On February 17, 2009 (“Effective Date”) President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the Recovery Act), a stimulus bill that includes tax breaks for businesses and individuals. This letter provides an overview of some of the key tax provisions included in the Recovery Act.

INDIVIDUAL TAX PROVISIONS

Making Work Pay Credit: The Recovery Act provides eligible individuals with a refundable income tax credit for tax years beginning in 2009 and 2010. The credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 for a joint return). The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly).

Tax Break for New Car Purchasers. The Recovery Act allows taxpayers to deduct state and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting at AGI of $125,000 ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as those who do not itemize. However, the deduction cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes.

Refundable Child Credit Eased: Currently, a taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit equal to 15% of earned income in excess of a threshold dollar amount. The Recovery Act modifies the earned income formula for the determination of the refundable child credit to apply to 15% of earned income in excess of $3,000 for tax years beginning in 2009 and 2010.

New American Opportunity Tax Credit: Individual taxpayers may claim a nonrefundable credit, the Hope credit, against Federal income taxes. The Recovery Act modifies the Hope credit for tax years beginning in 2009 or 2010. The credit is up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The modified credit rate is 100% on the first $2,000 of qualified tuition and related expenses, and 25% on the next $2,000 of qualified tuition and related expenses. The credit is subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly).

Computers as Education Expenses under 529 Plans: A person can make nondeductible cash contributions to a qualified tuition program (QTP, or 529 plan) on behalf of a designated beneficiary. The earnings on the contributions build up tax-free and distributions from a QTP are excludable to the extent used to pay for qualified higher education expenses. Under the Recovery Act, expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment or Internet access or related services qualify as qualified education expenses under QTPs if such technology, equipment, or services are to be used by the QTP beneficiary or his family during any of the years the beneficiary is enrolled at an eligible educational institution.

First-time Homebuyer Credit Eased: For qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500. The Recovery Act extends the credit so that it applies to purchases before Dec. 1, 2009. In addition, it waives the recapture of the credit for qualifying home purchases after Dec. 31, 2008. If the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, recapture of some/all of the credit may apply. The Recovery Act also increases the maximum homebuyer credit to $8,000. The credit phases out for taxpayers with AGI in excess of $75,000 ($150,000 in the case of a joint return).

Limited-Time-Only Subsidy for COBRA Continuation Coverage of Unemployed Workers: The Act provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers.

Boosted AMT Exemption Amounts for 2009: The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). Consistent with recent years, the Recovery Act increases the AMT exemption amounts (to adjust for inflation) to:

• $46,700 (up from $46,200 in 2008) for unmarried individuals
• $70,950 (up from $69,950 in 2008) for married couples filing a joint return and surviving spouses.

Personal Nonrefundable Credits May Offset AMT and Regular Tax for 2009: Under pre-Recovery Act law, for tax years beginning after 2008, nonrefundable personal tax credits were allowed only to the extent that their aggregate amount didn't exceed the excess of: (a) the taxpayer's regular tax liability, over (b) his tentative minimum tax. For tax years beginning in 2009, the Recovery Act provides that all of the otherwise allowable nonrefundable personal credits may offset AMT as well as regular tax.

Repeal of AMT Limits on Tax Exempt Bonds Issued in 2009 and 2010: Under pre-Recovery Act law, tax-exempt interest on certain tax-exempt bonds issued for private activities was a tax preference item. For interest on bonds issued after Dec. 31, 2008 and before Jan. 1, 2011, the Recovery Act provides that tax-exempt interest on private activity bonds issued isn't an item of tax preference for purposes of the alternative minimum tax (AMT).

BUSINESS TAX PROVISIONS

Small Business Estimated Taxes: For 2009 only, qualified individuals are allowed to make estimated tax payments that equal only 90% of their preceding tax year liability instead of 100%. To qualify, an individual taxpayer must have adjusted gross income of less than $500,000, and more than 50% of the individual’s gross income must come from a small business (one with an average of fewer than 500 employees).

Additional 50% First-Year Depreciation OK'd for Most Types of New Depreciable Property Placed in Service in 2009: Under the Economic Stimulus Act of 2008, for property placed in service after Dec. 31, 2007 and before Jan. 1, 2009 (Jan. 1, 2010 for certain longer-lived property), an additional depreciation deduction is allowed equal to 50% of the adjusted basis of “qualified property.” The Recovery Act extends this rule for property generally acquired before Jan. 1, 2010 (before Jan. 1, 2011 for certain longer-lived property). “Qualified property” includes most types of new property other than buildings.

