American Recovery and Reinvestment Act of 2009

American Recovery and Reinvestment Act of 2009

On February 17, 2009, President Obama signed into law a major spending bill designed to help jump-start the American economy. The Act contains $787 billion in spending programs, including nearly $300 billion in tax relief. Although many of the provisions are retroactive to January 1, 2009, they are also subject to phase-outs at higher income levels, making them unavailable to many taxpayers.Following is a summary of the important tax provisions contained in this massive new legislation.

Individuals

Unemployment compensation benefits received in 2009 are excludable from gross income up to the first $2,400.

The excludable amount of gain on the sale of certain “small business stock” acquired after February 17, 2009 and before 2011 is increased from 50 percent to 75 percent.
Qualified “Section 529” tuition plan program distributions can now be used for computer equipment, computer technology and internet access costs during 2009 and 2010.

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 SSI programs. Certain retired government workers not covered by social security will also qualify for the payment.

Most individuals who purchase qualified motor vehicles (generally cars, light trucks and SUVs) after the date the law was passed and before 2010 are eligible for a deduction for state and local sales and excise taxes. The deduction is available on the first $49,500 of the purchase price of any one qualified vehicle, but subject to phase-out for higher-income taxpayers.

The 2008 AMT patch is extended to 2009, with slightly higher exemption amounts. The use of nonrefundable personal tax credits against regular tax and AMT liability are both also extended through 2009.

The Making Work Pay Credit will provide eligible individuals with a refundable income tax credit for 2009 & 2010. The credit will be the lesser of (1) 6.2% of earned income or (2) $400 ($800 for joint filers). This credit is subject to phase-out for higher income individuals.
The Earned Income Tax Credit (EITC) is temporarily increased for families with three or more qualifying children.

The Hope Credit is renamed the New American Opportunity Tax Credit, and is temporarily enhanced for 2009 and 2010 by increasing it up to $2,500 per student for the first four years of post secondary education. Course materials will also qualify for the new credit. This credit is subject to phase-out for higher income taxpayers. Tuition paid in late 2008 for 2009 does not qualify for the enhanced credit, but may qualify under pre-act rules.

The First-Time Homebuyer Credit enacted in 2008 was revamped by increasing the amount to a maximum of $8,000 on purchases of principal residences by first-time homebuyers. The new law waives the previously required repayment of the credit for qualified purchases between January 1, 2009 and November 30, 2009, as long as the home is owned and used as a principal residence for 36 months. The availability of the credit is subject to phase-out for higher income taxpayers.

Businesses

The 50-percent first-year bonus depreciation allowed under the 2008 Economic Stimulus Act has been extended through December 31, 2009. The extension is retroactive to January 1, 2009. It would also extend, through 2010, the additional year of bonus depreciation allowed under the 2008 Economic Stimulus Act for property with a recovery period of 10 years or longer, for certain transportation property and for certain aircraft. The enhanced bonus deprecation rules for new vehicles provided by the 2008 Act is also extended through 2009.

The 2008 Economic Stimulus Act increased the amount of Code Sec 179 expensing for 2008 to $250,000 and increased the threshold for reducing the deduction to $800,000.The Act extends the increased 2008 Section 179 amounts for another year, through 2009.

The new Act provides a five-year carry-back of 2008 net operating losses, but only for qualified small businesses that meet certain gross receipts tests. The new law gives these businesses the choice to carry-back NOL’s three, four or five years. The new treatment will apply only to NOL’s for any tax year ending in 2008. If a taxpayer has two tax years that end in 2008, only one of the two years would qualify for the special NOL carry-back benefit. The normal NOL carry-back period, which is generally two years, returns for 2009.

The Act temporarily shortens, from 10 years to 7 years, the holding period for assets subject to the built-in gains tax imposed after a C Corp elects to become an S Corp. This reduction would apply to C Corps that convert to S Corps in tax years beginning in 2009 and 2010.

There are new provisions that enhance COBRA coverage. Laid off workers would pay a portion of the COBRA premium (40 percent) and the former employer would pay the remaining portion of the premium for nine months. The employer would be able to credit its share of the subsidy against wage withholding and payroll taxes. Income thresholds would apply.

Energy and Environment

In addition to the above, there are many new credits available to both individual and business taxpayers, as part of the President’s energy and environmental initiative programs. Such things as plug-in vehicles, residential and business energy-efficiency enhancements, alternative motor vehicles, solar and wind conversions can all qualify for special tax credits.