The American Recovery and Reinvestment Act of 2009, P.L. 111-5, was signed by President Obama on February 17, 2009. In addition to various spending programs intended to stimulate the economy, the act contains numerous tax provisions aimed at individuals and small businesses. The most significant individual and business provisions are discussed below.
Individual Tax BreaksMaking work pay credit: The act creates a new credit, called the making work pay credit, that is intended to partially offset an employee’s portion of Social Security payroll taxes. The temporary credit equals 6.2% of a taxpayer’s earned income up to a total credit of $400 for individuals and $800 for joint filers (Sec. 36A). The credit is retroactive to the beginning of 2009 and is set to expire at the end of 2010. It begins phasing out at a rate of 2% of modified adjusted gross income (MAGI) above $75,000 for individuals and $150,000 for joint filers.
AMT patch: For 2009, the alternative minimum tax (AMT) exemption is increased to $46,700 for singles and $70,950 for joint filers (Sec. 55(d)).
Homebuyer’s credit: The act increases the amount of the Sec. 36 first-time homebuyer’s credit from $7,500 to $8,000, and it eliminates the repayment requirement for houses purchased in 2009. The credit, added by the Housing Assistance Tax Act of 2008, P.L. 110-289, is refundable, but for homes purchased between April 9, 2008, and December 31, 2008, it must be recaptured ratably over 15 years, or earlier if the home is sold. The stimulus act waives the recapture requirement for homes purchased after January 1, 2009, and extends the sunset of the credit from June 30, 2009, to December 1, 2009.
The amount of the credit remains 10% of the purchase price of a principal residence of a taxpayer who has not owned a U.S. principal residence in the previous three years. Recapture still applies if the taxpayer disposes of the home or no longer uses it as a principal residence within three years after purchase.
New car sales tax deduction: Buyers of new cars and light trucks between February 17 and the end of 2009 may deduct the portion of state and local sales and excise taxes attributable to the first $49,500 of the vehicle’s purchase price (Sec. 164(b)(6)). This is an above-theline deduction, and it is allowed against AMT. The deduction will be phased out for single taxpayers with MAGI in excess of $125,000 for the tax year ($250,000 for joint filers). Taxpayers who elect under Sec. 164(b)(5) to take the state and local sales tax deduction in lieu of deducting state and local income tax cannot also take the new car sales tax deduction.
Hope scholarship credit expansion: The American opportunity tax credit is a temporary (for tax years beginning in 2009 and 2010) increase and expansion of the Hope scholarship credit (Sec. 25A(i)). The maximum credit per student increases from $1,800 to $2,500 and its availability is extended to the first four years of postsecondary education. The act makes the formerly nonrefundable credit 40% refundable. The phaseout range is increased from the former $50,000–$60,000 for single filers to $80,000–$90,000. The joint filer phaseout, formerly $100,000–$120,000, increases to $160,000–$180,000. Expenses for course materials, such as textbooks, are added to the definition of qualified tuition and related expenses eligible for the credit.
Sec. 529 plans may buy computers: For 2009 and 2010, the costs of computers and related technology qualify as higher education expenses for purposes of the rules governing distributions from a Sec. 529 qualified tuition plan, as long as the beneficiary of the plan is enrolled at an eligible educational institution. Internet access charges are also covered, as well as software, as long as it is not for sports, games, or hobbies (unless the software is predominantly educational in nature).
Qualified transportation fringe benefit increase: The act increased the excludible amount of a qualified transportation fringe benefit from $120 to $230 per month (the same as the qualified parking amount) (Sec. 132(f)). This higher limit is effective from March 2009 through 2010, with an annual inflation adjustment.
Child tax credit and other items: The act extends for 2009 and 2010 the lower, $3,000 income threshold for refundability of the Sec. 24 child credit, meaning more of it is refundable to low-income taxpayers. Other items directly benefiting less-affluent individual taxpayers or those in financial distress include a temporary increase in the earned income tax credit for 2009 and 2010, a one-time $250 payment to persons on fixed incomes not eligible for the making work pay credit, and a temporary exclusion of $2,400 of unemployment benefits from taxable income for 2009.
Small Business Tax Breaks
Bonus depreciation: Sec. 168(k) is amended to extend the 50% first-year bonus depreciation through 2009 (and through 2010 for certain transportation property and aircraft).
The election to accelerate AMT and research credits in lieu of taking the bonus depreciation (which had been introduced last year by the Housing Assistance Tax Act) is also extended to qualifying property placed in service through 2009. Special rules apply to taxpayers who had already made this election for property placed in service in 2008.
Sec. 179 expensing: The increase in the Sec. 179 expensing amount to $250,000 and the increase in the reduction threshold to $800,000 are both extended through 2009. The amounts had originally been temporarily increased (for 2008) by the Economic Stimulus Act of 2008, P.L. 110-185.
Carryback of small business NOLs: Eligible small businesses are allowed to carry their 2008 net operating losses (NOLs) back for five years (Sec. 172(b) (1)(H)). An eligible small business is one that has average gross receipts of $15 million or less (using the gross receipts test from Sec. 448(c)). The act gives Treasury authority to publish anti-abuse rules relating to this provision.
Small business estimated taxes: Qualified individuals are allowed (for 2009 only) to make estimated tax payments that equal only 90% of their preceding tax year liability instead of 100% (under Sec. 6654(d)(1)). To be a qualified individual, the taxpayer must have adjusted gross income (AGI) of less than $500,000, and more than 50% of the individual’s gross income must come from a small business (a business with an average of fewer than 500 employees).
Work opportunity tax credit: The act creates two new targeted groups for the work opportunity tax credit, “disconnected youth” and unemployed veterans (Sec. 51(d)(14)). A disconnected youth is defined as someone who has been certified by a designated local agency as being between the ages of 16 and 24, who has not regularly attended school or held a job in the preceding six months, and who is not readily employable “by reason of lacking a sufficient number of basic skills.” Employers who hire members of these groups during 2009 or 2010 may be eligible to take the credit.
Discharge of business indebtedness: The act allows certain businesses to recognize cancellation of indebtedness income over five years, starting in 2014, if the business repurchases specific types of debt in 2009 or 2010 (Sec. 108(i)).
Qualified small business stock: The Sec. 1202 exclusion of gain from the sale of qualified small business stock is increased from 50% to 75% for stock acquired after the enactment date and before January 1, 2011.
S corporations: The recognition period for assets subject to the built-in gains tax is reduced from ten years to seven years for S corporation tax years beginning in 2009 and 2010 (Sec. 1374(d)(7)).
Limitations of loss carryforwards: For businesses that have ownership changes under a restructuring plan required by a Treasury loan agreement or line of credit under the bailout provisions of the Emergency Economic Stabilization Act, P.L. 110- 343, the Sec. 382 limitation on loss carryforwards will not apply.
New markets tax credit: The Sec. 45D new markets tax credit investments limit is increased for 2008 and 2009 to $5 million.
Notice 2008-83 restricted: The act expresses Congress’s doubt about the legal authority of Notice 2008-83 (the ruling that helped Wells Fargo acquire Wachovia by suspending the Sec. 382 limitations on built-in losses for domestic banks) and states that it is inconsistent with congressional intent in enacting Sec. 382(m). Therefore, the act restricts the notice’s effect to changes in ownership occurring (or subject to a binding contract entered into) on or before January 16, 2009.
Energy credits: The act also includes a number of energy incentives aimed at both individuals and businesses, including increases in the Sec. 25C residential energy property credit, the Sec. 25D residential energy efficiency property credit, and the energy investment credit under Sec. 48.