American Recovery and Reinvestment Act of 2009

By Nancy Faussett, CPA
Publication date: 03/06/2009

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. In passing the 2009 Act, Congress hopes to strengthen the economy by "creating jobs, cutting taxes and investing in our country's future."

This article will look at the principal provisions of the Act that affect our income tax returns, both for businesses and individuals. (To read about those provisions directly affecting fixed assets management, see the related article posted on this site.) Realize, of course, that aside from the tax implications discussed here, there are many other provisions included in this Act, from subsidized COBRA coverage for the unemployed to much needed aid to the state and local governments. Most of the tax benefits described below are temporary, usually effective only for 2009 or sometimes for 2009 and 2010.

Effect of 2009 Act on Individual Taxpayers

While most changes from the 2009 Act won’t affect how individual taxpayers file their 2008 tax returns, it is important to study these provisions and do some tax planning wherever possible.

Making Work Pay Credit
The Act provides for a Making Work Pay credit that Congress hopes will give 95% of all working taxpayers the lesser of:

• 6.2% of the taxpayer’s earned income, or
• $400 ($800 if a joint return).

There is a phase-out whereby the credit is reduced by 2% of the amount by which the taxpayer’s modified adjusted gross income exceeds $75,000 ($150,000 if a joint return). This provision is effective for 2009 and 2010. It will be provided through decreased payroll withholding. The IRS has already issued new withholding tables that incorporate the Making Work Pay credit (see the new IRS Publication 15-T). Employers should start using the new tables as soon as possible, but no later than April 1st.

One-Time Payments to Certain Other Individuals
The Act provides a one-time "economic recovery" payment of $250 to retirees, disabled individuals, and Supplemental Security Income (SSI) recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, as well as to disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. This payment reduces the Making Work Pay credit amount.

In addition, there is also one-time refundable tax credit of $250 in 2009 to certain federal and state pensioners who are not eligible for Social Security benefits. This also reduces the Making Work Pay credit amount.

It is the individual agencies, and not the IRS, who will be responsible for making these payments. For example, the Social Security Administration has announced that those individuals receiving Social Security benefits or SSI payments should receive their economic recovery payments no later than the end of May, 2009.

Increase in Earned Income Credit
The Earned Income Tax Credit (EITC), under IRS Code Section 32, is a refundable income tax credit for low to moderate income working individuals and families. The EITC was created in order to offset the burden of social security taxes and to give qualifying taxpayers an incentive to work.

In order to give large families additional tax relief, the 2009 Act increases the Earned Income Tax Credit for a taxpayer with three or more children to 45% (increased from 40%), effective for 2009 and 2010. In addition, there is now an increase of $5,000 (with a cost of living increase for 2010) to the threshold phaseout amount if the taxpayers are married.

Increase of Refundable Portion of Child Credit
The Child Tax Credit, under IRS Code Section 24, provides a maximum nonrefundable credit of $1,000 per qualifying dependent child, as long as the taxpayer’s modified adjustable income does not exceed a threshold amount. There is a refundable portion of the Child Tax Credit (Section 24(d)) for qualifying taxpayers who do not get the full Child Tax Credit.

For 2009 and 2010, the Act increases the eligibility for the refundable Child Tax Credit for lower-income families by lowering the required threshold amount. For 2008, the child tax credit is refundable to the extent of 15% of the taxpayer's earned income in excess of $8,500. The Act reduces this threshold for 2009 and 2010 to $3,000. This means that the maximum amount of the refundable Additional Child Tax Credit that may be claimed in 2009 is $1,432.50 (i.e., 15% × ($12,550 − $3,000)).

American Opportunity Tax Credit
The Act assists individuals who want to attend college. For 2009 and 2010, the Act provides a new American Opportunity tax credit of up to $2,500 for the cost of tuition and related expenses. To do this, the Act increases the amount of the Hope Scholarship Credit* to be the total of:

• 100% of the qualified tuition and related expenses paid by the taxpayer during the tax year that does not exceed $2,000 (it was $1,000), and
• 25% of such expenses paid as exceeds $2,000, but does not exceed $4,000.

This means that the maximum credit that can be claimed is $2,500 per student per year.