One-Year Optional Extension of Election to Trade Bonus and Accelerated Depreciation for Otherwise-Deferred Credits: A corporation can, under an election that is made for its first tax year ending after Mar. 31, 2008, choose to forego bonus and accelerated depreciation for “eligible qualified property” in exchange for the present allowance, as refundable tax credits, of otherwise-deferred “pre-2006 credits” (research credits from tax years beginning before 2006 and credits for AMT paid that is attributable to tax years beginning before 2006). The Recovery Act extends the election to cover property placed in service by Dec. 31, 2009 (Dec. 31, 2010 for aircraft and long-production-period property discussed above) instead of, as under pre-Act law, property placed in service by Dec. 31, 2008 (Dec. 31, 2009 for aircraft and long-production-period property). This one-year extension of the pre-Act election is available even if an earlier election was not made.

Act Boosts Code Sec. 179 expensing for 2009: Under Code Sec. 179, a taxpayer can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The non-indexed annual expensing limit for tax years beginning in 2008 was $250,000. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of a specified investment ceiling. For tax years beginning in 2008, the investment ceiling limitation was $800,000. For tax years beginning in 2009, the Recovery Act keeps the expensing limit to $250,000 and the investment ceiling limit to $800,000 in place.

First-Year Depreciation Dollar Cap for New Passenger Autos Placed in Service in 2009 Raised by $8,000: Retroactively effective for vehicles bought and placed in service after 2008, the Recovery Act increases by $8,000 the first-year depreciation dollar limit for a passenger auto used in a trade or business. The boosted depreciation limit is reduced to the extent of non-business use and doesn't apply if the taxpayer “elects out” of bonus first year depreciation.

Small Businesses May Elect Longer NOL Carryback Period: In general, net operating losses (“NOLs”) may be carried back two years and forward 20 years. For NOLs arising in tax years ending after Dec. 31, 2007, the Recovery Act permits small businesses to elect to increase the NOL carryback period for an applicable 2008 or 2009 NOL from 2 years to any whole number of years which is more than 2 and less than 6. A small business is a corporation or partnership whose average annual gross receipts are $15 million or less.

Two Targeted Groups Added to Work Opportunity Tax Credit: For individuals beginning work for the employer after Dec. 31, 2008, the Recovery Act creates a new targeted group for the work opportunity tax credit, consisting of unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010. A disconnected youth is defined as an individual certified by the designated local agency as someone: (a) at least age 16 but not yet age 25 on the hiring date; (b) not regularly attending any secondary, technical, or post-secondary school during the six-month period preceding the hiring date; (c) not regularly employed during the six-month period preceding the hiring date; and (d) not readily employable by reason of lacking a sufficient number of skills.

Deferral of Debt Forgiveness Income on Repurchase of Debt: Gross income generally includes income realized by a debtor from the discharge of debt. These rules apply to the exchange of an old obligation for a new obligation. Similarly, a debtor that repurchases its debt instrument for an amount that is less than the “adjusted issue price” realizes income equal to the excess of the adjusted issue price over the repurchase price. Under the Recovery Act, for debt discharges in tax years ending after Dec. 31, 2008, a taxpayer can elect to have debt discharge income from the reacquisition of a debt instrument after Dec. 31, 2008, and before Jan. 1, 2011, included in gross income ratably over five tax years.

Exclusion for Qualified Small Business Stock Increased to 75% of Gain: Under pre-Act law, noncorporate taxpayers can exclude 50% of any gain realized on the sale or exchange of “qualified small business stock” (QSBS) held for more than five years. For QSBS acquired after the enactment date and before Jan. 1, 2011, the Recovery Act provides that the 50% gain exclusion is increased to 75%.

S Corp Built-In Gain Holding Period Shortened Temporarily to Seven Years: Where a corporation that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gains are recognized during the first ten S corporation years. For tax years beginning in 2009 and 2010, no tax is imposed under the Recovery Act on the net unrecognized built-in gain of an S corporation if it had been an S Corporation for at least seven years prior to the 2009 and 2010 tax years. 

ENERGY TAX PROVISIONS
The Recovery Act includes a number of energy-related tax provisions targeted to both individual and business taxpayers. Included amongst the bill’s provisions are expansions/extensions of some existing incentives (for example, the electricity production credit, nonbusiness homeowner’s energy credit, and the residential energy efficient property credit) with some new incentives (plug-in electric motor vehicle credit and the advanced energy manufacturing credit). Please contact us to learn more about these energy tax incentives that might apply to your individual or business tax situation.

GIVE OUR OFFICE A CALL
These new tax provisions create some real opportunities for early tax planning during 2009. While this communication gives you a brief summary, it is important to consider how you might be favorably impacted in the context of your overall tax situation. Please give your LBMC tax advisor a call.

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