Obama Signs Stimulus Legislation

by Leroy Baker, Tax-News.com, New York

19 February 2009

United States President Barack Obama signed into law the USD787bn American Recovery and Reinvestment Act in Denver on February 17, cementing into place approximately USD220bn in tax cuts designed to boost business investment and consumer spending.

"What I am signing is a balanced plan with a mix of tax cuts and investments," Obama remarked before putting his signature to the legislation at the Denver Museum of Science and Nature. "It is a plan that’s been put together without earmarks or the usual pork barrel spending. And it is a plan that will be implemented with an unprecedented level of transparency and accountability."

Most Republicans, however, would disagree, and several tax provisions, mainly targeting businesses, had to be stripped from the legislation at the conference stage in an effort to keep its price tag below USD800bn. But this still failed to win round GOP lawmakers, who voted overwhelmingly against the stimulus plan, mainly over what they considered to be reckless spending provisions rather than irresponsible tax cuts.

Alongside the individual and business tax cuts, the legislation also seeks to boost growth in the renewable energy industries, and makes provision for new and improved tax credits such as the long-term extension of the Renewable Energy Production Tax Credit.

Below is a summary of the tax relief measures aimed at businesses and individuals in the final version of the legislation signed by Obama.

Business Incentives

Extension of Bonus Depreciation. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off 50% of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 for use in the United States. The bill will extend this temporary benefit for capital expenditures incurred in 2009.

Election to Accelerate Recognition of Historic AMT/R&D Credits. Last year, Congress temporarily allowed businesses to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of bonus depreciation. The amount that taxpayers may accelerate is calculated based on the amount that each taxpayer invests in property that would otherwise qualify for bonus depreciation. This amount is capped at the lesser of 6% of historic AMT and R&D credits or USD30m. The bill will extend this temporary benefit through 2009.

Extension of Enhanced Small Business Expensing. In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Until the end of 2010, small business taxpayers are allowed to write-off up to USD125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed USD500,000 (indexed for inflation). Last year, Congress temporarily increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to USD250,000 and increased the phase-out threshold for 2008 to USD800,000. The bill will extend these temporary increases for capital expenditures incurred in 2009.

5-Year Carryback of Net Operating Losses for Small Businesses. Under current law, net operating losses (NOLs) may be carried back to the two taxable years before the year that the loss arises (the NOL carryback period) and carried forward to each of the succeeding twenty taxable years after the year that the loss arises. For 2008, the bill will extend the maximum NOL carryback period from two years to five years for small businesses with gross receipts of USD15m or less.

Delayed Recognition of Certain Cancellation of Debt Income. Under current law, a taxpayer generally has income where the taxpayer cancels or repurchases its debt for an amount less than its adjusted issue price. The amount of cancellation of debt income (CODI) is the excess of the old debt’s adjusted issue price over the repurchase price. Certain businesses will be allowed to recognize CODI over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011.

Incentives to Hire Unemployed Veterans and Disconnected Youth. Under current law, businesses are allowed to claim a work opportunity tax credit equal to 40% of the first USD6,000 of wages paid to employees of one of nine targeted groups. The bill will create two new targeted groups of prospective employees: unemployed veterans; and disconnected youth.

Small Business Capital Gains. Current law, Section 1202 provides a 50% exclusion for the gain from the sale of certain small business stock held for more than five years. The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or USD10 million gain from stock in that small business corporation. The provision allows a 75% exclusion for individuals on the gain from the sale of certain small business stock held for more than five years. This change is for stock issued after the date of enactment and before January 1, 2011.

Temporary Small Business Estimated Tax Payment Relief. The bill reduces the 2009 required estimated tax payments for certain small businesses.

Temporary Reduction of S Corporation Built-In Gains Holding Period from 10 Years to 7 Years. Under current law, if a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for ten years in order to avoid a tax on any built-in gains that existed at the time of the conversion. The bill will temporarily reduce this holding period from ten years to seven years for sales occurring in 2009 and 2010.

Repeal of Treasury Section 382 Notice. Last year, the Treasury Department issued Notice 2008-83, which liberalized rules in the tax code that are intended to prevent taxpayers that acquire companies from claiming losses that were incurred by the acquired company prior to the taxpayer’s ownership of the company. The bill will repeal this Notice prospectively.

Treatment of Certain Ownership Changes. The bill will clarify the application of section 382 to certain companies restructuring pursuant to the Emergency Economic Stabilization Act of 2008.

Individual tax relief

“Making Work Pay” Tax Credit. For 2009 and 2010, the bill will provide a refundable tax credit of up to USD400 for working individuals and USD800 for working families. This tax credit will be calculated at a rate of 6.2% of earned income, and would phase out for taxpayers with adjusted gross income in excess of USD75,000 (USD150,000 for married couples filing jointly).

Economic Recovery Payments. The bill will provide a one-time payment of USD250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs.

Refundable Credit for Certain Federal and State Pensioners. The bill will provide a one-time refundable tax credit of USD250 in 2009 to certain government retirees who are not eligible for Social Security benefits.

Increase in Earned Income Tax Credit. The bill will temporarily increase the earned income tax credit for working families with three or more children to 45% (from 40%) of the family’s first USD12,570 of earned income for families with three or more children and would increase the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) by USD1,880.

Increase Eligibility for the Refundable Portion of Child Credit. The bill will increase the eligibility for the refundable child tax credit in 2009 and 2010. For 2008, the child tax credit is refundable to the extent of 15% of the taxpayer’s earned income in excess of USD8,500. The bill will reduce this floor for 2009 and 2010 to USD3,000.

“American Opportunity” Education Tax Credit. The bill will provide financial assistance for individuals seeking a college education. For 2009 and 2010, the bill will provide taxpayers with a new “American Opportunity” tax credit of up to USD2,500 of the cost of tuition and related expenses paid during the taxable year.

Computers as Qualified Education Expenses in 529 Education Plans. Section 529 Education Plans are tax-advantaged savings plans that cover all qualified education expenses, including: tuition, room & board, mandatory fees and books. The bill provides that computers and computer technology qualify as qualified education expenses.

Refundable First-time Home Buyer Credit. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to USD7,500) by first-time home buyers. The bill eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to USD8,000, and removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit for homes purchased before December 1, 2009.

Sales Tax Deduction for Vehicle Purchases. The bill provides all taxpayers with a deduction for State and local sales and excise taxes paid on the purchase of new cars, light truck, recreational vehicles, and motorcycles through 2009. This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of USD125,000 (USD250,000 in the case of a joint return).

Temporary Suspension of Taxation of Unemployment Benefits. Under current law, all federal unemployment benefits are subject to taxation. The average unemployment benefit is approximately USD300 per month. The proposal temporarily suspends federal income tax on the first USD2,400 of unemployment benefits per recipient.

Extension of AMT Relief for 2009. The bill will provide more than 26 million families with tax relief in 2009 by extending AMT relief for nonrefundable personal credits and increasing the AMT exemption amount to USD70,950 for joint filers and USD46,700 for individuals.

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