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On Tuesday, February 17, 2008, President Barack Obama signed the $787 Billion American Recovery and Reinvestment Act of 2009 (H.R. 1) (the “Stimulus Bill”) passed by Congress on February 13th. In spite of weeks of often fierce debate, and the fact that the overall package closely resembles the rough lines laid out by President Obama, few in the business community are rejoicing. In all, revenue provisions in the Bill will cost approximately $326 Billion over ten years, roughly $285 Billion of which is attributable to tax measures, according to the Joint Committee on Taxation. According to Chuck O’Toole’s February 13, 2009 article posted on the “Tax Analysts” website (http://www.taxanalysts.com/), the House/Senate Stimulus Conferees Agreements (virtually incorporated into the final Stimulus Bill) fell short of tax/business related expectations and earlier versions of the Bill.
(Editor’s Note: The following presents an edited version of Mr. O’Toole’s article, summarizing several tax, business and real estate related provisions of the Bill. Please note that Mr. O’Toole’s article was prepared after the Stimulus Conferees Agreements, but prior to the final Bill. Accordingly, a few “last minute modifications” may not be reflected herein. Any such modifications will be summarized in a follow-up article on this Blog.)
Extended Loss Carryback Provision. Business lobbyists fell short in efforts to fully restore an extended loss carryback provision to the Economic Stimulus Bill on February 12th as Congress worked out the kinks in the $787 Billion package. Business groups were incensed by the news of February 11th that lawmakers had sharply restricted an earlier measure to let firms carry operating losses over five years, limiting it to firms with gross receipts of less than $5 million. A day of further negotiations raised that threshold to $15 million, but only losses incurred in 2008 are now eligible (to be “carried back” to: any whole number of years elected by the taxpayer that is more than two and less than six). The cutbacks lowered the cost of this measure from between $15 Billion and $20 Billion in the versions passed by the House and Senate to a mere $947 million over ten years in the final Conference Agreement.
Making Work Pay Tax Credit. The individual Making Work Pay tax credit, which the IRS is expected to disburse through reduced paycheck withholding is by far the biggest tax piece of the “puzzle”, accounting for approximately $116 Billion of the package’s cost. Each eligible worker would receive 6.2% of earned income, but the final Bill caps the credit at $400 ($800 for joint filers) per year, down from President Obama’s original proposal of $500 ($1,000 for joint filers).
First-Time Home Buyer Credit. In an effort to stimulate the housing market, Conferees opted to extend the current, refundable “Section 36 First-Time Home Buyer Credit” through November 30, 2009 with the repayment requirements waived for homes bought with the credit after December 31, 2008. The provision would raise the credit slightly, to $8,000 over two years. It would cost approximately $6.6 Billion over ten years, much less than the $39 Billion price tag on a $15,000 credit for all primary-residence purchases that Sen. Johnny Isakson, R-Ga, added to the Senate package. This credit is also available to taxpayers who have not bought a home for the past three years, and does not have to be repaid if the home is not sold for at least 36 months.
Partial Exemption of Unemployment Insurance Payments from Taxation. The Bill would exclude the first $2,400 of unemployment insurance payments from income for tax years beginning in 2009. All unemployment benefits were taxable pursuant to prior law.
Sales Tax Deduction for New Vehicles. The Bill also would allow an above-the-line deduction for state and excise taxes stemming from the first $49,500 of the purchase cost of a new car, motorcycle, light truck, or recreational vehicle purchased in 2009. The benefit would phase out for taxpayers earning between $125,000-$135,000 ($250,000-$260,000 for joint filers), and taxpayers who claim the existing itemized deduction for state and local sales taxes cannot claim this deduction.
Alternative Minimum Tax. The Alternative Minimum Tax (“AMT”) patch (i.e., annual fix) would be extended to 2009, and the Bill would raise the AMT exemption level to $46,700 ($70,950 for joint filers) while allowing nonrefundable personal credits to continue to offset the AMT.
Section 168/Section 179. The Bill retains one-year extensions of the fifty percent (50%) “bonus depreciation” of Section 168 (generally providing an additional [“bonus”] first-year depreciation deduction equal to 50% of the adjusted basis of qualified property placed in service) and the Section 179 small-business expensing provisions (generally allowing, in limited dollars/circumstances, the deduction or expensing of certain tangible personal property used in a trade or business, in lieu of depreciating such personal property) introduced in the Economic Stimulus Act of 2008 (P.L. 110-185).
Deferral of Cancellation of Indebtedness Income. The Bill also adds language championed by Senate tax writer John Ensign, R-Nev. that would let businesses defer tax on certain types of cancellation of trade or business debt income for four to five years, followed by a five-year repayment period.
