2009 stimulus package contains numerous tax law changes for families and businesses

On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 into law. This stimulus act contains wide-ranging provisions, including tax changes for businesses, individuals and families. Most of these provisions will not affect 2008 tax returns due April 15, but they will have an impact on the 2009 tax returns filed next year.

In addition to the tax changes outlined in this letter, the new law also includes energy incentives targeted to individuals and businesses and fiscal relief for states.

Tax changes for individuals and families

"Making Work Pay" credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000, or $150,000 for joint returns. The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.

Economic recovery payment. The new law provides one-time payments of $250 to individuals on fixed incomes, including Social Security recipients, railroad retirees and disabled veterans. Retired government workers, who are generally ineligible for Social Security, also will receive one-time payments of $250. The one-time payment is a reduction to any allowable Making Work Pay credit.

Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.

Expanded child tax credit. A provision increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).

Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100 percent of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25 percent of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000, or $160,000 for joint returns. Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.

Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in Section 529 education plans for tax years beginning in 2009 and 2010.

Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that amounted to an interest-free loan equal to 10 percent of the purchase price of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008, and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000, or $150,000 for a joint return. The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009 and bumps up the maximum value of the credit from $7,500 to $8,000.

Tax break for new car purchasers. The new law 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 with taxpayers earning $125,000 per year, or $250,000 for joint returns. The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. 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.

Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

Tax changes for businesses

COBRA benefits. The new law allows an individual who is involuntarily separated from employment between September 1, 2008, and January 1, 2010, to elect to pay 35 percent of his or her COBRA coverage and have it be treated as paying the full amount. The former employer will be required to pay the remaining 65 percent and, in effect, will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it is otherwise required to remit to the federal government. Income and other limitations on COBRA coverage apply. This provision takes effect March 1, 2009 - the first COBRA payment period following enactment.

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 percent of the cost of depreciable property acquired in 2008 for use in the United States. The new law extends this temporary benefit for qualifying property purchased and placed into service in 2009.

Extension of enhanced small business expensing (Section 179). 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. Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The new law extends these temporary increases for capital expenditures incurred in 2009.

Expanded carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises. For 2008, the new law extends the maximum NOLcarryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Incentives to hire unemployed veterans and disconnected youth. Businesses are allowed to claim a Work Opportunity Tax Credit (WOTC) equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups. The new law expands the WOTC to include two new targeted groups – unemployed veterans (individuals discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 who received unemployment compensation for more than four weeks during the year before being hired) and disconnected youth (individuals between the ages of 16 and 25 who have not been regularly employed or attended school in the past 6 months).

Extension of monetization of accumulated AMT and R&D credits in lieu of bonus depreciation. The new law extends the provision contained in the Foreclosure Prevention Act of 2008 and allows AMT and loss taxpayers in 2009 to receive 20 percent of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets that qualify for bonus depreciation.

Delayed recognition of certain Cancellation of Debt Income (CODI). To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses 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 tax years) for specified types of business debt repurchased by the business in 2009 or 2010.

Qualified small business stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50 percent to 75 percent for stock issued after the enactment date and before 2011.

S corp holding period. The new law temporarily shortens the holding period of assets subject to the built-in gains tax from ten years to seven years.

Repeal of IRS built-in loss rules. The new law provides a prospective repeal of Notice 2008-83, the controversial IRS guidance which provided that if a bank recognizes a loss from the disposition of a loan or takes a bad debt deduction under the specific charge-off or reserve methods of accounting after a change in ownership, that loss or deduction will not be treated as a built-in loss attributable to the pre-acquisition period.

Contact us

We encourage you to contact your WK tax advisor at (573) 442-6171 or (573) 635-6196 to discuss in more detail how the American Recovery and Reinvestment Act of 2009 applies to you and your business.

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