AMERICAN RECOVERY AND
REINVESTMENT ACT OF 2009
Overview
The American Recovery and Reinvestment Property Tax Act of 2009 is part of a massive $787 billion legislative vehicle comprised of tax breaks, spending on infrastructure, health care, and alternative energy, in addition to aid to the states and local governments. The following is a summary of key provisions in the act.
Individual Income and Deductions
Individual-Related Tax Credits
Business Income and Deductions
Group Health Insurance and Other Provisions
Individual Income and Deductions
Unemployment compensation. Up to $2,400 of unemployment compensation is excludable from gross income for 2009.
Excludable gain on small business stock. Individuals can exclude up to 75 percent (originally 50%) of their gain on the sale of qualified small business stock they acquire after the date of enactment and before 2011.
Public transportation fringe benefits. Through 2010, the limit on excludable fringe benefits for vanpools and transit passes increases to match the limit applicable to parking benefits ($230 for 2009).
Qualified tuition programs. Excludable qualified tuition program distributions can be used for some computer equipment and internet access costs that are paid or incurred during 2009 and 2010. The definition of education expense temporarily expanded to include computer, internet access, software (not games) and peripheral equipment.
Economic recovery payments. The Treasury Department will make one-time payments of $250 to adults who are eligible for benefits under certain social security, Railroad Retirement, veterans and supplemental security income (SSI) programs.
New car purchases. Most individuals who purchase qualified motor vehicles before 2010 can deduct some state and local sales and excise taxes, regardless of whether they itemize deductions. Deduction is phased out when a taxpayer’s modified adjusted gross income exceeds $125,000 ($250,000 for joint filers).
AMT. The increased alternative minimum tax (AMT) exemption amounts and the use of nonrefundable personal tax credits against regular tax and AMT liability are both extended to tax years beginning in 2009. Married joint filers get a $70,650 exemption (up from $69,950), unmarried filers get a $46,700 exemption (up from $46,200) and married filing separate filers get a $35,475 exemption (up from $34,975).
Note: The $40,000 corporate exemption and $22,500 exemption for estates and trusts remains the same. Also the individual taxpayer exemption phase-out remains the same ($150,000 for married joint filers, $112,500 for unmarried filers, and $75,000 for married separate filers).
Individual-Related Tax Credits
First-time homebuyer credit. The credit for first-time homebuyers is extended through November 30, 2009. For qualified purchases during 2009, the maximum credit increases to $8,000 and the repayment requirement is generally waived (taxpayer has to keep home for at least 36 months and use as principal residence). The credit can be claimed on Form 5405 (First-Time Homebuyer Credit). There is a phase-out for high income taxpayers.
Refundable child credit. For 2009 and 2010, the refundable child credit is calculated to apply to 15 percent of earned income in excess of $3,000.
Earned income credit. For 2009 and 2010, the phaseout amounts for the earned income credit increase by $5,000 for married taxpayers who file joint returns, and the credit percentage for taxpayers with at least three qualifying children increases to 45 percent.
Government retiree credit. Certain retired government workers whose work was not covered by social security can claim a refundable $250 tax credit.
American Opportunity Credit. For 2009 and 2010, the Hope Scholarship Credit is replaced by a more generous American Opportunity Credit. Credit is increased to a maximum of $2,500 eligible student, credit can be claimed up to four years per eligible student. Income phase-out has been increased to $80,000 to $90,000 for single taxpayers and $160,000 to $180,000 for joint filers. 40% of the credit is refundable.
Nonbusiness energy property credit. The residential energy property credit is modified and increased through 2010, and the efficiency standards for qualifying property are updated. The credit amount is 30 percent of expenditures for qualified energy efficiency improvements and qualified energy property placed in service in 2009 and 2010. Credit is limited to maximum of $1,500 (previously $500). Applies to building envelope components, furnaces, certain fans, central air conditioners, water heaters, certain heat pumps and biomass stoves.
Residential energy efficient property credit. The annual maximum limits applicable to the residential alternative energy credit are eliminated for solar hot water heaters, wind turbine property, and geothermal heat pumps.
