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 qualified
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 generally 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 also enjoy new 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 phases 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 serval 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
Although much of ARRA
focuses on working Americans, it also provides
some tax relief for laid-off workers. For 2009,
the act suspends federal income tax on the first
$2,400 of unemployment benefits per
recipient.
Take full advantage
ARRA may significantly affect your tax
liability in a variety of ways. If you would like
more detailed information about this new tax law,
please give us a call. We would be glad to help
you determine exactly how ARRA will affect your
tax liability - and what you should do to take
full advantage of the act.