The American Opportunity tax credit will be available for the first four years (it was previously only available for the first two years) of post-secondary education. In addition to tuition and fees being eligible expenses for the credit, the Act adds "course material."

The Act increases the adjusted gross income limits, allowing more taxpayers to claim the credit. The credit will be subject to a phase-out for individual taxpayers with an AGI in excess of $80,000 ($160,000 if a joint return). Furthermore, 40% of the credit will be refundable. This new credit may be claimed against AMT liability.

*Note: The Hope Scholarship Credit, therefore, is expanded, increased, and renamed. The Lifetime Learning Credit is not affected by this provision, although, as before, both of these credits cannot be claimed on the same student in the same year.

Expansion of Qualified Expenses for 529 Education Savings Plans
An IRS Code Section 529 Plan is a tax-advantaged education savings plan that is operated by a state or education institution to assist taxpayers in saving for future college costs of a designated beneficiary. It is a "qualified tuition program" that allows individuals to prepay and guarantee the cost of a college education. The money in the plan can only be used for qualifying expenses such as tuition, books, and fees at an eligible educational institution.

The Act now allows the purchase of computer technology or equipment, as well as Internet access, to qualify as a higher education expense for Section 529 Plans in 2009 and 2010. Any software used for games or entertainment purposes is excluded and, in fact, the Act specifically states that qualifying software must be "predominantly educational in nature."

Extension and Increase in First-Time Home Buyer Tax Credit
There is currently a tax credit under IRS Code Section 36 for a first-time home buyer purchasing a home after April 8, 2008, and before July 1, 2009. The credit is 10% of the residence's purchase price, not to exceed $7,500. The taxpayer must repay the credit over 15 years, or earlier, if the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 if a joint return).

The Act extends the credit for homes purchased through November 30, 2009. It also increases the maximum value of the credit to $8,000, and eliminates the obligation to repay if the home is purchased after December 31, 2008 and before December 1, 2009. The credit amount does need to be repaid, however, if the house is sold within three years of purchase. Finally, the Act removes the prohibition on financing by mortgage revenue bonds.

The Act allows an election to treat a home purchase made in 2009 as if it had occurred on December 31, 2008 and, therefore, take advantage of this credit much sooner.

To receive the First-Time Homebuyer Credit, file IRS Form 5405, which has recently been revised for the new amount.

Note: The Act prohibits anyone from also claiming the first-time home buyer credit for the District of Columbia (Section 1400C) for 2009 if the Section 36 First-Time Home Buyer Credit is claimed.

Suspension of Tax on Portion of Unemployment Income
For any tax year beginning in 2009, the Act exempts from gross income, the first $2,400 of unemployment compensation. This is a temporary provision only applying to 2009.

Deduction for Certain New Vehicles’ Sales Taxes 
The Act allows a deduction for state and local sales and excise taxes* paid on the amount of a qualifying new vehicle’s purchase price not exceeding $49,500. The deduction applies to the purchase of new cars, light trucks, and motorcycles, none of which can have a gross vehicle weight exceeding 8,500 pounds. It also applies to the purchase of new motor homes.  

This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 if a joint return). Most importantly, a taxpayer does not have to itemize to claim this deduction. The deduction applies to qualifying purchases on or after February 17, 2009 and through December 31, 2009.

*Note: This does not include motor vehicle taxes.

Alternative Minimum Tax Relief 
The Act extends the temporary AMT relief for nonrefundable personal credits (thus allowing them to offset AMT) for 2009. The Act also increases the AMT exemption amount to $70,950 for joint filers (it was $69,950 in 2008) and $46,700 for individuals (it was $46,200 in 2008) for 2009. Unless further legislation is passed, however, the lower AMT exemption amounts will once again apply in 2010.

Increase in Health Coverage Tax Credit
The Health Coverage Tax Credit (HCTC) was created by the Trade Adjustment Assistance Act of 2002 to help certain individuals pay for their health insurance. The HCTC is intended to assist workers whose trade-related jobs have been lost, as well as certain retirees who are not entitled to Medicare. HCTC covers 65% of the amount paid by an eligible individual (and certain family members) for qualified health insurance. To learn more about this credit see the article Health Coverage Tax Credit, posted on this site.

