Overview of Key Tax Provisions in the American Economic Recovery And Reinvestment Act of 2009March 20, 2009
This summary provides an overview of tax relief provisions relevant to business, individual and renewable energy tax provisions in the American Recovery and Reinvestment Act of 2009 ("ARRA") signed by President Obama on February 17, 2009. ARRA includes numerous other targeted incentives not summarized here.
BUSINESS TAX PROVISIONS
Extension of Bonus Depreciation. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off 50% of the cost of depreciable property acquired in 2008. The bill would extend this temporary benefit for capital expenditures incurred in 2009.
Extension of Small Business Expensing. In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small business could write off for certain capital expenditures incurred in 2008 to $250,000, subject to a phase-out once capital expenditures exceed $800,000. The bill would extend these temporary increases for capital expenditures incurred in 2009.
5-Year Carryback of Net Operating Losses for Small Businesses. A business with average gross receipts of $15,000,000 or less for its prior three years may elect to carryback losses from tax years beginning and/or ending in 2008 for up to five years (in lieu of the normal two year limit).
Delayed Recognition of Certain Cancellation of Debt Income. Certain businesses will be allowed to recognize cancellation of debt income ("CODI") over 10 years (generally defer tax on CODI for the first five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011.
Small Business Capital Gains. Under current law, Section 1202 provides a 50% exclusion for the gain from the sale of certain small business stock held for more than five years. The non-excluded portion of section 1202 gain is taxed at the lesser of ordinary income rates or 28%, instead of the lower capital gains rates for individuals. The provision increases the exclusion to 75% for individuals on the gain from the sale of certain small business stock held for more than five years. This change is for stock issued after February 17, 2009 and before January 1, 2011.
Temporary Suspension of S Corporation 10-Year Built-in Gain Rule. S corporations that have not been C corporations for more than seven years can sell built-in gain assets during 2009 or 2010 without incurring corporate-level tax, rather than having to wait until more than 10 years after electing S corporation status.
Incentives to Hire Unemployed Veterans and Disconnected Youth. Businesses are allowed to claim a work opportunity tax credit equal to forty (40%) percent of the first $6,000 of wages paid to employees of one of eleven targeted groups. The targeted groups are now expanded to cover unemployed veterans and disconnected youth.
New Markets Tax Credit. Available New Markets Tax Credits are increased to $5 billion for 2009 and 2010.
Temporary Estimated Tax Payment Relief for Individuals with Small Businesses. The bill reduces the 2009 required estimated tax payments for individuals to 90% of their prior year's tax provided at least one-half of their gross income is attributable to income from certain small businesses and their prior year's adjusted gross income is less than $500,000.
OVERVIEW OF KEY RENEWABLE ENERGY TAX PROVISIONS IN THE AMERICAN RECOVERY AND REINVESTMENT ACT
Over $25 billion of the ARRA's $300 billion tax title is devoted to incentivizing investment in renewable energy technology. Many of the energy-related tax provisions are expansions or extensions of existing programs; however, two provisions establish new programs that could significantly affect investment in renewable energy projects and manufacturing related to renewable energy technologies. Some of the more significant energy-related tax provisions of the ARRA include:
Creation of renewable energy grants. In recognition of the recent constriction in the market for production and investment tax credits, Congress is allowing for-profit taxpayers that place in service a wide variety of renewable energy facilities (generally, facilities that would otherwise qualify for the investment tax credit or production tax credit) to receive a grant from the Treasury Department in lieu of claiming a production or investment tax credit for those facilities. The grant will be equal to either 10% or 30% (depending on the type of facility) of the taxpayer's basis in depreciable tangible personal property and tangible real property (not including buildings) that is used as an integral part of the facility. Taxpayers must apply for the grant by October 1, 2011 and must meet certain placed-in-service deadlines. Notably, the grants are not available to state or local governments, or tax-exempt organizations.
Creation of credit for investment in advanced energy property. Section 1302 of the ARRA authorizes $2.3 billion in tax credits for investment in advanced energy property. The credit will be equal to 30% of a taxpayer's basis in certain depreciable tangible personal property or tangible real property (excluding buildings) related to any project that re-equips, expands or establishes a manufacturing facility for the production of a variety of renewable energy-related property. Credits will be awarded through an application process.
Expansions and Extensions of Existing Programs
Extension of production tax credits. Section 1101 of the ARRA extends the production tax credit to wind facilities placed in service before January 1, 2013, and to most other qualified renewable energy facilities placed in service before January 1, 2014.
