R&R: Shining a little light on the relief provided by the Recovery Act
February, 2009
By
Darin Christensen
The American Recovery and Reinvestment Tax Act of 2009 (Recovery Act) was recently signed into law and contains provisions that offer financial relief to a wide variety of individuals and businesses. Some of the highlights include:
Individuals
"Making Work Pay" Credit – For 2009 and 2010, the Recovery Act provides qualifying individuals with a refundable tax credit for tax years 2009 and 2010. The Act provides a credit of up to $400 for working individuals and $800 for working families. Taxpayers can claim the credit on their tax returns or they may choose to reduce the amount of tax that is withheld from their paychecks.
First-Time Homebuyer Credit – The Recovery Act waives the requirement to repay the first-time homeowner credit. In 2008, Congress implemented a $7,500 refundable tax credit to first-time homebuyers. The credit amounted to an interest-free loan equal to 10 percent of the purchase price of a house (up to $ 7,500). Prior to the Recovery Act, taxpayers had to repay that amount over the course of 15 years. However, the Recovery Act bumped up the amount of the refundable credit to $8,000 and eliminated the repayment obligation for the purchase of homes after 2008 and before December 1, 2009.
Expanded Earned Income Tax Credit (EITC) – The EITC credit percentage for working families with three or more children is increased to 45 percent of the family's first $12,570 for 2009 and 2010.
Transportation Fringe Benefits – The Recovery Act equalizes the benefit employers can provide for transit and parking. The Act increases the maximum monthly exclusion for employer-provided transit to the same level as the exclusion for employer-provided parking (currently $230).
Unemployment Compensation Exclusion – Federal income tax on $2,400 of unemployment benefits received in 2009 is suspended under the Recovery Act. Unemployment compensation in excess of $2,400 will be taxed.
Businesses
Significant business tax reduction measures include a five-year net operating loss carryback provision, extended small business Section 179 expensing, and extension of bonus depreciation.
Net Operating Losses (NOLs) – The Recovery Act extends the maximum carryback period for NOLs from two years to five years for losses arising in tax year 2008. For a business to qualify for this election, they must be considered a "small business" and meet the gross receipts test.
Small Business Expensing – Section 179 of the Internal Revenue Code (the "Code") permits an immediate deduction of up to $125,000 for capital expenditures in lieu of taking depreciation. This deduction applies to qualifying property acquired by small businesses used in their trade or business. In 2008, the deduction was temporarily increased from $125,000 to $250,000 with a phase-out beginning at expenditures of $800,000. The Recovery Act extends the $250,000 and $800,000 amounts to taxable years beginning in 2009.
Extension of Bonus Depreciation – The 2008 temporary recovery of the cost of capital expenditures through bonus depreciation expensing is extended an additional year. The Recovery Act extends first-year bonus depreciation to qualifying property. An owner of qualifying property may deduct 50% of the adjusted basis of the property placed in service in 2009.
Repeal of Treasury Notice 2008-83 – The Recovery Act limits the effects of a controversial Notice issued by the Internal Revenue Service in September 2008. The Notice had the effect of loosening rules in the Code for merging financial institutions and giving them a sizeable tax break by excusing them from Code limits on built-in losses. The Recovery Act repeals the Notice prospectively and only permits exemptions from Code Section 382 to ownership changes taking place prior to January 16, 2009 (unless a limited exception applies).
If you are interested in learning more about the tax provisions in the American Recovery and Reinvestment Tax Act of 2009, or in determining whether the incentives provided to individuals and businesses may apply to you or your business, please contact the Tax Group at Bullivant Houser Bailey.