On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009. A significant part of the economic stimulus provided by the legislation is in the form of tax cuts and other tax benefits and incentives. These are contained in a part of the legislation called the American Recovery and Reinvestment Tax Act of 2009 (the “Act”).
Many of the tax provisions are in the form of credits to low and middle income taxpayers to stimulate consumer spending. These types of credits are phased out at various levels of adjusted gross income and are generally not relevant to high income taxpayers. Once again, Congress has acted to keep millions of middle income taxpayers from being subjected to the alternative minimum tax by further increasing the exemption amount at an estimated cost to the government of more than $70 billion. In addition to these provisions which benefit low and middle income taxpayers, the Act also contains several provisions that are of interest to high income taxpayers or their families and numerous additional provisions that are relevant to businesses.
Individual Tax Provisions
Temporary expansion of permitted uses for funds in Section 529 plans. Section 529 education savings plans may be used to pay qualified higher education expenses which to date have included tuition, certain room and board, books, supplies and required equipment. The Act provides that during 2009 and 2010, these accounts may also be used to pay for the purchase of computer technology or equipment and internet access and related services, if such items are used by the beneficiary or his family during years in which he is enrolled at an eligible educational institution. Computer technology or equipment includes software, computers, computer peripherals and fiber optic cable related to computer use.
Extension of first time homebuyer tax credit. The first time home buyer credit may be applicable to your children or grandchildren. The credit is equal to 10% of the cost of the home with a maximum credit of $7,500, and was originally applicable for first time home purchases between January 1 and June 30 of 2009. The Act increases the maximum credit amount to $8,000 and extends the credit for first time purchases through November 30, 2009. Previously, the credit was recaptured over a period of 15 years or sooner, if the taxpayer disposed of the home. Under the Act, there is no recapture if the taxpayer owns the home and uses it as his principal residence for at least 36 months.
Deduction of sales taxes on certain motor vehicle purchases. The Act permits sales or excise taxes paid on new passenger vehicles (including motorcycles) purchased by December 31, 2009, to be deducted to the extent the tax is attributable to the first $49,500 of the vehicle’s purchase price. This deduction is not useful for high income taxpayers because it is phased out for those with adjusted gross income in excess of $125,000. However, this deduction may benefit children and grandchildren who need to purchase a vehicle, as they may take this deduction even if they do not otherwise itemize deductions on their income tax return.
Increased tax benefit upon sale of Qualified Small Business Stock. If a taxpayer sells Qualified Small Business Stock that he held for more than five years, he is permitted to exclude from his taxable income 50% of the gain realized on the sale. There is a limit of the greater of ten times the taxpayer’s basis in the stock or $10,000,000 of gain per issuer to which the 50% exclusion can be applied. In order to be Qualified Small Business Stock, the taxpayer must have acquired the stock upon its original issuance by a C corporation that is engaged in the active conduct of a trade or business and which has gross assets of $50,000,000 or less. Under the Act, for Qualified Small Business Stock acquired after February 17, 2009, and before January 1, 2011, 75% of such gain upon sale may be excluded from the taxpayer’s taxable income. The five year holding period rule still applies, with the result that stock purchased during 2009 will have to be held past the corresponding date in 2014 for the 75% exclusion to apply.
Business Tax Provisions
Bonus depreciation extended for property purchased in 2009. The special 50% bonus first year depreciation on certain kinds of new property, including aircraft, was originally applicable only to property purchased by December 31, 2008. The bonus depreciation is applicable for both the regular income tax and the alternative minimum tax. The Act extends the 50% bonus depreciation to qualifying property purchased during 2009 as well. Most kinds of equipment and other tangible personal property qualify for the bonus depreciation, as do leasehold improvements that are placed in service more than three years after the building in which they are located was placed in service. Certain assets having a longer production period may be placed in service before January 1, 2011, and qualify for the bonus depreciation.
Increased limitation on amount of business property that can be expensed is extended through 2009. The Economic Stimulus Act of 2008 increased the amount of business property that could be expensed from $125,000 to $250,000 for property acquired during 2008. The Act extends the $250,000 limit through 2009.
Expanded carryback of net operating losses for small businesses. The normal period for which a net operating loss may be carried back and deducted against income from prior tax periods is two years. The Act increases the carryback period for small businesses for losses incurred during 2008. Those losses, at the election of the taxpayer, may also be carried back three, four or five years. Only small businesses are eligible for the extended carryback. A small business is one which, for the three taxable years prior to the loss year, had average gross receipts not exceeding $15,000,000. This is a significant disappointment as it was initially proposed that the expanded carryback apply to all taxpayers. In the first Conference Agreement, the average gross receipts was limited to $5,000,000 but applicable to both 2008 and 2009 losses. Further lobbying by business groups resulted in the limit being raised to $15,000,000 but limited to 2008 losses. The limitation was imposed to help contain the cost of the Act.
Expansion of Work Opportunity Credit. Employers are currently entitled to a tax credit equal to 40% of the first $6,000 of first year wages paid to new employees who are members of a “targeted group.” One targeted group was veterans who were either disabled or they or their family qualified for nutrition assistance under the Food and Nutrition Act of 2008. For hires during 2009 or 2010, the Act expands the group of veterans that qualify and adds a new class of eligible employees called “disconnected youth.” During this period, a veteran need only have been discharged during the prior five years and be receiving unemployment compensation for at least four weeks during the one-year period ending on his hiring date. A "disconnected youth" is one between the ages of 16 and 25 who has not attended school for six months prior to his hiring date, who has not been regularly employed for six months prior to his hiring date and who is not readily employable because he lacks a sufficient number of basic skills.
Built-in gains of S Corporations. If a C Corporation has unrealized gain in its assets at the time it elects to become an S Corporation, it must pay corporate level tax on such built-in gain if the assets are sold within the first ten years after the corporation becomes an S Corporation. The purpose of this provision is to prevent corporations from electing S Corporation status immediately before they sell their assets. The Act reduces the ten year period to seven years for sales of assets during 2009 or 2010.
Conclusion. This posting contains only a brief summary of those tax provisions most likely to be of interest to high income taxpayers, their families, and businesses.
Any questions or comments should be directed to: firstname.lastname@example.org Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation. He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.
Circular 230 Disclosure: To ensure compliance with Treasury Department rules governing tax practice, we inform you that any advice contained herein (including any attachments) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer; and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.