Key Tax Provisions of the American Recovery and Reinvestment Act of 2009
Signed by President Obama on February 17, 2009, date of enactment.
The new law provides immediate relief to both individuals and businesses. Most of the provisions are retroactive to January 1, 2009. The Act makes over 300 changes to the Internal Revenue Code. The Act has several tax provisions of interest to individual taxpayers, including the expansion of existing credits relating to education and renewable energy, as well as new energy incentives, and tax benefits for major purchases. The following is a list of the possible provisions that might benefit you.
Individual Tax Incentives
Credits
(1) Making Work Pay Credit: The Act allows a credit for the lesser of 6.2% of earned income or $800 ($400 for single taxpayers) for 2009 and 2010. The credit amount begins to reduce for taxpayers with modified adjusted gross incomes above $75,000 ($150,000 for joint returns). The credit is unavailable for those taxpayers who are claimed as a dependent on another taxpayer's return, nonresidents, and any estate or trust.
Comment: Modified adjusted gross income is adjusted gross income increased by certain exclusions for income earned outside the US.
(2) Child Tax Credit: The Act potentially increases the refundable portion of the child tax credit for 2009 and 2010. For those years, the refundable credit is amended to apply to 15% of earned income in excess of $3,000, depending on your particular circumstances.
(3) AMT Relief: The 2009 Act includes an AMT patch for 2009 which raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are $70,950 for joint filers (a $1,000 increase) and surviving spouses and $46,700 for singles and heads of households (a $500 increase). The Act allows nonrefundable credits, such as the child tax credit and the credit for adoption expenses, to offset alternative minimum tax for the 2009 tax year.
(4) $250 Economic Recovery Payment
There will be a one-time payment of $250 for 2009 only to individuals on fixed incomes, primarily Social Security recipients, railroad retirees, and disabled veterans. These payments will reduce the Making Work Pay Credit if the individual is eligible for that credit.
Comment: The logistics for distributing the $250 checks have not yet been announced.
Purchase Incentives
(1) Credit for First-Time Homebuyers: This is a more generous one-time only credit for the home purchases made after December 31, 2008 and prior to December 1, 2009. It equals 10% of the purchase price of a principal residence limited to $8,000 ($4,000 for married filing separately). The credit begins to be phased out at modified adjusted gross incomes of $75,000 ($150,000 for taxpayers filing a joint return). There is no repayment provision; however, recapture provisions apply to certain dispositions within three years of purchase. Purchases on or after April 9, 2008 and before January 1, 2009 continue to be governed by the prior law.
Comment: A purchase takes place when title passes.
(2) Deduction for Automobile Sales and Excise Taxes: The Act allows an above-the-line deduction for state and local sales and excise taxes imposed on the purchase of new passenger automobiles, light trucks, motorcycles, and motor homes. The purchase must be made after February 17, 2009, and before January 1, 2010; and the deduction is limited to the taxes paid or incurred on a purchase price of up to a $49,500 ($24,750 for separate returns by married individuals). This deduction is available to non-itemizers, but it begins to phase out for taxpayer's with modified adjusted gross incomes of $125,000 ($250,000 for married filing jointly).
Comment: This deduction only applies to newly purchased vehicles weighing less than 8,500 gross pounds. There is no weight limit on motor homes.
Education Benefits
(1) American Opportunity Tax Credit: This is a credit of up to $2,500 per eligible student per year for qualified tuition and related expenses, including related course materials, paid for each of the first four years of the student's post-secondary education. This was formerly known as the HOPE credit, but now it is extended to all four years. But, under this law, this renamed credit is only applicable for 2009 and 2010, applies against alternative minimum tax, and is 40% refundable. The credit begins to phase out for taxpayers with modified adjusted gross incomes of $80,000 ($160,000 for married filing jointly), and is completely phased out at adjusted gross incomes of $90,000 ($180,000 for married filing jointly).
Comment: Only tuition paid in 2009 is eligible for the new credit. Tuition paid in 2008 for the 2009 semister is not eligible for the enhanced American Opportunity Tax Credit.
(2) 529 Plans: Computers, computer technology and internet access expenses can be paid for by distributions from 529 plans paid in 2009 and 2010.
Energy Provisions
(1) The Nonbusiness Energy Property Credit percentage is increased to 30% (formerly 10%) for the cost of certain energy efficient improvements and residential energy property expenditures. This credit applies to expenditures for electric heat pumps, central air conditioners, water heaters, wood stoves, natural gas, propane, and oil furnaces and hot water heaters, exterior windows, doors, skylights, and insulation. These improvements must meet certain energy standards in order to qualify for the credit and must be placed in service in 2009 and 2010. Note that there is a lifetime maximum cap of $1,500, which replaces the $500 limitation previously in effect, as well as specific dollar limitations applicable various energy saving properties. For example, the $200 limitation for windows no longer applies.
