering the foreign tax credit).
Two other changes to the AMT provisions include the allowance of the alternative motor vehicle credit against the AMT (see IRC §30B) and the change in treatment of tax-exempt interest from private activity bonds. The interest from such bonds will not be treated as a tax preference item for AMT purposes (such interest is also not included in the corporate current earnings adjustment).
BUSINESS TAX CHANGES
Compensation Deduction Limit On TARP Recipients Broadened
Generally, a publicly held corporation cannot deduct more than $1 million per year of applicable employee remuneration paid to a covered employee. Under IRC §162(m)(5), the $1 million deduction limit is reduced to $500,000 for remuneration paid to covered executives of an "applicable employer." The term "covered executives" means the chief executive officer, the chief financial officer, and the three highest paid other officers of an employer that is a financial institution (even if not publicly held or not incorporated) from whom troubled assets were acquired under the Troubled Assets Relief Program (TARP) established by the 2008 Economic Stabilization Act, if the aggregate amount of acquired assets exceeded $300 million.
The Act broadens the limitation by providing that each TARP recipient is subject to the $500,000 compensation deduction limit of IRC §162(m)(5), as applicable, during the period in which any obligation arising from financial assistance provided under TARP remains outstanding.
Additional 50 Percent First-Year Depreciation For Certain Depreciable Property
For property placed in service after December 31, 2008, and generally acquired before January 1, 2010, the Act provides an additional depreciation deduction in the placed-in-service year equal to 50 percent of the adjusted basis of "qualified property." "Qualified property" includes most types of new property other than buildings. There is no AMT depreciation adjustment for qualified property recovered under IRC §168(k) (providing for the additional 50 percent first-year depreciation allowance).
Increase In First-Year Depreciation Dollar Cap For New Passenger Autos
For passenger autos bought and placed in service after 2008, the Act increases the first-year depreciation dollar limit by $8,000 for qualified property that meets the original use, acquisition and placed-in-service requirements. In order to claim this additional depreciation amount, the passenger autos must be used for trade or business more than 50 percent of the time.
Section 179 Expensing For 2009
Under IRC §179, certain taxpayers can elect to deduct as an expense, rather than depreciate, the cost of the new or used tangible personal property (up to a specified amount) placed in service during the tax year. The Act increases the expensing limit to $250,000 and the investment ceiling limit to $800,000. Thus, for tax years beginning in 2009, a taxpayer's §179 expense is limited to $250,000, and begins to phase out when the cost of the §179 property exceeds $800,000.
Small Business NOL Carryback Election
The Act provides small businesses with an election to increase the Net Operating Loss (NOL) carryback period for tax years ending or commencing in 2008 or 2009 from two years to any whole number of years which is more than two and less than six. The NOLs must arise in tax years ending after December 31, 2007. Small business is defined in IRC §172(b)(1)(F)(iii) as a corporation or partnership where the average annual gross receipts for its trade or business are $15 million or less.
New Groups Added To Work Opportunity Tax Credit
Work opportunity tax credit is available for employers that hire individuals from one or more of nine targeted groups. Generally, the credit is a percentage of firstwages up to $6,000 per employee.
For individuals hired after December 31, 2008, the Act adds two new targeted groups, unemployed veterans and disconnected youth, for the work opportunity tax credit.
Deferral Of Debt Forgiveness Income On Repurchase Of Business Debt
Gross income generally includes income realized on the discharge of indebtedness, subject to certain exceptions. Under the Act, a taxpayer can elect to include the discharge of indebtedness in gross income ratably over five tax years when the income is from the reacquisition of an applicable debt instrument after December 31, 2008, and before January 1, 2011.
"Applicable debt instrument" means any debt instrument that was issued by a C corporation, or any other person in connection with the conduct of a trade or business by that person. The term "reacquisition" means any acquisition of the debt instrument by the debtor that issued the debt instrument, or a related person to that debtor.
