News Releases
Stimulus Act Provides Substantial Tax Breaks
ARRA may significantly affect local
taxpayers’ tax liability in a variety of ways. If you would like more detailed
information about this new tax law, please give us a call. Our team is available
to talk to you about how the American Recovery and Reinvestment Act of 2009 may
affect local businesses and individuals
Business Breaks
Businesses
will enjoy new tax breaks. The act
provides some new breaks that will benefit many businesses:
Reduced estimated tax payment
requirements. For 2009, ARRA reduces the
estimated tax payment requirements for many small business owners. Owners
generally will qualify for the reduced payments if their adjusted gross income
(AGI) for 2008 was less than $500,000 and if more than 50% of their 2009 gross
income is generated from a "small business," which is defined as a business
that, on average, had fewer than 500 employees during 2008.
Deferral of income from
cancellation of debt. Taxpayers generally
must recognize cancellation-of-debt income (CODI) when they cancel — or
repurchase — debt for an amount less than its adjusted issue price. In certain
situations, ARRA allows businesses to defer CODI generated from repurchasing
business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year
2014 and then report the income ratably over the 2014 through 2018 tax years.
S corporation built-in gains tax
relief. Although a C corporation conversion
to an S corporation isn't a taxable event, the S corporation normally must hold
on to its assets for 10 years to avoid tax on any built-in gains that existed at
the time of the conversion. Under ARRA, for tax years beginning in 2009 and
2010, there generally will be no tax on an S corporation's net unrecognized
built-in gain if the seventh tax year in the recognition period occurred before
the 2009 and 2010 tax years.
Other business breaks expanded.
The act expands some important tax breaks for businesses:
Net operating loss carryback.
Generally, a net operating loss (NOL) may be carried back two years to generate
a current tax refund, providing a cash infusion in times of loss. For 2008 (not
2009), ARRA extends the maximum NOL carryback to five years for small businesses
with gross receipts of $15 million or less.
Work Opportunity credit.
Employers can claim a credit equal to 40% of the first $6,000 of wages paid to
employees in certain target groups, such as ex-felons, food stamp recipients and
disabled veterans. ARRA expands the eligible target groups to include unemployed
veterans and disconnected youth. This expanded benefit applies to such workers
hired in 2009 and 2010.
Depreciation breaks extended
To spur additional investment, ARRA extends the increase in
the Section 179 limit for initial year expensing to $250,000 (from $125,000
indexed for inflation). The expensing election begins to phase out dollar for
dollar when total asset acquisitions for the tax year exceed $800,000 (up from
$500,000 indexed for inflation). The new higher limit applies for calendar year
2009 or a business's fiscal year that begins in 2009.
Another depreciation-related provision extends the special
allowance for certain property, generally if acquired in 2009. For eligible
property, the special depreciation amount is equal to 50% of its adjusted basis.
For passenger automobiles that are eligible property under the 50% bonus
depreciation rules, the $8,000 increase for the first-year limit on depreciation
also is extended to new vehicles placed in service in 2009.
Last year, corporate taxpayers were also allowed to
accelerate their alternative minimum tax (AMT) and research and development
(R&D) credits in lieu of taking the 50% bonus depreciation. That break has now
been extended through 2009.
Energy-related breaks for
businesses expanded
ARRA creates or expands several energy-related breaks for
businesses, such as the:
-
Advanced energy investment credit,
-
Renewable electricity production credit, and
- Alternative fuel pump tax credit.
Individuals Tax Breaks
ARRA also provides some new tax breaks for individuals:
New relief for most workers,
retirees and other Social Security recipients.
For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for
joint filers and $400 for other filers. The credit generally is phased out for
joint filers with AGIs exceeding $150,000 and for other filers with AGIs
exceeding $75,000. Unlike last year's "recovery rebate," which was distributed
via checks mailed to taxpayers, the new credit will generally be "paid" through
a reduction in income tax withholding.
The act also provides a one-time payment of $250 to many
people on fixed incomes, such as Social Security recipients and disabled
veterans. Similarly, it provides a one-time refundable tax credit of $250 to
certain government retirees who aren't eligible for Social Security benefits.
Both the $250 payment and the $250 credit reduce any allowable Making Work Pay
credit.
New sales tax deduction for
vehicle purchases. ARRA creates a new
above-the-line deduction for state and local sales and excise taxes paid on the
purchase of new cars, light trucks, motorcycles and recreational vehicles. The
deduction is available for vehicles purchased from Feb. 17, 2009, through Dec.
31, 2009.
The deduction is not, however, available for tax attributable
to vehicle value in excess of $49,500. The deduction also phases out based on
AGI, but the limits are higher than those for the Making Work Pay credit: The
phaseout begins for joint filers with AGIs exceeding $250,000 and for other
filers with AGIs exceeding $125,000.
Other individual breaks expanded
The bulk of the tax relief for individuals involves expanding
existing breaks. Here are the key changes to be aware of:
Credit for first-time
homebuyers. Last year, a refundable credit
equal to 10% of the purchase price of a principal residence was made available
to qualified first-time homebuyers. This credit was set to expire July 1, 2009,
but ARRA extends its availability to purchases made before Dec. 1, 2009. For
qualifying purchases made after Dec. 31, 2008, the act also increases the
maximum credit from $7,500 to $8,000. Perhaps most significant, the act
eliminates the repayment obligation for taxpayers whose qualifying purchase
occurs after Dec. 31, 2008 — except in situations where a home is sold within
three years of purchase.
American Opportunity education
credit (previously called the Hope credit).
For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of
tuition and related expenses (including books) and 25% of the next $2,000 of
such expenses. The maximum credit is $2,500 per year for the first four years of
postsecondary education. (The maximum Hope credit was $1,800 and applied to only
the first two years of postsecondary education.) The credit phases out for joint
filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding
$80,000.
529 savings plans.
529 plan distributions used to pay qualified
education expenses — tuition, room, board, mandatory fees and books — are
generally tax free. For expenses paid in 2009 and 2010, ARRA expands the
definition of qualified education expenses to include computers and computer
technology.
Qualified small business stock
gain exclusion. Generally, taxpayers
selling qualified small business (QSB) stock are allowed to exclude 50% of their
gain as long as they've held the stock for at least five years. ARRA increases
the exclusion to 75% if the stock is issued after Feb. 17, 2009, and before Jan.
1, 2011.
AMT relief granted early this
year
One tax provision affecting individuals that many thought
wouldn't be enacted until later in the year is the extension of alternative
minimum tax (AMT) relief. ARRA provides a one-year "patch" that increases the
AMT exemption. For married couples filing jointly, the 2009 exemption is
$70,950. For singles and heads of households, it's $46,700, and for married
filing separately, it's $35,475.
The patch also expands the AMT income ranges over which the
exemptions phase out and only partial exemptions are available. The 2009
phaseout ranges are now $150,000 to $433,800 for married filing jointly,
$112,500 to $299,300 for singles and heads of households, and $75,000 to
$216,900 for married filing separately. The exemption is completely phased out
if AMT income exceeds the top of the applicable range.
Additionally, ARRA extends a provision through 2009 that
allows certain nonrefundable personal tax credits to provide a benefit against
the AMT. These include the dependent care credit, the American Opportunity
credit and the Lifetime Learning credit. The act also excludes from the AMT any
income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010
refundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.
Energy-related breaks expanded
for individuals
ARRA creates or expands several energy-related breaks for
individuals, such as:
-
Transit benefits,
-
Residential energy property credit,
-
Residential energy-efficient property credit, and
-
Plug-in electric vehicles credit.
Help given
to laid-off workers
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