Special Treatment under Section 382. The Bill both gives and takes away special treatment under Section 382 for different industries. Auto manufacturers -- specifically General Motors Corp. -- managed to secure a $3.2 Billion provision “clarifying” Section 382’s application to its restructuring. GM has faced possible tax liabilities triggered by a technical ownership change because of a broad debt-for-equity swap the company has undertaken as part of its federally mandated restructuring. Senate tax writer Debbie Stabenow, D-Mich., led the effort to shield GM from Section 382’s post-ownership change loss limits.
But at the same time, financial institutions would lose the benefits of Notice 2008-83, which the IRS issued in October and which let acquiring banks effectively ignore Section 382 and treat the losses of an acquired bank as having occurred after the ownership change. The Bill would repeal the notice for deals not either in writing or publicly announced as of January 16. The repeal would raise $7 Billion over 10 years.
Temporary Reduction in Recognition Period for S Corporation Built-In Gains Tax.
According to IRC Section 1374, the highest marginal rate applicable to corporations (currently 35%) is imposed on the gain of an S Corporation that converted from a C Corporation, for gain that arose prior to the conversion. Such gain is recognized by the S Corporation during the recognition period (i.e., the first 10 taxable years that the S election is in effect).
The Stimulus Bill temporarily reduces this ten-year "built-in gains period" to seven years for built-in gains recognized in 2009 and 2010. For 2009, that benefits corporations that made S elections effective in 2000-2002; in 2010, it would help S elections made in 2001-2003.
Estimated Tax. Under present law, the required annual estimated tax payment is the lesser of 90% of the tax shown on the return or 100% of the tax shown on the return for the prior taxable year (110% if adjusted gross income for the preceding year exceeded $150,000).
The Stimulus Bill provides that for taxable years beginning in 2009, the required annual estimated tax payments of a qualified individual is not greater than 90% of the tax liability shown on the return for the prior taxable year.
Small Business Stock. Under present law, individuals may exclude 50% (60% for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock issued after the date of enactment of the Bill and before January 1, 2011, the percentage exclusion is increased from 50% to 75%.
Miscellaneous. While the Bill directs $20 Billion in tax incentives toward renewable energy, energy efficiency, and plug-in vehicles (roughly the same amount as in the Senate/House versions), with the near-elimination of the net operating loss carryback provision, the conference agreement falls short in the “benefits for businesses category”.
We thank Mr. O’Toole and Tax Analysts for allowing us to reprint much of their article originally entitled: “Stimulus Conferees Hammer out Stimulus Details, Business Provisions Are Scaled Back". Tax Analysts is a nonprofit publisher that provides current and in-depth tax information worldwide. To further their public-service mission, they supply a variety of information and resources for tax professionals that provide news and analysis on tax policy, practice, administration, regulation, and legislation. You can get more information on Tax Analysts by contacting them at:
Customer Service 800-955-2444
Corporate Offices 703-533-4400
Address 400 S. Maple Avenue
Suite 400
Falls Church, VA 22046 USA
For specific questions regarding the Stimulus Bill and how it effects you, please contact your tax advisor(s).
(Editor’s Note: The following presents an edited version of Mr. O’Toole’s article, summarizing several tax, business and real estate related provisions of the Bill. Please note that Mr. O’Toole’s article was prepared after the Stimulus Conferees Agreements, but prior to the final Bill. Accordingly, a few “last minute modifications” may not be reflected herein. Any such modifications will be summarized in a follow-up article on this Blog.)
Extended Loss Carryback Provision. Business lobbyists fell short in efforts to fully restore an extended loss carryback provision to the Economic Stimulus Bill on February 12th as Congress worked out the kinks in the $787 Billion package. Business groups were incensed by the news of February 11th that lawmakers had sharply restricted an earlier measure to let firms carry operating losses over five years, limiting it to firms with gross receipts of less than $5 million. A day of further negotiations raised that threshold to $15 million, but only losses incurred in 2008 are now eligible (to be “carried back” to: any whole number of years elected by the taxpayer that is more than two and less than six). The cutbacks lowered the cost of this measure from between $15 Billion and $20 Billion in the versions passed by the House and Senate to a mere $947 million over ten years in the final Conference Agreement.
Making Work Pay Tax Credit. The individual Making Work Pay tax credit, which the IRS is expected to disburse through reduced paycheck withholding is by far the biggest tax piece of the “puzzle”, accounting for approximately $116 Billion of the package’s cost. Each eligible worker would receive 6.2% of earned income, but the final Bill caps the credit at $400 ($800 for joint filers) per year, down from President Obama’s original proposal of $500 ($1,000 for joint filers).
First-Time Home Buyer Credit. In an effort to stimulate the housing market, Conferees opted to extend the current, refundable “Section 36 First-Time Home Buyer Credit” through November 30, 2009 with the repayment requirements waived for homes bought with the credit after December 31, 2008. The provision would raise the credit slightly, to $8,000 over two years. It would cost approximately $6.6 Billion over ten years, much less than the $39 Billion price tag on a $15,000 credit for all primary-residence purchases that Sen. Johnny Isakson, R-Ga, added to the Senate package. This credit is also available to taxpayers who have not bought a home for the past three years, and does not have to be repaid if the home is not sold for at least 36 months.
