An article in the Spring 2009 edition of this newsletter provided an overview of the American Recovery and Reinvestment Act of 2009 (“Stimulus Act”) which President Obama signed into law to help the ailing economy. This article addresses in more detail some of the tax incentives for businesses and individuals included in the Stimulus Act. These incentives include a wide variety of tax benefits such as an increase in the carryback period for certain net operating losses, the extension of many expiring tax credits and deductions, and the creation of incentives to encourage major purchases and energy efficiency.
Tax Incentives for Businesses
There are a number of tax incentives that can benefit small, as well as large, businesses.
Extension of the Net Operating Loss (“NOL”) Carryback Period
The Stimulus Act provides an excellent opportunity for certain small businesses to obtain an immediate refund for taxes that were paid in previous years. Corporations, partnerships, and sole proprietorships with average gross receipts of $15 million or less can elect to use an extended carryback period of up to five years for a “2008 NOL” instead of the normal two-year carryback period. For a calendar-year taxpayer, a 2008 NOL is the net operating loss for calendar year 2008. For a fiscal-year taxpayer, a 2008 NOL is the net operating loss for any tax year beginning or ending in 2008. The election is irrevocable and must be made by the due date (including extensions) for filing the taxpayer’s return for the year in which the net operating loss arose. While the time for making this election by calendar-year taxpayers has expired (absent an extension), many fiscal-year taxpayers still may be able to take advantage of the extended carryback period.
Deferral of Discharge of Indebtedness Income
Generally, a debtor realizes taxable income upon the cancellation or forgiveness of a debt owed by the debtor. With respect to such income arising in 2009 and 2010 from the cancellation or forgiveness of business debt, the debtor can elect to delay payment of the tax by recognizing the discharge of indebtedness income ratably over a five-year period beginning in 2014. The election is irrevocable and can be made on a debt-by-debt basis.
Extension of Enhanced Section 179 Election
Businesses can elect to treat the cost of certain property as a current business expense rather than being limited to a deduction based on depreciation of the value of the property over time (commonly referred to as a “Section 179 election”). Last year, the limit on the amount that could be deducted as a business expense pursuant to a Section 179 election was increased temporarily to $250,000. The Stimulus Act has extended this increase to qualifying property purchased in 2009.
Extension of Bonus Depreciation
Last year, businesses could immediately write off 50% of the cost of depreciable property acquired in 2008 instead of recovering the cost slowly over time. This immediate write-off provision has been extended through 2009.
Decrease in Holding Period for S Corporations
When a C corporation converts to an S corporation, the S corporation must hold property acquired prior to the conversion for ten years in order to avoid double taxation upon the subsequent disposition of the property. For tax years 2009 and 2010, the holding period has been shortened to seven years.
Exclusion of Gain on the Sale of Certain Small Business Stock
Upon the sale or exchange of qualified small business stock acquired by individual investors after February 17, 2009, and before January 1, 2011, and held for more than five years, the percentage of any gain that can be excluded from taxation has been increased from 50% to 75%.
Expansion of the Work Opportunity Credit
The Work Opportunity Credit provides tax savings to businesses employing members of certain targeted groups. The Stimulus Act expands the credit to include the hiring of unemployed veterans and certain youth between the ages of 16 and 25.
Tax Incentives for Individuals
There are numerous tax incentives in the Stimulus Act for individual taxpayers.
First-Time Home Buyer Credit
A first-time home buyer interest-free loan program was passed last year, but the Stimulus Act improved the program by transforming it into an actual tax credit. An individual who qualifies as a first-time home buyer and who purchases a home in 2009, but before December 1, will be entitled to a tax credit equal to 10% of the purchase price, up to a maximum credit of $8,000. The tax credit begins to phase out at a modified adjusted gross income of $75,000 for individual buyers and $150,000 for married couples. An otherwise applicable repayment requirement will not apply if the home remains the taxpayer’s principal residence for three years.
Alternative Minimum Tax (“AMT”) Relief
For 2009, the AMT exemption amount is increased to $46,700 for individuals and $70,950 for married couples.
Making Work Pay Credit
For 2009 and 2010, certain wage earners will receive a tax credit of up to $400 for individuals and $800 for married couples. The credit will be implemented through new withholding rates that increase take-home pay. The credit will be phased out at adjusted gross income in excess of $75,000 for individuals and $150,000 for married couples.
Deduction for Vehicle Sales and Excise Taxes
The Stimulus Act allows a deduction for state and local sales tax paid on the purchase price (up to $49,500) of a new vehicle (including passenger cars, light trucks, motorcycles, and motor homes) purchased after February 17, 2009, and before January 1, 2010.
Credit for Educational Expenses
For 2009 and 2010, individual taxpayers will be entitled to a tax credit of up to $2,500 for the cost of tuition and textbooks for post-secondary education in a degree or certificate program.
Various Energy Incentives
Credit for Energy-Efficient Improvements
For 2009 and 2010, the tax credit for the cost of installing energy-efficient improvements to residential property is increased to 30% of the cost of the improvements. These improvements must meet certain energy standards in order to qualify for the credit, and there is a lifetime maximum cap of $1,500. This credit applies to expenditures for items such as electric heat pumps, central air conditioners, water heaters, wood stoves, exterior windows, doors, skylights, and insulation.
Removal of the Dollar Limitation on Certain Energy Tax Credits
Businesses and individuals now are allowed to claim a 30% tax credit for the cost of certain energy-generating property (i.e., small wind energy property or solar water heaters). The Stimulus Act eliminates the previously applicable dollar limitations.
Alternative Motor Vehicle Credit
Through 2012, taxpayers will be entitled to a 10% tax credit up to $4,000 for the cost of converting a motor vehicle to a plug-in electric vehicle.
Plug-in Electric Vehicle Credit
Certain two- and three-wheeled electric vehicles and certain low-speed electric vehicles placed in service after February 17, 2009, and before 2011 will be eligible for a tax credit equal to 10% of their cost, up to a maximum of $2,500 per vehicle.
Conclusion
The tax-related provisions of the Stimulus Act are significant and represent approximately $300 billion of the total $789 billion stimulus package. The Stimulus Act creates a myriad of incentives for individuals and businesses, only some of which are highlighted in this article. While the rules applicable to the various tax-related provisions can be very detailed with varying effective dates and limits, both businesses and individuals should take steps to reap these tax rewards before they disappear.
For further information regarding the issues described above, please contact Deborah B. Andrews.
