By Stanley E. Rose

The recently enacted economic stimulus act (the “American Recovery and Reinvestment Act of 2009”) contains numerous tax incentives for businesses and individuals. This article provides a summary of those changes and links to more information regarding many of the provisions. Although there is some overlap, the information is presented below in two sections: benefits for individual and benefits for businesses.

Benefits for individuals

Note that many of the changes involve tax credits, and a distinction should be made between “refundable” and “nonrefundable” credits. By example, if an individual’s Form 1040 shows tax of $400 before credits and that person qualifies for a $500 credit, a refundable credit would eliminate their tax and produce a payment of $100 to the individual. In the same example, a nonrefundable credit would be capped at $400, thereby eliminating the tax but producing no refund.

“Making Work Pay” credit - for individuals with earned income
The law provides a refundable credit equal to 6.2% of earned income, capped at $400 for single filers and $800 for joint filers. It applies to years 2009 and 2010, and begins to phase out for single and joint filers reporting modified adjusted gross income (“AGI”) exceeding $75,000 and $150,000, respectively. The credit will be claimed on an eligible individual’s 2009 and 2010 tax returns, but reports from the House Ways & Means Committee indicate that the benefit likely will be “advanced” for individuals earning wages. The IRS plans to do this by revising income tax withholding tables for the balance of this year and 2010. By losing less to withholding, each recipient’s paycheck will contain a little more cash.

Expanded credit for first-time home buyers
Last year, Congress provided first-time home buyers with a refundable tax credit equal to 10% of the purchase of a home. The credit was capped at $7,500 and had to be repaid to the government over a 15 year period through adjustments to future tax returns (it therefore resembled an interest-free loan more than a tax credit). The new law enhances the credit by increasing the cap to $8,000 and completely eliminating the repayment requirement. The new credit applies only to homes purchased during January 2009 through November 2009, and is not available for taxpayers reporting AGI of $75,000 ($150,000 for joint filers). If the home is sold within three years of purchase, a portion of the credit must be repaid. Note that “first-time” home buyer is a misnomer, as a taxpayer is eligible for this credit if he or she merely has not owned a principal residence for a period of three years prior to this purchase. 2009 Act\Homebuyer credit

Buying a new car is encouraged
Beginning with 2009, sales tax paid on the purchase of a new (not used) vehicle can be deducted, subject to a few limitations. The benefit applies to those who itemize deductions and those who use the standard deduction. It also is allowed as a deduction for purposes of computing the alternative minimum tax. The deduction phases out quickly for taxpayers earning $125,000 per year ($250,000 for joint filers), and applies only to the first $49,500 of purchase cost ($24,750 for married people filing separate returns). Qualifying purchases include cars, light trucks, SUVs, motor homes, motorcycles and apparently scooters. (Note that some taxpayers – typically residents of states that impose no income tax – already deduct sales tax in lieu of income tax via a special election available under existing law. Those taxpayers cannot utilize this new deduction because doing so would allow the same deduction twice.)

Alternative minimum tax (AMT) patch
An increasing number of taxpayers have been stung by AMT in recent years, in great part because the exemptions have not been indexed for inflation. To counter this trend,the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows certain credits to offset the AMT. Note that the new law allows many credits and deductions to reduce AMT, rather than only regular tax, as was the case with many previous law changes. This, too, should help reduce the number of AMT “participants.” 2009 Act\AMT relief

Cash payment for retirees and others
The new law provides a one-time payment of $250 to Social Security and certain government pension benefit recipients. The payments are expected to commence this summer. Some government retirees collecting non-Social Security benefits will instead be entitled to a refundable credit of the same amount. Any recipient of the $250 payment or credit who is also entitled to the Making Work Pay credit must reduce that credit by this $250 benefit.