Election to take investment tax credit in lieu of production tax credit. Under Section 1102 of the ARRA, owners of wind facilities placed in service in before January 1, 2013, and other qualified renewable energy facilities placed in service before January 1, 2014, may elect to take the investment tax credit in lieu of the production tax credit. Generally, this election would provide the owner of such a facility with a tax credit equal to 30% of the owner's basis in depreciable tangible personal property and tangible real property (not including buildings) that is used as an integral part of the renewable energy facility, instead of the 2.1¢ or 1¢ credit for each kW of energy produced at that facility.
Repeal of reduction of investment tax credit for renewable energy facilities financed by subsidized energy financing or private activity bonds. Under prior law, the owner of energy property eligible for the investment tax credit was, for purposes of calculating the credit, required to reduce its basis in that property to the extent the property was financed by tax-exempt bonds or other subsidized financing, thus reducing its investment tax credit (which is calculated as a percentage of eligible basis); Section 1103(b) of the ARRA eliminates this basis reduction. Thus, an owner of a qualifying renewable energy facility can now both receive tax-exempt financing for the facility and claim an investment tax credit.
Increase in the amount of energy conservation bonds by $2.4 billion, to $3.2 billion; Increase in the amount of clean renewable energy bonds by $1.6 billion, to $2.4 billion. Energy conservation bonds (ECBs) and clean renewable energy bonds (CREBs) are both qualified tax credit bonds that entitle holders to an annual, nonrefundable tax credit equal to a percentage of the outstanding face amount of the bonds. ECBs can be used by state, local and Indian tribal governments to finance a wide range of renewable energy investments, including capital expenditures to reduce energy consumption or build renewable energy facilities, research, education, and more; CREBs can be used by state, local and Indian tribal governments, public power providers and cooperative electric companies to finance capital expenditures related to renewable energy facilities.
Commuter benefits. Section 1151 of the ARRA increases the monthly per-employee cap on an employer's tax-free reimbursement for and/or payment of expenses related to commuter highway vehicles and transit passes to $175, placing these benefits on par with the allowed benefit for qualified parking.
Modification of the alternative motor vehicle credit and the credit for qualified plug-in electric drive motor vehicles. Sections 1141 through 1144 of the ARRA modify the alternative motor vehicle credit and the credit for qualified plug-in electric drive motor vehicles in several ways, including changing the phase-out of the credit for qualified plug-in electric drive motor vehicles from a total vehicle basis to a per-manufacturer basis and allowing the alternative motor vehicle credit against the alternative minimum tax. Notably, these sections of the ARRA also create two new credits: one for 10% of the cost (up to $2,500) of certain low-speed or 2- or 3-wheel plug-in electric drive motor vehicles, and one for 10% of the cost (up to $4,000) of converting any motor vehicle to a qualified plug-in electric motor drive vehicle.
Removal of cap on investment tax credit for qualified small wind energy property. Under prior law, the investment tax credit for qualified small wind energy property was limited to $4,000; Section 1103(a) of the ARRA removes that limitation.
Expansion of the tax credit for alternative fuel vehicle refueling property placed in service in 2009 and 2010. Taxpayers are currently allowed to take a credit for 30% of their investments in qualified alternative fuel vehicle refueling property, subject to a $30,000 cap for business property and a $1,000 cap for non-business property. For qualified alternative fuel vehicle refueling property placed in service in 2009 and 2010, section 1123 of the ARRA raises the percentage for calculation of the credit to 50% of the cost of such property, and raises the caps to $50,000 for business property and $2,000 for non-business property. In addition, the ARRA raises the cap to $200,000 for qualified alternative fuel vehicle refueling property used in a trade or business and related to hydrogen.
Modification of tax credit for carbon dioxide sequestration. Under prior law, a taxpayer could receive a tax credit equal to $10 per metric ton of qualified carbon dioxide captured by a taxpayer at a qualified facility and used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project. Section 1131 of the ARRA adds a third requirement, granting a credit only if such carbon dioxide is disposed of by the taxpayer in secure geological storage.
Extension and enhancement of credit for nonbusiness energy property. Section 1121 of the ARRA extends the availability of the credit for nonbusiness energy property by one year, through 2010, it increases the allowable credit for a taxpayer's qualified energy efficiency improvements to 30%, up from the previous 10% credit, and it raises the aggregate (per-taxpayer) cap for the credit to $1,500 (from $500).
Removal of certain caps on credits for residential energy efficient property. Section 1122 of the ARRA eliminates the per-taxpayer cap on the credit for qualified expenditures on solar water heating property, small wind energy property and geothermal heat pump property.
OVERVIEW OF KEY INDIVIDUAL TAX PROVISIONS IN THE AMERICAN ECONOMIC RECOVERY AND REINVESTMENT ACT
This summary provides an overview of ARRA tax relief provisions relevant to individuals. For high income individuals, many of these credits will be phased out.