(2) The Residential Energy Credit allows taxpayers to take a 30% credit for the cost of residential energy expenditures made in tax years after 2008 for solar electric generating property and solar water heaters, fuel cell property, wind turbine electric generating property, and geothermal heat pumps. The previous dollar caps are completely removed, except for the fuel cell property cap.
(3) Certain Plug-In Electric Vehicles acquired after February 17, 2009 and before 2012, qualify for a new credit equal to 10% of the cost. The credit applies to certain two and three-wheeled electric vehicles and low-speed vehicles and is limited to $2,500.
(4) The Alternative Motor Vehicle Credit now includes a 10% credit up to a maximum of $4,000 for the cost of converting the taxpayer's motor vehicle to a plug-in-electric drive motor vehicle. This credit is allowed in addition to any other available credits applicable to that particular motor vehicle. There is no recapture that applies to a vehicle which ceases to be a pre-existing alternative motor vehicle (for example, a hybrid) as a result of its conversion to a plug-in electric drive motor-vehicle. The credit applies to property placed in service after February 17, 2009, and before 2012.
(5) The Alternative Fuel Vehicle Refueling Property Credit allows a credit for the cost of any qualified alternative fuel vehicle refueling property installed at the taxpayer's principal residence. The 2009 Act increased the credit to a maximum of $2,000 for individuals, effective for property placed in service in 2009 and 2010.
Other Provisions
(1) Unemployment Compensation. The Act provides that unemployment compensation benefits received in 2009 may be excluded from income up to $2,400. After that limit and after 2009, unless extended, unemployment benefits continue to be fully taxable.
(2) Transit Benefits Parity. Qualified transportation fringe benefits, such as transit passes, van pooling and qualified parking, are not included in an employees income up to specified dollar amounts. The Act provides that the current $120 per month exclusion for transit passes and van pooling is increased to $230 per month for 2009 and 2010, adjusted for inflation. This equalizes the $230 per month now permitted for parking. These benefits are treated as a tax-free fringe if provided by an employer.
Business Tax Incentives
The American Reinvestment and Recovery Tax Act (2009 Act) has a number of tax provisions designed to stimulate the economy and create jobs. These provisions expand existing business tax incentives and create several new ones. The following is a list of the provisions that might be of interest to you in your business.
General Provisions
(1) Election to Expense Certain Depreciable Business Assets: The 2009 Act extends the current expensing amount of $250,000 and the $800,000 phase-out amount through 2009.
(2) Bonus Depreciation: The 2009 Act extends 50% additional first-year depreciation through 2009 (2010 for certain longer-lived property and transportation property with useful lives of 10 years or longer), effective for property placed in service in 2009. Also, the election to accelerate AMT credits and research credits instead of taking additional first-year depreciation is extended through 2009. Also for bonus depreciation purposes, the regular dollar cap for new vehicles placed in service in 2009 is extended. In 2008 the cap was $8,000 plus the normal Code Section 280F first year cap of $2,960, resulting in a first-year limit of $10,960 for cars and $11,160 for trucks and vans, both based on 100% business use.
(3) Net Operating Losses: Taxpayers with gross receipts not exceeding $15,000,000 may elect a three, four, or five-year carryback of 2008 net operating losses, instead of the otherwise two-year period, but only for net operating losses for any tax year beginning or ending in 2008.
Comment: As soon as the tax return for 2008 showing the loss is filed, the refund claim can be filed immediately.
(4) Credit for Unemployed Veterans and Disconnected Youths Hired in 2009/2010. The 2009 Act creates a new targeted group for purposes of the work opportunity tax credit. This new group includes certain unemployed veterans and disconnected youth who begin work for the employer in 2009 and 2010.
(5) Income from Discharge of Indebtedness: Businesses may elect to treat 2009 and 2010 business income from a discharge of indebtedness occurring in connection with the repurchase of a debt instrument as includible in income ratably over an five-year tax period. For a 2009 repurchase, the inclusion begins in the fifth tax year following the tax year in which the repurchase occurs. For a 2010 repurchase, the inclusion begins in the fourth tax year following the tax year in which the repurchase occurs.
(6) Partial Exclusion for Gain from Certain Small Business Stock: Effective for stock acquired after February 17, and before 2011, the percentage exclusion is increased from 50% to 75%.
(7) Tax Imposed on Certain Built-in Gains: Effective for tax years beginning in 2009 and 2010, the S corporation built-in gains holding period is reduced from 10 years to seven years.
Energy Incentives
(1) Alternative Motor Vehicle Credit: Effective for property placed in service in 2009 through 2012, the 2009 Act adds a 10% credit up to $4,000 for the cost of converting a motor vehicle to a plug-in electric drive vehicle. There is no recapture if the vehicle ceases to be eligible for the pre-existing alternative motor vehicle credit as a result of the conversion.
(2) Alternative Fuel Vehicle Refueling Property Credit: The 2009 Act temporarily increases this credit for property placed in service in 2009 and 2010 for commercial and retail refueling stations. For non-hydrogen refueling property, the credit is increased from the existing 30% to 50%, with a $50,000 maximum. For hydrogen refueling property, the credit percentage remains the same, but the maximum credit is increased to $200,000. For individual taxpayers, the credit is also increased to 50%, capped at $2,000.