Partial Exemption of Unemployment Insurance Payments from Taxation. The Bill would exclude the first $2,400 of unemployment insurance payments from income for tax years beginning in 2009. All unemployment benefits were taxable pursuant to prior law.
Sales Tax Deduction for New Vehicles. The Bill also would allow an above-the-line deduction for state and excise taxes stemming from the first $49,500 of the purchase cost of a new car, motorcycle, light truck, or recreational vehicle purchased in 2009. The benefit would phase out for taxpayers earning between $125,000-$135,000 ($250,000-$260,000 for joint filers), and taxpayers who claim the existing itemized deduction for state and local sales taxes cannot claim this deduction.
Alternative Minimum Tax. The Alternative Minimum Tax (“AMT”) patch (i.e., annual fix) would be extended to 2009, and the Bill would raise the AMT exemption level to $46,700 ($70,950 for joint filers) while allowing nonrefundable personal credits to continue to offset the AMT.
Section 168/Section 179. The Bill retains one-year extensions of the fifty percent (50%) “bonus depreciation” of Section 168 (generally providing an additional [“bonus”] first-year depreciation deduction equal to 50% of the adjusted basis of qualified property placed in service) and the Section 179 small-business expensing provisions (generally allowing, in limited dollars/circumstances, the deduction or expensing of certain tangible personal property used in a trade or business, in lieu of depreciating such personal property) introduced in the Economic Stimulus Act of 2008 (P.L. 110-185).
Deferral of Cancellation of Indebtedness Income. The Bill also adds language championed by Senate tax writer John Ensign, R-Nev. that would let businesses defer tax on certain types of cancellation of trade or business debt income for four to five years, followed by a five-year repayment period.
Special Treatment under Section 382. The Bill both gives and takes away special treatment under Section 382 for different industries. Auto manufacturers -- specifically General Motors Corp. -- managed to secure a $3.2 Billion provision “clarifying” Section 382’s application to its restructuring. GM has faced possible tax liabilities triggered by a technical ownership change because of a broad debt-for-equity swap the company has undertaken as part of its federally mandated restructuring. Senate tax writer Debbie Stabenow, D-Mich., led the effort to shield GM from Section 382’s post-ownership change loss limits.
But at the same time, financial institutions would lose the benefits of Notice 2008-83, which the IRS issued in October and which let acquiring banks effectively ignore Section 382 and treat the losses of an acquired bank as having occurred after the ownership change. The Bill would repeal the notice for deals not either in writing or publicly announced as of January 16. The repeal would raise $7 Billion over 10 years.
Temporary Reduction in Recognition Period for S Corporation Built-In Gains Tax.
According to IRC Section 1374, the highest marginal rate applicable to corporations (currently 35%) is imposed on the gain of an S Corporation that converted from a C Corporation, for gain that arose prior to the conversion. Such gain is recognized by the S Corporation during the recognition period (i.e., the first 10 taxable years that the S election is in effect).
The Stimulus Bill temporarily reduces this ten-year "built-in gains period" to seven years for built-in gains recognized in 2009 and 2010. For 2009, that benefits corporations that made S elections effective in 2000-2002; in 2010, it would help S elections made in 2001-2003.
Estimated Tax. Under present law, the required annual estimated tax payment is the lesser of 90% of the tax shown on the return or 100% of the tax shown on the return for the prior taxable year (110% if adjusted gross income for the preceding year exceeded $150,000).
The Stimulus Bill provides that for taxable years beginning in 2009, the required annual estimated tax payments of a qualified individual is not greater than 90% of the tax liability shown on the return for the prior taxable year.
Small Business Stock. Under present law, individuals may exclude 50% (60% for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock issued after the date of enactment of the Bill and before January 1, 2011, the percentage exclusion is increased from 50% to 75%.
Miscellaneous. While the Bill directs $20 Billion in tax incentives toward renewable energy, energy efficiency, and plug-in vehicles (roughly the same amount as in the Senate/House versions), with the near-elimination of the net operating loss carryback provision, the conference agreement falls short in the “benefits for businesses category”.
We thank Mr. O’Toole and Tax Analysts for allowing us to reprint much of their article originally entitled: “Stimulus Conferees Hammer out Stimulus Details, Business Provisions Are Scaled Back". Tax Analysts is a nonprofit publisher that provides current and in-depth tax information worldwide. To further their public-service mission, they supply a variety of information and resources for tax professionals that provide news and analysis on tax policy, practice, administration, regulation, and legislation. You can get more information on Tax Analysts by contacting them at:
Customer Service 800-955-2444
Corporate Offices 703-533-4400
Address 400 S. Maple Avenue
Suite 400
Falls Church, VA 22046 USA
For specific questions regarding the Stimulus Bill and how it effects you, please contact your tax advisor(s).
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