The 2009 Act now makes the following changes to the HCTC:

• It increases the eligible health insurance costs to 80% (it was 65%), effective for May 1, 2009 through December 31, 2010,
• It allows retroactive payments for premiums paid before the advance payment of the credit in 2009 and 2010,
• It expands the eligibility for the HCTC to TAA (Trade Adjustment Allowance) recipients not enrolled in training programs,
• It ignores the pre-certification period after a TAA-related loss of health coverage for plan years beginning after February 17, 2009 and before 2011,
• It temporarily, for 2010, allows family members to continue their HCTC eligibility after the following events: becoming entitled to Medicare, divorce, and death,
• It modifies the COBRA continuation period for certain TAA-eligible individuals and Pension Benefit Guaranty Corporation (PBGC) recipients  when either their employment terminates or their hours are reduced,
• It allows the HCTC for insurance coverage under the voluntary employees' beneficiary association (VEBA), after February 17, 2009 and before 2011, and
• It modifies the information that must be included on an HCTC eligibility certificate issued after August 18, 2009 and before 2011.

Nonbusiness Energy Property Credit 
IRS Code Section 25C allows individual taxpayers to claim a nonrefundable personal credit on qualified energy efficiency improvements made to a principal residence. The credit is generally 10% of the cost of the property and is effective in 2006, 2007, and 2009 (i.e., the credit was not allowed in 2008). It could not exceed $500 in the aggregate (reduced to $200 for exterior windows or skylights), plus there were certain dollar restrictions on specific types of property (such as $150 for a gas furnace).

The 2009 Act changes this credit in the following ways:

• It increases the 10% rate to 30%,
• It eliminates the dollar restrictions on specific types of property (such as a gas furnace) and makes such property subject to the 30% allowable amount,
• It increases the $500 cap to be $1,500 in the aggregate for 2009 and 2010,
• It modifies the efficiency standards for qualifying property placed in service after February 17, 2009 (although the standard for biomass fuel stoves is effective for expenditures after December 31, 2008, even if the stove was placed in service before February 18, 2008) and
• It extends the credit through December 31, 2010.

Residential Energy Efficient Property Credit
IRS Code Section 25D allows individual taxpayers to claim a nonrefundable personal credit on qualifying solar water heating, fuel cell, small wind energy, geothermal heat pump, and solar electric property. The credit is generally 30% of the cost of the property, but certain of these property types have a maximum dollar amount (although there is no cap on solar electric property after 2008).

The 2009 Act eliminates the cap on qualifying solar water heating, geothermal heat pumps, and on small wind energy property (it retains the cap on fuel cell property), effective for tax years beginning after 2008.

Parity for Transit Fringe Benefit
Taxpayers may exclude from income employer-provided fringe benefits for both transit and parking under IRS Code Section 132(f). Currently these benefits are set at different dollar amounts. The Act now provides that the same dollar amount in effect for parking reimbursements will also be used for transit benefits and passes. Therefore, the tax-free amount for qualifying transit fringe benefits is $230 for 2009 (see Rev. Proc. 2008-66), which will be adjusted for inflation for 2010. This provision is effective for months beginning on or after February 17, 2009 and before January 1, 2011.

Exclusion of Capital Gain on Sale of Small Business Stock
Currently, IRS Code Section 1202 allows individuals to exclude from gross income 50% of the gain from the sale of certain small business stock held for more than five years. For most taxpayers, such stock is a capital asset and, therefore, any gain is capital gain.

The Act increases the available exclusion to 75% and is effective for the sales of qualifying small business stock acquired after February 17, 2009 and before 2011.

Decreased Estimated Tax Payments for Certain Small Business
For tax years beginning 2009, other than an exception under IRS Code Section 6654(d)(i)(C)), the Act decreases the required estimated payments to 90% for individuals whose adjusted gross income for the preceding year was less than $500,000 and more than 50% of such income for the preceding year was from a small business. To qualify, the small business must have had fewer than 500 employees, on average, for the preceding year.

Effect of 2009 Act on Business Returns:

Although for the most part, the provisions contained in the 2009 Act won’t affect the filing of 2008 tax returns by businesses, there are a few provisions, such as the changes in net operating loss carrybacks that could impact the 2008 returns of some businesses. Remember to also read the related article on this site that describes those provisions directly affecting fixed assets management.

