On Feb. 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). While approximately two-thirds of the nearly $800 billion stimulus act is focused on government spending initiatives intended to create jobs and stimulate the economy, about one-third provides tax breaks for businesses and individuals.
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 percent 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.
Shortening of S corporation built-in gains period. 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. For conversions occurring in 2009 and 2010, however, ARRA reduces this holding period to seven years.
Other breaks expanded
The act expands some important tax breaks:
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 s
mall businesses with gross receipts of $15 million or less.
Work Opportunity credit. Employers can claim a credit equal to 40 percent 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 applies to such workers hired in 2009 and 2010.
Depreciation breaks. 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 percent of its adjusted basis. For passenger automobiles that are eligible property under the 50 percent 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 percent bonus depreciation. That break has now been extended through 2009.
Energy-related relief. 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.
AMT relief granted early
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.
This has been a general discussion of a complex subject and is not intended as advice. Always consult your tax adviser before making any tax decisions.
Norman G. Grill Jr. is managing partner of Grill & Partners L.L.C., certified public accountants and consultants with offices in Fairfield and Greenwich, Conn. Reach him at N.Grill@GRILL1.com.
