Summary of Key Tax-Related Provisions of the American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted as Pub. L. 111-5 in February 2009 by the 111th Congress. Based largely on proposals made by President Obama, ARRA was intended to provide a stimulus package to the US economy in the form of various measures with a face value of approximately $787 billion. These measures include a variety of federal tax cuts, increases in unemployment benefits, and spending in the areas of health care, education, welfare, and infrastructure projects. ARRA goes much further than the provisions of the 2008 Economic Stimulus Act, whose provisions were primarily limited to increases in tax refunds.
This article summarizes the various tax-related provisions of ARRA. These provisions can be divided into two separate areas, namely those that primarily affect individuals and those that primarily affect businesses.
ARRA provisions that relate primarily to individuals include:
oh Health coverage tax credit. This credit increases from 65% under prior law to 80% under ARRA of qualified health insurance premiums. Additionally, more taxpayers fall within the scope of the credit’s eligibility requirements.
oh New vehicle purchases. Purchasers of certain new vehicles during 2009 may deduct state and local sales taxes paid on those purchases or, in states without sales taxes, certain other taxes and fees.
oh First time home buyers. New homebuyers who purchase their property before December 1, 2009 may be eligible for a credit of up to $8,000 with no repayment required.
oh Improved tax credits for 2009 and 2010. Both the earned income credit and the additional child tax credit have been expanded for tax years 2009 and 2010.
oh The “Make Work Pay” provision. This tax credit results in a higher take-home pay for many taxpayers by reducing the amount employers would have previously withheld from paychecks.
oh Educational Benefits. ARRA provides a new “American Opportunity Credit” as well as enhanced benefits for Section 529 college savings plans in an effort to help families find additional mechanisms to finance higher education expenses.
oh Transportation subsidies. Employer-provided transit and parking benefits were increased for 2009.
oh Unemployment benefits. Taxpayers, under ARRA, can receive up to $2,400 in unemployment benefits tax-free during 2009. In light of this provision, the IRS encourages employees to verify their tax withholding amounts as set forth on Form W-2 to ensure that taxes are not exceeded. there is no withholding.
oh Bonuses for Beneficiaries of Certain Benefits. ARRA provides a $250 bonus for recipients of Social Security benefits, veterans, and railroad retirees. This “Economic Recovery Payment” will be paid directly by the Social Security Administration, the Department of Veterans Affairs and the Railroad Retirement Board, as the case may be.
oh Incentives for Energy Efficiency and Renewable Energies. Tax incentives in the form of a “Residential Energy Property Credit”, a “Residential Energy Efficient Property Credit”, a “Plug-in Electric Vehicle Credit”, a credit for certain “Conversion Kits” and a provision allowing Alternative Motor Vehicle Credits to be applied against the Alternative Minimum Tax are available under ARRA beginning in 2009.
ARRA provisions that relate primarily to business include:
oh Reversal of net operating losses. Small businesses can offset losses by getting refunds on taxes paid up to five years ago. An “eligible small business” is a taxpayer that meets the $15,000,000 gross receipts test, that is, whose gross receipts were less than $15,000,000 during a particular tax year.
oh Revised Section 179 Deduction. The deduction under Section 179 relates to qualified property that a taxpayer may choose to spend entirely in the year of acquisition rather than depreciate over a period of years. Under pre-ARRA law, there was a temporary increase in the maximum amount a taxpayer could spend during tax year 2008 (a provision that was part of the ESA) up to $250,000 of the cost of qualified property placed in service during that tax year. year. ARRA extends the $250,000 maximum through 2009. This extension is a temporary increase; for the taxable year beginning in 2010, the limitation returns to $125,000 indexed for inflation. For tax years beginning in 2011 and later, the limitation is reduced to $25,000 and is not indexed for inflation.
oh Bonus depreciation. ESA provided a first year temporary depreciation “bonus” deduction in the amount of 50% of the adjusted basis of qualified property placed in service during 2008 (and 2009 for certain properties that have a longer estimated useful life). ARRA extends the temporary bonus deduction through 2009 for properties purchased and placed in service before January 1, 2010.
oh Incorporated earnings for certain “S” corporations. Under pre-ARRA law, if a business converted from an ordinary “C” corporation to a Subchapter “S” corporation, a corporate-level tax, at the highest marginal rates applicable to corporations, was imposed on the profit from an “S” corporation that arose prior to the conversion of the “C” corporation to an “S” corporation. This gain was recognized by the “S” corporation during the “recognition period”, that is, the first 10 taxable years in which the Subchapter “S” election is in effect. ARRA provides that for any tax year beginning in 2009 or 2010, no tax is imposed on an “S” corporation if the seventh tax year in the corporation’s “recognition period” preceded that tax year. The effect of the old law was that in the case of a Subchapter “S” corporation that owned appreciated assets, it was necessary to hold those assets for at least 10 years after converting to “S” corporation status; the penalty for not owning the assets for the minimum period of 10 years was the imposition of an additional tax on the gains derived from the sale of the assets. Under the provisions of ARRA, no tax will be imposed on any gain arising prior to conversion from a “C” corporation to an “S” corporation, provided the appreciated assets are held for at least seven years from the year when the corporate conversion took place.
oh Work Opportunity Tax Credit. ARRA’s expanded version of this existing credit adds returning veterans and “disconnected youth” to the list of newly hired employees that businesses can claim.
oh COBRA Health Insurance Continuation Subsidy. Form 941 has been substantially revised in light of the enactment of this new ARRA grant.
oh Incentives for Energy Efficiency and Renewable Energies. In 2006, approximately $550 million in tax credits were awarded to 450 companies. According to ARRA, this amount has increased substantially to approximately $3 billion. “The Departments of Treasury and Energy expect a rapid acceleration of companies applying for the energy funds in lieu of the tax credit,” according to a July 9, 2009 joint announcement from these departments.
oh Small Business Estimated Taxes. Pre-ARRA law stated that the required annual payment for estimated taxes was 90% of the tax shown on the return or 100% of the tax shown on the prior tax year’s return (or 110% if the prior year adjusted gross income was over $150,000). ARRA states that a “qualified individual”‘s estimated annual tax payments for tax years beginning in 2009 will not exceed 90% of the tax liability shown on the prior tax year’s tax return. To be a “qualifying individual,” the taxpayer’s adjusted gross income shown on the prior tax year’s tax return must be less than $500,000 (or $250,000 for married individuals filing separately), and the individual certifies that at least 50% of the gross income shown on the return for the previous taxable year was income from a “small trade or business.” A “small industry or business” is defined as any business that employed no more than 500 people, on average, during the calendar year ending on or with the previous taxable year.
oh Municipal Bond Programs. ARRA provides a variety of new ways to finance the construction of schools, energy projects, and other public infrastructure, as well as non-infrastructure projects.
Most of the tax-related provisions of ARRA will affect 2009 individual tax returns filed in 2010 and due April 15, 2010. However, the law could also affect some 2008 tax returns due in 2009. .
Footnotes:
Tea Economic Stimulus Act of 2008 (Pub.L. 110-185, 122 Stat. 613, enacted Feb. 13, 2008) (“ESA”) provided various types of economic stimulus intended to boost the US economy in 2008 and prevent or least minimize the impact. of, a recession. The law provided tax rebates for low- and middle-income US taxpayers, tax incentives to stimulate business investment, and increased limits on mortgages eligible for purchase by government-sponsored businesses (for example, Fannie Mae and Freddy Mac). The total cost of this bill was projected to be $152 billion for 2008, an amount dwarfed by ARRA’s estimated cost of $787 billion.