Small Business Net Operating Loss Carrybacks
Currently, net operating losses may generally be carried back to the two years prior to the year of the loss and carried forward for twenty years. (There was a special five-year carryback period for NOLs arising in tax years ending in 2001 and 2002.)

For any tax year beginning in 2008, the Act temporarily extends the maximum NOL carryback period from two years to five years for small businesses with average annual gross receipts of $15 million or less for the three-year period ending with the loss year. A qualifying "small business" may be a corporation, partnership, or a sole proprietorship.

The Act provides the following three transitional rules for an NOL occurring in a tax year ending before Feb. 17, 2009:

• If a taxpayer made an election under IRS Code Section 172(b)(3) to waive the carryback period for a 2008 NOL, the taxpayer may revoke that election if the revocation is made before April 18, 2009,
• A taxpayer may make the election to carryback a 2008 NOL, even if the due date for filing that return has passed, if the election is made before April 18, 2009, and
• A taxpayer has additional time to make an application under IRS Code Section 6411(a), for a tentative carryback adjustment with respect to a 2008 NOL, if it is made before April 18, 2009.

Income from Reacquisition of Business Debt
Generally, the discharge of indebtedness results in income to the debtor. When a debt instrument is repurchased for less than its adjusted issue price, the issuer usually must recognize income in the year of the repurchase. Now, the 2009 Act allows a taxpayer to elect to have the income from the discharge of indebtedness that is due to the reacquisition of a debt instrument to be included in income ratably over five years if it occurs in 2009 or 2010. This applies to individuals as well as corporations and partnerships.

Expansion of Work Opportunity Tax Credit
The Work Opportunity tax credit is equal to 40% of the first-year wages (up to $6,000) attributed to a member of one of nine targeted groups.

The Act expands the Work Opportunity tax credit by adding a new targeted group for unemployed veterans and disconnected youth hired in 2009 or 2010. A qualifying "unemployed veteran" must have been released from active duty during the five-year period ending on the hiring date and must have received unemployment compensation for at least four weeks during the one-year period before being hired. A "disconnected youth" is between the ages of 16 and 25 and must not have regularly attended school or been regularly employed (as well as being someone lacking enough basic skills so as not to be readily employable) during the six-months prior to being hired.

Shortens S Corporation Built-In Gain Holding Period
Currently, a C corporation that converts to an S corporation is subject to a potential tax on any appreciated assets held at that time unless it holds such assets for ten years after the conversion. This is referred to as a "built-in gains tax." The Act temporarily reduces the holding period to seven years for sales of such assets occurring in years beginning in 2009 and 2010.

Increase of New Markets Tax Credit
The New Markets Tax Credit program was created in 2000 with the hope of revitalizing low-income and impoverished communities. Under IRS Code Section 45D, a taxpayer holding a qualified equity investment in an economically distressed community is eligible for the credit. Currently, there are $3.5 billion of New Markets Tax Credits available in 2008 and in 2009. The Act now increases the available credits for 2008 and 2009 to $5 billion each.

Repeal of Certain Limitations on Energy Credit Property 
There is an IRS Code Section 48 credit for placing qualifying energy property in service. Included in this credit is a 30% credit, not to exceed $4,000, for qualified small wind energy property used to generate electricity, placed in service before 2017.

The 2009 Act eliminates the $4,000 cap on this credit for qualifying small wind energy property placed in service after 2008.

The Act also eliminates the requirement that the basis of the property, for which the Section 48 Energy Credit is claimed, be reduced if the property is financed at all by subsidized energy financing or with proceeds from private activity bonds. This provision is retroactive and applies to qualifying property acquired and placed in service after December 31, 2008.

New Investment Credit for Advanced Energy Manufacturing Project 
There is an IRS Code Section 46 Investment Tax Credit, which includes the following four credits:

• Rehabilitation Credit,
• Energy Credit,
• Qualifying Advanced Coal Project Credit, and
• Qualifying Gasification Project Credit.