(3) Plug-in Electric Vehicle Credit (new): Certain two- and three-wheeled electric vehicles and certain low-speed electric vehicles placed in service after February 17, 2009, and before 2011, are eligible for a credit equal to 10% of their cost, up to a maximum of $2,500 per vehicle.
Comment: If a vehicle is eligible for the plug-in electric vehicle credit, it is not eligible for the Code Section 30B qualified hybrid vehicle credit. Plug-in vehicles are not yet on the market. Once they do come on the market, the credit will be reduced once the manufacturer records its 200,000th sale.
(4) Energy Credit: The Act increases the Internal Revenue Code Section 25C residential energy property tax credit from 10% to 30%, raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations placed in service in 2009 to 2010, eliminates the $500 lifetime cap, and makes several other modifications. This credit was allowed to lapse in 2008. Pre-2008 credits are not counted toward the new $1,500 maximum.
Comment: Improvements eligible for the Code Section 25C credit include insulation materials, exterior windows including skylights, exterior doors, central air conditioners, natural gas, propane or oil water heaters, electric heat pump water heaters, certain metal roofs and stoves, and advanced main air circulating fans.
(5) Qualified Advanced Energy Property Credit (new): The 2009 Act allows for up to $2.3 billion for a new 30% credit for the cost of investments in qualified advanced energy projects, effective for periods after February 17, 2009. Qualified energy projects are projects that equip, expand, or establish manufacturing facilities that produce certain renewable and alternative energy property. This credit will be administered by the Treasury Department in consultation with the Energy Department.
(6) Residential Energy Efficient Property Credit Limitation: The Act removed the individual dollar caps under Internal Revenue Code Section 25D for solar hot water property, geothermal heat pumps, and wind energy property. It does place a $500 dollar cap on qualified fuel cell property expenditures.
(7) Investment Credit Election: In lieu of producers taking the Code Section 45 production tax credit, the new law allows taxpayers to treat certain qualified alternative energy facilities as energy property eligible for a 30% investment credit under Code Section 48. Code Section 45 provides a credit for the production of electricity from alternative sources of energy at qualified facilities. The agreement limits the election for wind property placed in service in 2009-2012 and for other property placed in service in 2009-2013.
First-Time Homebuyer Credit
The Credit/Loan Payback Rule :A first-time homebuyer who, after April 8, 2008 and before January 1, 2009, purchased a home that he or she uses as a principal residence may claim a credit of up to $7,500 that may be used to offset federal income tax. A taxpayer who is married and files a separate return may claim up to $3,750. A taxpayer who is married and files a joint return, and has modified adjusted gross income of $150,000 or more, will see that credit gradually reduced. For other taxpayers, the reduction begins at $75,000. In addition, any person claiming this credit must pay it back — similar to an interest-free loan — over a 15-year period beginning in the second tax year after the tax year the credit is claimed. For 2008, that is 2010. Finally, any taxpayer who claims the credit, then divests himself or herself of the home before the end of the 15-year recapture period faces an accelerated recapture provision. In effect, he or she must repay the amount of the credit that has not been repaid in a single payment.
The New Credit – No Payback: The first-time homebuyer who purchases a home between January 1, 2009 and November 30, 2009 benefits from more taxpayer-friendly provisions. The amount of the credit increases to $8,000 ($4,000 for a married taxpayer filing a separate return). The repayment provision no longer applies; and the accelerated recapture provision only applies to the three-year period following the year of purchase. The income limits are the same as the prior rule, above.
Comment: Although hard to imagine at this writing, the 2009 purchaser who would realize a better tax result by claiming the credit in 2008 may elect to treat the purchase as occurring in 2008.
Employer Obligations for COBRA Premium Subsidy
Certain laid-off workers are entitled to a 65% COBRA health insurance premium subsidy for up to 9 months. As with ordinary COBRA premiums, the employer does not pay the subsidy but the employer is responsible for administering the COBRA coverage, which is a significant challenge particularly if your company has laid off employees or has plans to do so. Even if your company does not have to comply with federal COBRA law because it has fewer than 20 employees, it must comply with the COBRA subsidy if it is covered by a COBRA-type state law.
As you know, COBRA is a federal law that provides that former employees and their families may retain their health insurance coverage, generally for up to 18 months after losing a job. The former employee must pay the full premium, which can be very expensive. Under the subsidy program, the federal government will help pay for the COBRA benefit of any individual who is involuntarily terminated between September 1, 2008, and December 31, 2009, and whose income in the year of the subsidy does not exceed certain limits. These individuals pay just 35% of the premium to the company as the plan sponsor. The company will be reimbursed by the federal government for the remainder of the premium by a credit against the company's payroll taxes. If an employee was laid off after September 1, 2008, and declined COBRA coverage, the company must give that employee another chance to elect coverage. Your company must notify all COBRA-eligible individuals of the subsidy and ordinary COBRA benefits.
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