News & Events

The Legislative Acts of 2009

On Nov. 6, 2009, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 (2009 WHBAA). The legislation expands both the first-time homebuyer credit and a special net operating loss carryback provision, as well as other provisions from the American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law in Feb, 2009. These Acts are focused on government spending initiatives intended to create jobs and jumpstart the economy, about one-third provides tax breaks for individuals and businesses.

Following is a summary outline of the various provisions - Individual breaks are first followed by those enhancements for businesses.

Individuals enjoy new tax breaks:

Unemployment benefits. The WHBAA extended unemployment insurance for an additional 14 weeks, with six additional weeks for workers in states with unemployment levels over 8.5%. The President signed the bill into law on Nov. 6. A special $2,400 exclusion from gross income for benefits received in tax year 2009 is in effect.

New relief for most workers, retirees and other Social Security recipients. For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for joint filers and $400 for other filers. The credit generally is phased out for joint filers with AGIs exceeding $150,000 and for other filers with AGIs exceeding $75,000. Unlike last year's "recovery rebate," which was distributed via checks mailed to taxpayers, the new credit will generally be "paid" through a reduction in income tax withholding.

The act also provides a one-time payment of $250 to many people on fixed incomes, such as Social Security recipients and disabled veterans. Similarly, it provides a one-time refundable tax credit of $250 to certain government retirees who aren't eligible for Social Security benefits. Both the $250 payment and the $250 credit reduce any allowable Making Work Pay credit.

New sales tax deduction for vehicle purchases. ARRA creates a new above-the-line deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motorcycles and recreational vehicles. The deduction is available for vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009.

The deduction is not, however, available for tax attributable to vehicle value in excess of $49,500. The deduction also phases out based on AGI, but the limits are higher than those for the Making Work Pay credit: The phaseout begins for joint filers with AGIs exceeding $250,000 and for other filers with AGIs exceeding $125,000.

Credit for homebuyers. The first-time homebuyer credit is a refundable tax credit available to taxpayers buying a principal residence for the first time. Under the law in effect before the enactment of the 2009 WHBAA, the credit phases out for individuals with incomes between $75,000 and $95,000, and for joint filers with incomes between $150,000 and $170,000. Generally, for purchases made on or after January 1, 2009, and before December 1, 2009, the tax credit is $8,000. If the principal residence is disposed of within 36 months of purchase however, a portion of the credit must be repaid. For purchases made on or after April 9, 2008, and before January 1, 2009, the tax credit is generally $7,500. Taxpayers purchasing homes in 2008 are required to repay the credit over 15 years.

The 2009 WHBAA extends the expiration date for taxpayers who enter into a written binding contract to purchase a home to before May 1, 2010, and to close before July 1, 2010. Thus, you have until April 30, 2010, to sign a purchase agreement and until June 30, 2010, to close on that purchase agreement in order to receive the first-time homebuyer credit. In addition, the income phase outs are increased to $125,000 (complete phase out at $145,000) for individuals and $225,000 (complete phase out at $245,000) for joint filers. Please keep in mind that if you closed prior to November 6, 2009, the old income limitations will apply. The $8,000 credit amount continues to apply to all first-time homebuyers. You can still elect to treat your home purchase as having occurred in the year prior to the year of purchase in order to expedite your refund.

The 2009 WHBAA also expanded the first-time homebuyer definition to include homebuyers who are long-time residents of the same principal residence. A $6,500 ($3,250 for married filing separately) credit is available to homebuyers who have been in their current residence for five consecutive years out of the last eight years and who purchase another residence. Home purchases of over $800,000 closing after November 6, 2009, do not qualify for either the first-time homebuyer credit or its expanded version for long-time residents.

In order to curb some of the reported abuses with respect to the first-time homebuyer credit, the Act places certain limitations which apply to purchases made after November 6, 2009. Individuals who can be claimed as a dependent of another taxpayer for the taxable year that the credit is claimed are ineligible for the credit. Also, the taxpayer or the taxpayer's spouse must be 18 or over to claim the credit.

American opportunity education credit (previously called the hope credit). For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books, supplies and equipment needed) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of postsecondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of postsecondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.

529 savings plans. 529 plan distributions used to pay qualified education expenses - tuition, room, board, mandatory fees and books - are generally tax free. For expenses paid in 2009 and 2010, ARRA expands the definition of qualified education expenses to include computers and computer technology.

Qualified small business stock gain exclusion. Generally, taxpayers selling qualified small business (QSB) stock are allowed to exclude 50% of their gain as long as they've held the stock for at least five years. ARRA increases the exclusion to 75% if the stock is issued after Feb. 17, 2009, and before Jan. 1, 2011.

AMT relief granted early this year. One tax provision affecting individuals that many thought wouldn't be enacted until later in the year is the extension of alternative minimum tax (AMT) relief. ARRA provides a one-year "patch" that increases the AMT exemption. For married couples filing jointly, the 2009 exemption is $70,950. For singles and heads of households, it's $46,700, and for married filing separately, it's $35,475.

The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2009 phaseout ranges are now $150,000 to $433,800 for married filing jointly, $112,500 to $299,300 for singles and heads of households, and $75,000 to $216,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range.