The 2009 Act adds a fifth type of Investment Credit: a new 30% Qualifying Advanced Energy Project Credit. To be eligible, the expenditure must be for an investment in a manufacturing facility for such property as:

• Property producing solar, wind, or geothermal energy,
• Fuel cells, microturbines, electric or hybrid energy storage systems,
• Electric grids for renewable energy,
• Carbon dioxide sequestration property,
• Renewable fuels or energy conservation technologies property,
• Plug-in electric drive motor vehicles or components, and
• Other property designed to reduce greenhouse gas emissions

Furthermore, qualifying property must be either tangible personal property or other tangible property (not including a building or its components) that is an integral part of the facility.

This new credit is effective for periods after February 17, 2009.

Modification of the Renewable Electricity Production Credit
There is an IRS Code Section 45 Renewable Electricity Production Credit for selling electricity from renewable sources. Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, solar, small irrigation, hydropower, landfill gas, trash combustion, and marine renewable facilities are all eligible for the credit.

The Act provides that a taxpayer can make an irrevocable election to claim a 30% Section 48 business Energy Credit instead of the Renewable Electricity Production Credit for qualifying property that is part of an Investment Credit facility placed in service after 2008 and before 2014 (or before 2013 for a wind facility).

The Act also extends the placed-in-service date for certain facilities qualifying for the Section 45 Renewable Electricity Production Credit. The extension is for either two or three years, depending on the type of facility.

Grants in Lieu of Certain Tax Credits
The Act provides that a taxpayer can apply to the Treasury Secretary for a grant covering part of the expense of placing in service certain energy property in 2009 or 2010 (or after 2010, if the construction of the property begins in 2009 or 2010). Qualifying property must be either an electricity production facility otherwise eligible for the Section 45 Renewable Electricity Production Credit or qualifying property otherwise eligible for the Section 48 Energy Credit. If a grant is made, neither of these credits is allowed. The amount of the grant depends on the type of property and is either 10% or 30%, not to exceed certain specified dollar amounts. (For example, for microturbine property, the amount cannot exceed $200 for each kilowatt of capacity of such property.)

This provision is effective February 17, 2009. The application for such a grant must be received by October 1, 2011.

In addition, the Act allows the state housing agencies to elect to receive grants from the Treasury Department for low-income housing projects in 2009 instead of claiming the IRS Code Section 42 Low-Income Housing Tax Credit they would have otherwise received. This provision is effective February 17, 2009 and generally applies to low-income housing allocations made during 2009.

Built-in Losses Following an Ownership Change
The Act repeals (prospectively) IRS Notice 2008-83. Notice 2008-83 allowed banks to deduct an unlimited amount of losses on loans or bad debts that were brought over by another bank acquired in a merger or acquisition. However, in overturning this notice, the Act states that the Secretary of the Treasury is not authorized to provide exemptions, or any other special rules, to particular industries or classes of taxpayers. Generally, the effective date for this provision is January 17, 2009.

Modification of AMT Limits on Tax-Exempt Bonds
Currently, interest on tax-exempt activity bonds is generally subject to the Alternative Minimum Tax, thereby limiting the marketability of these bonds. The Act provides that interest on private activity bonds issued in 2009 and 2010 will not be treated as a tax preference item under AMT.

Tax Credit Bonds
State and local governments may at times issue a tax credit bond under IRS Code Section 54A, rather than a tax-exempt bond. Current examples of tax credit bonds are forestry conservation bonds and clean renewable energy bonds. Tax credit bonds are not interest-bearing obligations. Instead, the taxpayer may claim a federal tax credit against both the regular tax liability and AMT liability.

• The 2009 Act allows the issuer of an otherwise tax-exempt bond to elect to treat it as a "Build America Bond" under a new IRS Code Section 54AA. The holder of a Build America Bond accrues a tax credit equal to 35% of the interest payable on the interest payment dates of the bond. In lieu of the bond holder claiming the credit, the issuer of the bond may make an irrevocable election, under a new Section 6431, to claim the 35% credit instead. The bond must be a "qualified bond" where all of the available project proceeds are used for capital expenditures.

To qualify, the bond must be issued after February 17, 2009 and before January 1, 2011.

• The Act creates a new category of tax credit bonds: qualified school construction bonds. Among other requirements is that all of the bond’s proceeds must be used to either finance the construction, rehabilitation, or repair of a public school building or to purchase land and the construction of a public school on such land. The proceeds must be used within three years of the bond’s issuance. This provision is effective for bonds issued after February 17, 2009.

