“The American Recovery and Reinvestment Act of 2009” by Frank C. Carnahan
Approximately one-third of the nearly $800 billion is for tax incentives for individuals and businesses, many retroactive to January 1, 2009.
Making Work Pay credit against income tax of the lesser of: (i) 6.2% of the individual’s earned income; or (ii) $400 ($800 for married couples filing jointly) retroactive to January 1, 2009 through December 31, 2010, but limited for higher income wage earners.
Individuals receiving Social Security benefits, disabled veterans and others on fixed incomes will receive one-time payments of $250, but which reduces the Making Work Pay credit by $250.
First-time homebuyer tax credit of 10% of the purchase price up to $8,000 ($4,000 for married individuals filing separately) for homes purchased by first-time homebuyers between January 1, 2009 and December 1, 2009, but without the prior law repayment requirement. Income limitations preclude higher income individuals and couples from taking advantage of the credit.
New car deduction above-the-line for state and local sales taxes or excise taxes paid on qualified new motor vehicles purchased from the date of enactment through the end of 2009. Income thresholds and other limitations apply. AMT patch, increasing the AMT exemption amounts and allowing taxpayers to take most personal credits to reduce AMT liability for 2009.
Child tax credit refundable portion for 2009 and 2010 increased to 15% of earned income over $3,000 subject to restrictions and phaseouts. Unemployment compensation up to $2,400 excluded from a recipient’s gross income in 2009.
Education. The income phase-outs are expanded and the maximum credit for the current Hope education credit (renamed the American Opportunity Tax Credit) are increased. The credit extends over four years of post-secondary school education, and makes 40% of the credit refundable. Beneficiaries of qualified tuition plans (known as “529” plans) can use tax-free distributions to pay for computers and computer technology.
Transit benefits. The income exclusion amount for employer provided transit passes and van pooling increased from $120 to $230 per month starting in March 2009 and through 2010 with an inflation adjustment.
Earned Income Tax Credit (EITC) is enhanced for taxpayers with three or more qualifying children and helps eliminate an existing “marriage penalty” across the board.
Energy incentives reward taxpayers for installing energy-efficient property and alternative energy sources in their homes. This time around, the residential credits are limited to HVAC (heating ventilation and air conditioning) and building envelope items, but exclude lighting. The efficiency standards for much of the qualifying property have been increased to very high January 1, 2009, building code standards, and many HVAC and building envelope dealers do not stock equipment at these high energy efficiency levels. The credit is extended for 2009 and 2010 and triples the $500 credit to $1,500. The previous 10% credits and the $50, $100 and $150 sub-capped items are now all eligible for the full 30% credit up to $1,500. A tax break is implemented for purchasers of plug-in electric vehicles.
50% Bonus depreciation to be taken on top of regular depreciation is extended through 2009 (longer for certain types of property). The firstyear depreciation cap limits for bonus depreciation for vehicles are raised by $8,000. Eligible businesses can monetize accumulated AMT and research tax credits in lieu of taking bonus depreciation for 2009. This may require analysis of multiple available options and predictions about the value of these items as future tax benefits, and becomes even more complex when carrybacks may free up tax credits claimed in those earlier years for carryback to even earlier tax years.
Code Sec. 179 expensing is revived for 2009 up to $250,000, and the threshold for reducing the deduction is $800,000. Advanced planning is required when an S corporation plans to utilize Code Sec. 179 to expense assets, because Code Sec. 179 occurs at both the S corporate level to elect the deduction and then at the shareholder level to utilize the deduction.
Net operating loss carryback period increased to five years for small businesses (those with average gross receipts of $15MM or less). Work Opportunity Tax Credit for employer who hire individuals from targeted groups, such as veterans and young people.
Cancellation of indebtedness by eligible businesses can be recognized over five years, beginning in 2014, for specified types of business debt repurchased or forgiven by the business after December 31, 2008 and before January 1, 2011.
Energy incentives for developers and producers of alternative and renewable energy, including wind, biomass and solar power.
COBRA premium assistance allows terminated employees to pay 35% of the premium and the employer pays 65% and takes a credit against employment taxes. Studies show only a small percentage of eligible individuals elect COBRA continuation coverage due to the cost, and subsidized coverage may increase those percentages. Employees electing COBRA coverage on average tend to be those most in need of medical care, which may increase plan cost. Individuals involuntarily terminated from September 1, 2008 through February 16, 2009, who (1) did not elect COBRA when it was first offered or (2) did elect COBRA, but are no longer enrolled (e.g., because they couldn’t pay the premium) are given a special grace period for electing COBRA coverage. This election period begins on February 17, 2009 and ends
60 days after the plan provides the required notice. Plans must notify individuals of this special grace period by April 18, 2009.
Other qualified individuals can exclude 75% of gain from the sale of certain small business stock. The ten year holding period for S corp built-in gain is reduced to seven years. The New Markets Tax Credit program is increased.
Estimated tax payments for certain individuals whose income comes from small businesses are decreased. Withholding on government contractors is delayed. Tax-exempt and tax-credit bond rules are revised to help states and local governments generate revenue.