Unemployment compensation is not fully taxed
A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Education breaks
Temporarily replacing the Hope 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) and 25% of the next $2,000 of tuition and related expenses paid during the tax year. It is available in 2009 and 2010, and 40% of the benefit is refundable, except for taxpayers subject to the so-called “kiddie tax.” The credit begins to phase out for taxpayers reporting AGI exceeding $80,000 ($160,000 for joint filers). 2009 Act\Expanded tax credit for college costs

Credit for energy-efficient homes
Pre-act law provided a 10% credit for certain energy-efficient improvements to homes. A lifetime cap of $500 applied and within that amount various subcategories contained caps of their own (for instance, windows could make up only $200 of the total). The credit was valid only through 2009. The new law extends the credit through 2010, increases the credit to 30% of costs, increases the cap to $1,500 (combined for 2009 and 2010) and eliminates the caps on subcategories. 2009 Act\Nonbusiness energy property credit

Pre-act law also provided a $2,000 credit for qualified solar water heating property, a $2,000 credit for geothermal heat pump property, a $500 credit for each ½ kilowatt of capacity of certain fuel cell property and a $500 credit for each ½ kilowatt of capacity (capped at $4,000) for certain wind energy property. Under the new law, the credit cap on the fuel cell property is retained, but caps on the other properties described above are lifted for outlays made after 2008.

Credit for “plug-in” electric drive 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 credit may offset both regular tax and AMT. 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. 2009 Act\Plug-in electric vehicle credit

Other miscellaneous provisions

• The first $2,400 of unemployment benefits received in 2009 is not taxable.
• Computer costs are eligible Section 529 Plan expenditures in 2009 and 2010. 2009 Act\Section 529 plans
• The portion of the child tax credit that is refundable has been increased for 2009 and 2010. 2009 Act\Expanded child tax credit
• The earned income credit has been increased for families with three or more children for 2009 and 2010.
• A 65% subsidy of COBRA premiums is provided for up to 9 months for workers involuntarily terminated between September 1, 2008 and the end of 2009. Those expecting to earn $125,000 ($250,000 for families) during the year are not eligible.

Benefits for businesses

Extension of capital expenditure write-offs
Section 179 deductions were expanded for 2008 to increase the annual deduction to $250,000 (from $125,000) and increase the phase-out threshold to $800,000 (from $500,000). The lower amounts would then apply through 2010. The new law allows the increased 2008 levels to apply for one more year – through the end of 2009. Also, the so-called “bonus depreciation” of 50% that previously was allowed through 2008 was extended to include property purchased and placed into service in 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 twenty years after the year that the loss arises. 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. 2009 Act\Carryback of 2008 net operating losses

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. 2009 Act\Expanded work opportunity credit

Estimated taxes for individuals with small businesses are reduced
Individuals with prior year AGI less than $500,000 ($250,000 if married filing separately) who derived more than 50% of their income from a small business (fewer than 500 employees) can pay reduced estimated taxes for purposes of the “prior year tax safe harbor” rules. Pre-Act laws require payments of as much as 110% of the prior year tax. Qualifying individuals instead can pay 90% beginning with 2009.

Other miscellaneous provisions

• The S Corporation “built-in gains” holding period temporarily has been shortened from 10 years to 7.
• The new law increases the exclusion for gain from the sale of certain small business stock held for more than 5 years from 50% to 75% for stock issued after the enactment date and before 2011.
• Income recognized from certain cancellation of debt may be spread over several years.
• Renewable energy production tax credit: The placed-in-service date for wind facilities has been extended for three years until 2012.
• A temporary election to claim the investment tax credit in lieu of the production tax credit is available.
• A tax credit related to alternative fuel pumps has been expanded by increasing the credit percentage and cap, respectively, from 30% and $30,000 to 50% and $50,000.

The American Recovery and Reinvestment Act of 2009 contains numerous provisions that will benefit many businesses and individuals. This article presents partial summaries of complex and detailed changes. It is provided for information purposes only and should not be relied upon for legal or financial advice. For more information regarding these rules, please contact a BNN tax professional at 800.244.7444

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