• Under current law, a state or local government can issue up to $400 million of Qualified Zone Academy Bonds (QZABs) each year, through 2009. QZABs can be used to finance renovations, equipment purchases, develop course material, and train teachers and personnel at a qualified zone academy. A "qualified zone academy" is any public school (below college level) located in an empowerment zone or enterprise community. A qualified academy cooperates with businesses to improve the school’s curriculum and increase both graduation and employment rates. Now, the 2009 Act expands and extends these bonds; $1.4 billion of QZABs may be issued each year in 2009 and 2010.

• The Act modifies the rules that allow the pass-through of a credit from tax credit bonds to shareholders of both RIC and REITs, for tax years ending after February 17, 2009.

• The Act creates a new category of tax credit bonds for investment in economic recovery zones called "Recovery Zone Economic Development Bonds," under IRS Code Section 1400U-2. A "recovery zone" generally has significant poverty or unemployment, or is an empowerment zone or renewal community. The Act authorizes $10 billion of these bonds may be issued before January 1, 2011.

• Under IRS Code Section 54C, a taxpayer who holds a clean renewable energy bond (CREB), a type of tax credit bond, on one or more credit allowance dates is allowed a credit for the tax year in which that date occurs. The CREB program was designed to encourage investment in renewable electricity generation facilities. They were introduced as part of the Energy Policy Act of 2005. The 2009 Act authorizes the issuance of an additional $1.6 billion of CREBs.

Definition of High-Speed Intercity Rail Facilities
High-speed intercity rail facilities are defined in IRS Code Section 142(i). If certain conditions are met, a taxpayer can forgo depreciation on such property and finance it with tax-exempt facility bonds. A "high-speed intercity rail facility" uses a fixed guideway rail system, which is available for use by the public, to transport passengers and their luggage between certain metropolitan areas. Currently, the trains must be reasonably expected to operate at speeds in excess of 150 miles per hour between scheduled stops. Now, to qualify for financing with tax-exempt facility bonds, such trains need only be capable of operating at a maximum speed in excess of 150 miles per hour between scheduled stops.

This provision applies to bonds issued after February 17, 2009.

Tax-Exempt Indian Tribal Government Bonds
Currently, Indian tribal governments are treated similarly to state or local governments for certain specified tax purposes. One such purpose is the issuance of certain tax-exempt bonds. While IRS Code Section 7871 generally prohibits Indian tribal governments from issuing tax-exempt private activity bonds, there is an exception for certain bonds for qualifying tribal manufacturing facilities.

The 2009 Act allows Indian tribal governments to issue qualifying tribal economic development bonds, with a national bond limitation of $2 billion, for financing certain facilities within the Indian reservation. This gives the Indian tribes the flexibility to use tax-exempt financing for economic development.

This provision applies to bonds issued after February 17, 2009.

Miscellaneous Provisions 
In addition to the above, there are a myriad of other provisions included in the Act, such as the following:

• The Act increases the estimated payments by corporations with assets of $1 billion or more for installments due in July, August, or September of 2013.
• The Act delays the required 3% withholding of taxes on government contractors for one year, until 2012. This is intended to give the Treasury Department more time to study the impact of this provision.
• Currently facilities that manufacture tangible personal property are eligible for tax exempt bond financing. (IRS Code Section 144) The Act temporarily expands the availability of industrial development bonds (IDBs) to facilities manufacturing intangible property. This provision is effective after February 17, 2009 and before January 1, 2011.
• The Act modifies the rules under IRS Code Section 265, which governs expenses and interest relating to tax-exempt income:
  • There is a de minimis safe harbor exception for tax-exempt interest expense for financial institutions. The Act excludes investments in tax-exempt municipal bonds issued during 2009 and 2010 to the extent that these investments constitute less than two percent (2%) of the average adjusted bases of all the assets of the financial institution.
  • The Act modifies the small issuer exception to tax-exempt interest expense allocation rules for financial institutions in 2009 and 2010 by increasing the annual limit for qualified small issuers from $10 million to $30 million.

Related Article:
American Recovery and Reinvestment Act of 2009 - Effect on Fixed Assets Management