AMT Exemption Amounts Increased. The stimulus bill increased the alternative minimum tax ("AMT") exemption amounts to $46,700 for unmarried individuals, $70,950 for married couples on a joint return (or surviving spouses), and $34,975 for married individuals filing separately. The phase-out rules remain the same as they were prior to the stimulus bill. Under those rules, the AMT exemption is reduced by an amount equal to (i) 25% multiplied by (ii) the taxpayer's income exceeding the following amounts: $112,500 for unmarried taxpayers; $150,000 for married couples on a joint return (or surviving spouses), and $75,000 for married individuals filing separately. The stimulus bill also postponed a reduction in the exemption amounts that, prior to the stimulus bill, were scheduled to go into effect in 2009.
AMT Credit Rules Expanded. Individuals may receive further AMT relief under the nonrefundable credit rules, which permit individuals with nonrefundable tax credits to use these credits against AMT taxes as well as regular income taxes. The new formula liberalizes permissible credits under the AMT. For certain nonrefundable tax credits, the credits may offset the AMT to the extent the total credits' aggregate amount does not exceed the sum of (i) the taxpayer's regular tax liability, as reduced by the foreign tax credit, and (ii) the taxpayer's AMT. Eligible nonrefundable tax credits include the child and dependent care credit, the credit for the elderly and disabled, the child tax credit, the adoption expense credit, the Lifetime Learning credit, certain energy credits, and other credits. This provision is anticipated to benefit taxpayers that are subject to the AMT and have substantial nonrefundable tax credits available.
New Car Credit. The stimulus bill enacted a new income tax deduction for state or local sales taxes or excise taxes paid on motor vehicle purchases made in 2009. The vehicle must be purchased on or after February 17, 2009 and before January 1, 2010. The deduction is generally an above the line deduction, i.e. the deduction is available to itemizers and as an additional deduction for taxpayers claiming the standard deduction. Motor home purchases are eligible for the credit. The credit, however, is limited to the taxes applying to the first $49,500 of the vehicle's purchase price. The credit is subject to a phase-out for taxpayers with modified adjusted gross incomes in excess of $250,000 (joint filers)/$125,000 (individual filers), and completely phases out for taxpayers with modified adjusted gross incomes in excess of $260,000 (joint filers)/$135,000 (individual filers). Taxpayers that choose to deduct local sales and use taxes in lieu of deducting state and local income taxes on their federal tax return are not eligible to claim the new credit. The credit deduction, however, is allowed when computing a taxpayer's AMT, which may make this credit more valuable (for certain taxpayers) than deducting state and local income taxes on a federal tax return.
Improved First Time Homebuyer Credit. A new tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a home on or after January 1, 2009 and before December 1, 2009. Unlike the prior tax credit enacted in 2008, the new credit is not recaptured and does not have to be repaid. The credit only applies to principal residences, and the taxpayer must keep the home as their principal residence for at least 36 months. The credit phases out for taxpayers with modified adjusted gross incomes in excess of $150,000 (joint filers)/$75,000 (individual filers) and completely phases out for taxpayers with modified adjusted gross incomes in excess of $170,000 (joint filers)/$95,000 (individual filers).
Expanded Hope Credit for Educational Expenses. Under old law, eligible students (or their parents, if the student was a dependant) could claim up to $1,800 for qualified educational expenses for the first two years of a student's post-secondary education. Under the stimulus bill, the Hope Credit is expanded to $2,500 per eligible student for each year, and may be claimed for the first four years of a student's post-secondary education. The credit, however, ratably phases out for taxpayers with modified adjusted gross incomes between $160,000 and $180,000 (joint filers)/$80,000 and $90,000 (individual filers). A portion of the credit is refundable, unless the taxpayer claiming the credit is subject to the "kiddie tax."
Technology Purchases from 529 Plans. Purchases of computer technology, computer equipment, or Internet access are designated as qualified education expenses under 529 plans for 2009 and 2010.
"Making Work Pay" Credit. The stimulus bill permits a refundable income tax credit for 2009 and 2010. The credit is 6.2% of a taxpayer's earned income, up to a maximum of $800 on a joint return (or $400 maximum for an individual). The credit begins to phase out for taxpayers with adjusted gross incomes in excess of $150,000 (joint return)/$75,000 (individual) and is completely phased out for taxpayers with an adjusted gross income of $190,000 (joint return)/$95,000 (individual return) or more. The IRS has updated withholding tables to include the new credit. Self-employed individuals may account for the credit by reducing the amount of their estimated tax payments -- however, care should be taken to calculate estimated tax payments correctly so that the taxpayer does not become liable for estimated tax underpayment penalties.
Partial Exclusion of Unemployment Compensation. While unemployment benefits are generally included in gross income, in 2009 the stimulus bill permits taxpayers to exclude up to $2,400 of unemployment benefits from gross income.