Additionally, ARRA extends a provision through 2009 that allows certain nonrefundable personal tax credits to provide a benefit against the AMT. These include the dependent care credit, the American Opportunity credit and the Lifetime Learning credit. The act also excludes from the AMT any income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010 refundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.

Energy-related breaks expanded for individuals. ARRA creates or expands several energy-related breaks for individuals, such as:

Transit benefits,
Residential energy property credit,
Residential energy-efficient property credit, and
Plug-in electric vehicles credit.

Help given to laid-off workers. Although much of ARRA focuses on working Americans, it also provides some tax relief for laid-off workers. For 2009, the act suspends federal income tax on the first $2,400 of unemployment benefits per recipient.

Military personnel. The 2009 WHBAA provides several tax relief provisions for members of the military. First, it eliminates the recapture requirement for military personnel, including members of the Foreign Service and intelligence community, who are forced to sell their principal residence as a result of an official extended duty of service. Also, it allows military personnel (including Foreign Service members and intelligence community members) serving outside the United States for at least 90 days in 2009 or before May 1, 2010, one additional year to qualify for the credit. Thus, if you or your spouse is a member of military, intelligence community, or Foreign Service, you have until May 1, 2011, to purchase a house and until July 1, 2011, to close on that purchase agreement.

You may remember that the 2009 ARRA expanded the HAP program which provides tax-exempt payments to military personnel who sell homes that declined in value due to a base closure. While the 2009 ARRA expanded the program to include payments made due to permanent reassignments and certain other purposes, it did not provide that those payments are tax-exempt. The 2009 WHBAA makes all HAP payments tax-exempt.

Businesses will enjoy new tax breaks:

Reduced estimated tax payment requirements. For 2009, ARRA reduces the estimated tax payment requirements for many small business owners. Owners generally will qualify for the reduced payments if their adjusted gross income (AGI) for 2008 was less than $500,000 and if more than 50% of their 2009 gross income is generated from a "small business," which is defined as a business that, on average, had fewer than 500 employees during 2008.

Deferral of income from cancellation of debt. Taxpayers generally must recognize cancellation-of-debt income (CODI) when they cancel - or repurchase - debt for an amount less than its adjusted issue price. In certain situations, ARRA allows businesses to defer CODI generated from repurchasing business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year 2014 and then report the income ratably over the 2014 through 2018 tax years.

Shortening of S corporation built-in gains period. Although a C corporation conversion to an S corporation isn't a taxable event, the S corporation normally must hold on to its assets for 10 years to avoid tax on any built-in gains that existed at the time of the conversion. For conversions occurring in 2009 and 2010, however, ARRA reduces this holding period to seven years.

Net operating loss carryback. The 2009 WHBBA contains several tax provisions with respect to businesses. Most importantly, it extends the NOL carryback period. You will recall that the 2009 ARRA extended the NOL carryback period from two to up to five years for tax years beginning in or ending in 2008. However, the 2009 ARRA extension only applied to small businesses with gross receipts of $15 million or less. The 2009 WHBBA allows all businesses to carryback an NOL for up to five years for losses incurred either in 2008 or 2009, but not both (at the election of the taxpayer). Businesses are able to offset 50% of the available income from the fifth taxable year preceding the loss, and 100% of all income in the remaining four carryback years. However, eligible small businesses that previously elected (or will elect) to carry back an “applicable 2008 NOL” (which could be for a 2008 or 2009 loss year) under 2009 ARRA are allowed to elect to carry back losses from 2009 or 2010. Further, these eligible small businesses are not limited to the 50% limitation applicable to the fifth taxable year preceding the loss for the “applicable 2008 NOL.”

Work opportunity credit. Employers can claim a credit equal to 40% of the first $6,000 of wages paid to employees in certain target groups, such as ex-felons, food stamp recipients and disabled veterans. ARRA expands the eligible target groups to include unemployed veterans and disconnected youth. This expanded benefit applies to such workers hired in 2009 and 2010.

Depreciation breaks extended. To spur additional investment, ARRA extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $125,000 indexed for inflation). The expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $500,000 indexed for inflation). The new higher limit applies for calendar year 2009 or a business's fiscal year that begins in 2009.

Another depreciation-related provision extends the special allowance for certain property, generally if acquired in 2009. For eligible property, the special depreciation amount is equal to 50% of its adjusted basis. For passenger automobiles that are eligible property under the 50% bonus depreciation rules, the $8,000 increase for the first-year limit on depreciation also is extended to new vehicles placed in service in 2009.

Last year, corporate taxpayers were also allowed to accelerate their alternative minimum tax (AMT) and research and development (R&D) credits in lieu of taking the 50% bonus depreciation. That break has now been extended through 2009.

Energy-related breaks for businesses expanded. ARRA creates or expands several energy-related breaks for businesses, such as the:

Advanced energy investment credit,
Renewable electricity production credit, and
Alternative fuel pump tax credit.

Take full advantage:

The 2009 WHBAA and the ARRA may significantly affect your tax liability in a variety of ways. If you would like more detailed information about these new tax laws, please give us a call at (909) 597-1100, for an appointment. We would be glad to help you determine exactly how these new provisions will affect your tax liability - and what you should do to take full advantage of the acts.