Business Income and Deductions
Cancellation of debt income. A taxpayer can elect to defer cancellation of indebtedness income arising from a qualified reacquisition of certain corporate or business debt instruments issued by the taxpayer or a related person. The COD income can be deferred 5 years. The deferral only applies to reacquisition debt. Reacquisition means buy-back of debt for new debt, for cash, for stock or partnership interest, contribution of debt instrument to capital and complete forgiveness.
Code Sec. 179 expensing. The increase in the Code Sec. 179 expensing allowance (to a $250,000 dollar limitation and $800,000 investment limitation) that applies to tax years beginning in 2008 is extended to tax years beginning in 2009.
Bonus depreciation. The 50-percent bonus depreciation deduction that applies to tax years beginning in 2008 is extended for one year.
S corporations. For tax years beginning in 2009 and 2010, no tax is imposed on an S corporation's net unrecognized built-in gain if the seventh tax year in the corporation's 10-year recognition period preceded its 2009 or 2010 tax year.
NOL carrybacks. Eligible small businesses can elect to use an extended three-, four-, or five-year carryback period for 2008 net operating losses (NOLs). Note: 20-year carryforward period is still in effect. Eligible small businesses have to meet a $15 million gross receipts test.
Corporate OID. Rules limiting corporate deductions of original issue discount (OID) on high-yield discount obligations are suspended for certain obligations issued in a debt-for-debt exchange, including an exchange resulting from a significant modification of a debt instrument, after August 31, 2008, and before January 1, 2010.
Withholding on government contracts. Required tax withholding and reporting on certain government payments to contractors is delayed until 2012.
Individual estimated tax payments. For certain individuals with qualified small business income, estimated tax payments for tax years beginning in 2009 may be based on 90 percent of the prior year's tax liability. Qualification is determined by adjusted gross income on individual’s return for prior year being less than $500,000 and more than 50% of the gross income shown on that return was from a business which employed less than 500 employees.
Large corporation's estimated tax payments. Corporations with at least $1 billion in assets must increase their estimated tax payments for July, August and September of 2013 to 120.25 percent of the amount otherwise due.
Accelerated credits. A corporation that elects to claim an accelerated alternative minimum tax credit or research credit in lieu of bonus depreciation may increase its credit limitation by the amount of bonus depreciation claimed with respect to certain extension property placed in service in 2009. Note: Same option as in 2008.
Energy credit. The energy credit is modified with respect to small wind energy property and subsidized energy financing or industrial development bonds. Taxpayers can elect to claim the energy credit portion of the investment tax credit in lieu of the production tax credit for certain qualified energy production facilities.
Work opportunity credit. The work opportunity credit is expanded to include unemployed veterans and disconnected youth who begin work during 2009 and 2010. Incentive for employers to hire individual from disadvantaged groups. Credit is generally equal to 40% of first $6,000 of qualified wages paid to individual during first year of employment. Credit is reduces to 25% if employee works 400 hours or less and employer cannot claim credit if employee works less than 120 hours.
Exempt bond interest and AMT. For purposes of the alternative minimum tax (AMT), tax-exempt interest on private activity bonds issued in 2009 and 2010 is not treated as a tax preference item or included in a corporation's AMT income for purposes of computing its adjusted current earnings.
Group Health Insurance and Other Provisions
COBRA premium assistance. Certain involuntarily terminated employees can qualify for a 65-percent reduction in their premiums to maintain health insurance through their former employers under COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985). A penalty is imposed on workers who fail to notify the health plan when they cease to be eligible for the assistance.
COBRA extension. COBRA continuation coverage is extended for certain workers who are eligible for benefits from the Pension Benefit Guaranty Corporation (PBGC) or under the Trade Adjustment Assistance Act (TAA).
Group health plan enrollment. A special 60-day period for enrollment in an employer's group health plan is triggered by certain determinations regarding the eligibility of an employee or dependent for Medicaid or children's health insurance program (CHIP) benefits.
HCTC. The health coverage tax credit (HCTC), a benefit under the Trade Adjustment Assistance Act, is increased to 80 percent of the taxpayer's premiums for qualified health insurance through 2010.
Please contact Hal Margolit, Tax Manager, at 215-675-8364 or hmargolit@wm-cpa.com with any questions.
