The American Recovery and Reinvestment Act of 2009 was passed by Congress on February 13 and signed by President Obama on February 17, 2009. It contains myriad tax provisions, many of which have a direct impact on business owners.



The Act provides targeted incentives for business investment in 2009, expanding bonus depreciation and expensing provisions, accelerating refunds of R&D credits and AMT credits, and reducing effective capital-gain rates for qualified small business stock. Business owners may be able to reduce their estimated tax payments in 2009, in anticipation of a lower overall tax bill next April.

Bonus Depreciation
Last year, as an investment incentive, Congress temporarily allowed businesses to take deductions for certain capital expenditures faster than the ordinary depreciation schedule would allow. Specifically, Congress allowed 50% of the cost of certain capital property purchased in 2008 to be depreciated in that same year. The Recovery Act extends this benefit to 2009.

Expensing Provision
Similarly, the Act extends through 2009 a 2008 provision that allows expensing the full cost of certain property, up to $250,000.

Extension of Refundable Credits
The Act also extends through 2009 provisions that permit certain corporations to turn their previously-unused alternative minimum tax (AMT) credits or research and development (R&D) credits into cash. A corporation that is eligible for Bonus Depreciation (see above) can elect instead to claim additional AMT or R&D credits.

Small Business Capital Gains Rate Reduction
Under pre-existing law, 50% of the gain realized on certain “qualified small business stock” that is held for five years is excluded from income (although a corresponding increase in the tax rate on the unexcluded portion made this provision only marginally attractive to taxpayers). The Recovery Act increases the exclusion from 50% to 75% for qualified stock acquired after February 17, 2009 and before January 1, 2011.

Reduction of Estimated Taxes
If business owners expect to enjoy a tax reduction as a result of these provisions, they may be able to reduce their estimated tax payments in 2009.



Below the headlines, the Recovery Act makes easier the complex and often difficult tax of reorganizing a business that needs an infusion of capital. The Act provides for deferral of taxes on the “cancellation of debt” income that often arises when lenders exchange their notes for equity positions. The Act also extends the period of time over which losses can be carried back to prior years. It also reduces the holding period required for “built-in gain assets” of certain corporations that have converted to “S” status.

Deferral of Taxes on “Cancellation of Debt” Income
Generally, taxpayers must recognize income when a debt owed by them is forgiven by the creditor. This “cancellation of debt” income often arises in restructurings, when lenders either voluntarily reduce their claims, or exchange their claims for equity positions (stock) in the debtor company. To facilitate restructurings, the Recovery Act allows the tax on this cancellation-of-debt income to be paid over time. For example, a company that reacquires its own debt during 2009 or 2010 would be able to recognize the income ratably over the five years beginning in 2014.

Extension of Carryback Losses
Under pre-existing law, in general, net operating losses incurred in any given tax year can be applied retroactively against income earned in the prior two years. The Act extends this two-year carryback period to five years, but only for certain eligible small businesses. Generally, those with gross receipts below $15 million are eligible.

Reduction of Holding Period for 2000-2003 C-to-S Conversions
Many small companies have reduced their federal income taxes by converting from the normal Subchapter “C” corporation structure to a Subchapter “S” corporation. As a rule, “S” corporations generally pay no tax themselves (their income is attributed to their shareholders). Under current law, however, if a “C” corporation converts to “S” status, certain gains that it realizes on the sale of its assets will nevertheless be taxed to the corporation for a ten-year period after the conversion. This ten-year period is temporarily reduced to seven years under the Act, but only for “S” corporations that converted from “C” status in tax years 2000 through 2003. For example, a company that converted from “C” to “S” status in 2001 might now be able to sell its assets without realizing any capital gain, rather than having to wait until 2011 to do so.



For energy producers, the Recovery Act extends production credits for wind facilities through 2012 (and for other renewable energy facilities through 2013). It removes the cap on the Energy Investment Credit for small wind properties, and provides a new manufacturing Investment Tax Credit (ITC) for next-generation “green” technologies. For energy consumers, the Act expands tax credits for investments in home energy efficiency and plug-in hybrid vehicles.

Energy Production Credits
Current law allows a 2008 production credit for electricity produced from renewable resources. The Act extends this credit to wind facilities placed in service through 2012, and to other renewable energy facilities (such as biomass and geothermal) placed in service through 2013.

Energy Investment Credit for Wind Facilities
An energy investment credit exists under prior law, but it is limited to $4,000 per year. The Recovery Act removes the cap for qualified small wind energy property.

New Energy Manufacturing Investment Tax Credit
The Recovery Act provides a new 30% investment tax credit (ITC) for facilities engaged in the manufacture of “advanced energy property,” or what might be called “green” technologies. These include renewable energy, energy storage, energy conservation, efficient transmission and distribution of electricity, and carbon capture and sequestration. The credits are available only for projects that are pre-certified by the U.S. Treasury through a competitive bidding process, and up to $2.3 billion in credits may be authorized.

Consumer Credits
Under pre-existing law, a 10% tax credit is allowed for certain improvements to energy-efficient homes (such as new furnaces, energy-efficient windows and doors, and insulation) subject to certain caps. The Recovery Act boosts the tax credit to 30% for 2009-2010 improvements, and increases the cap amounts. It also provides a tax credit of up to $5,000 for families that purchase plug-in hybrid vehicles.



For taxpayer with modest incomes, the Recovery Act offers meaningful tax incentives for purchases of homes, new cars, and higher education. While most of the incentives are targeted to middle-class workers and therefore “phase out” at higher income levels, some benefits (such as relief from the Alternative Minimum Tax) are meaningful to higher-income taxpayers as well.

Tax incentives for purchases of homes . . .
The Recovery Act provides an enhanced credit for first-time home purchases and limits an earlier requirement that the credit be repaid. For homes purchased in 2009 (but not later than November 30) the Act provides a maximum credit of $8,000; the credit need not be repaid if the home is owner-occupied for three years. The credit phases out for taxpayers with adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

. . . and new cars . . .
The Act provides a federal tax deduction for state sales taxes and excises paid on the purchase of new cars (including light trucks and SUVs, motorcycles and motor homes). The deduction is “above the line” and so is limited by the “2% floor” that applies to some itemized deductions, and it is available even to taxpayers who do not itemize but take the “standard deduction” instead. This new-car-tax deduction phases out at AGI levels above $125,000 ($250,000 for joint filers).

. . . and for higher education.
The pre-existing education credits are expanded and made available at somewhat higher income levels. The “HOPE” credit (renamed the “American Opportunity” credit) will increase to a maximum of $2,500 annually and will be fully available at AGI levels up to $80,000 ($160,000 for joint filers). The maximum credit is obtained by incurring $4,000 of qualifying expenses (such as tuition and textbooks).

Relief from the Alternative Minimum Tax
The Recovery Act modestly increases the AMT exemption amounts for 2009, from $69,950 to $70,950 (for single individuals). It also provides that for 2009, personal nonrefundable credits may offset both the AMT and regular tax. Additionally, interest on qualifying private activity bonds (if issued in 2009 or 2010) is no longer treated as an AMT preference; this will increase the viability of bonds issued by state and local governments.



If you have any questions, please contact one of the authors of this Client Update:
Avi Lev
Andrew Myers

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