Exclusion For Qualified Small Business Stock Increased
Prior to the Act, noncorporate taxpayers could exclude 50 percent of any gain realized on the sale or exchange of "qualified small business stock" (QSBS) held for more than five years. Also under the pre-Act law, for QSBS in a corporation that is a "qualified business entity" (QBE) during substantially all of the taxpayer's holding period, noncorporate taxpayers could exclude 60 percent of the gain realized on the sale or exchange of the QSBS, if the holding period exceeds five years.
For QSBS acquired after the enactment date of the Act but before January 1, 2011, the Act provides that the 50 percent gain exclusion is increased to 75 percent, and the 60 percent gain exclusion rule for QBE does not apply.
S Corporation Built-In Gain Holding Period Temporarily Shortened
For tax years beginning in 2009 and 2010, no tax is imposed under the Act on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010. Thus, for 2009 and 2010, the recognition period under IRC §1374 is reduced to seven years from 10 years.
If an S corporation election was made for 2002 or 2003, the recognition period will end at the beginning of 2009 or 2010, respectively.
Section 382 Limit Does Not Apply To Ownership Restructuring Required By EESA Bail-Out Agreement
IRC §382 limits losses that may be used to offset income generated after an ownership change. Generally, the annual limitation is an amount equal to the value of the corporation immediately before the ownership change multiplied by the long-term tax-exempt rate.
The Act provides that IRC §382 loss limitations do not apply to an ownership change (a) caused by a restructuring plan required under a loan agreement or a commitment for a line of credit entered into with the U.S. under the 2008 Emergency Economic Stabilization Act (EESA), and (b) intended to result in a rationalization of the costs, capitalization and capacity with regard to the manufacturing workforce of, and suppliers to, the taxpayer and its subsidiaries.
ENERGY TAX PROVISIONS
The Act makes a number of changes to certain energy tax provisions. Some of the more important changes, applicable to tax years starting in 2009 or with respect to facilities placed in service after 2008, as the case may be, include:
- Extension of the time during which certain renewable electricity production facilities (e.g. wind & geothermal) may be placed in service. The renewable energy production credit will be available with respect to such facilities placed in service through 2013 (as compared to 2010 and 2011 under prior law for specific types of facilities).
- For certain facilities, an election may be made to take an investment tax credit under §48 instead of a renewable energy production credit under §45.
- The qualified small wind energy property credit (§48) cap is eliminated.
- The basis reduction for certain energy property financed through subsidized energy financing or with private activity bonds is eliminated.
- No energy credit or electricity production credit is allowed under §§48 and 45, respectively, for property with respect to which a grant was received from the Energy Secretary under section 1603 of the Act.
- The nonbusiness energy tax credit is extended for one year and the credit is raised to 30 percent for certain property. §25C
- The cap on residential energy efficient property credit has been eliminated for solar hot water, geothermal and wind property.
- The maximum credit for qualified hydrogen refueling property is increased to $200,000 for property placed in service during 2009 or 2010.
- A new nonrefundable personal credit of 10 percent is available for certain low-speed plug-in electric motor vehicles (excluding four-wheeled vehicles).
- A 30 percent credit is available with respect to investments in certain property that is used in a qualified advanced energy manufacturing project.
- An additional $1.6 bullion of new clean renewable energy bonds may be issued by qualified issuers to finance qualified renewable energy facilities.
- Additional energy conservation bonds may be issued to finance
qualified conservation purposes.
An additional $3.2 billion of such bonds may be issued.
Note:
* While not part of the Act, President Obama's proposed budget
allows the tax rates for the top two individual income tax brackets
to revert to 36 percent and 39.6 percent respectively. The change
would take effect in 2011 when the 2001 tax cut package expires. In
addition, most capital gains and dividends would be taxed at a rate
of 20 percent for upper-income taxpayers (dividend income would not
be treated as ordinary income, however). The phase-out for the
personal exemption and itemized deductions also would be reinstated
for individuals earning $200,000 or $250,000 for joint filers.
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.
