The 2009 American Recovery and Reinvestment Act; Individual and Business Tax Incentives

The 2009 American Recovery and Reinvestment Act (commonly known as the “2009 Economic Stimulus Act”) that was passed in February of this year contains a few tax provisions that readers may find noteworthy, particularly since most of the Act’s provisions take immediate effect:

Individual Tax Incentives

  • A new individual tax credit (the “Making Work Pay Credit”) gives taxpayers a credit equal to the lesser of 6.2% of earned income or $800 ($400 for a single taxpayer) and is available to all taxpayers for 2009 and 2010. The credit phases out for taxpayers earning more than $75,000 ($150,000 on a joint return).
  • The child tax credit has been potentially increased for 2009 and 2010. The credit now applies to 15% of earned income over $3,000, depending on the taxpayer’s particular circumstances.
  • First-time homebuyers who purchase a home after December 31, 2008 and before December 1, 2009 are eligible for a tax credit of 10% of the purchase price up to $8,000 ($4,000 for a single taxpayer). The credit phases out for earning more than $75,000 ($150,000 on a joint return), and does not have to be repaid of the taxpayer(s) retain the home for three years following the date of purchase. (See last month’s article $8,000 First-Time Home Buyer Credit and the Michigan Homestead Exemption for more information about this credit.)
  • There is also a tax deduction available for sales, use or excise taxes incurred to purchase a new automobile, light truck, motorcycle or motor home. The purchase must be made after February 17, 2009 and before January 1, 2010. This deduction can be claimed whether or not a purchaser itemizes deduction for income tax; is limited to the taxes on a purchase of no more than $49,500 ($24,750 for single taxpayers) and is phased out for taxpayers earning more than $125,000 ($250,000 on a joint return).
  • The “American Opportunity Tax Credit” is a credit for up to $2,500 per student per year for qualified tuition and related post-secondary school educational expenses. The credit phases out for taxpayers with adjusted gross income of $80,000 ($160,000 for a joint return).
  • The residential property energy tax credit for energy efficient home improvements has been increased to 30% (up from 10%), with a maximum of $1,500. The credit applies for improvements such as furnaces, heat pumps, hot water heaters, exterior doors and windows, skylights and insulation.
  • The residential energy credit is also increased to 30% for energy improvements made after 2008 for solar, fuel cell technology, wind turbines and geothermal energy pumps. There is no limit on this credit.
  • There are also tax credits available for plug-in electric vehicles, conversion of gasoline vehicles to electric or natural gas.

Business Tax Incentives

  • The Act extends the current expensing amount of $250,000 and the $800,000 phase-out amount through 2009.
  • The Act extends 50% additional first-year depreciation through 2009 (2010 for certain longer-lived property and transportation property), effective for property placed in service in 2009. Also, the election to accelerate AMT credits and research credits instead of taking additional first-year depreciation is extended through 2009.
  • Taxpayers with gross receipts not exceeding $15,000,000 may elect a three, four, or five-year carryback of 2008 net operating losses, instead of the otherwise two-year period.
  • The Act creates a new targeted group for purposes of the work opportunity tax credit. This new group includes certain unemployed veterans and disconnected youth who begin work for the employer in 2009 and 2010.
  • Taxpayers may elect to treat 2009 and 2010 business Income from a discharge of indebtedness occurring in connection with the repurchase of a debt instrument as includible in income ratably over an eight-year tax period. For a 2009 repurchase, the inclusion begins in the fifth tax year following the tax year in which the repurchase occurs. For a 2010 repurchase, the inclusion begins in the fourth tax year following the tax year in which the repurchase occurs.
  • Effective for stock acquired after February 17, and before 2011, the percentage exclusion is increased from 50% to 75%.
  • Effective for tax years beginning in 2009 and 2010, the S corporation built-in gains holding period is reduced from 10 years to seven years.
  • Effective for property placed in service in 2009 through 2012, the 2009 Act adds a 10% credit up to $4,000 for the cost of converting a motor vehicle to a plug-in electric drive vehicle. There is no recapture if the vehicle ceases to be eligible for the pre-existing alternative motor vehicle credit as a result of the conversion.
  • The 2009 Act temporarily increases this credit for property placed in service in 2009 and 2010. For hydrogen refueling property, the credit percentage remains the same, but the maximum credit is increased to $200,000. For non-hydrogen refueling property, the credit is increased from the existing 30% to 50%, with a $50,000 maximum.
  • Certain two- and three-wheeled electric vehicles and certain low-speed electric vehicles placed in service after February 17, 2009, and before 2011, are eligible for a credit equal to 10% of their cost, up to a maximum of $2,500 per vehicle.
  • There are several changes to the energy credit. The $4,000 cap for small wind energy property is eliminated along with the basis reduction for subsidized energy financing, effective for periods beginning after 2008. In addition, for property placed in service in 2009 and 2010, the taxpayer may apply for a grant from The Treasury Department instead of taking the credit. Grant recipients must reduce the basis of the property by 50%, but the grants are not includible in income.
  • The 2009 Act allows for up to $2.3 billion for a new 30% credit for the cost of investments in qualified advanced energy projects, effective for periods after February 17, 2009. Qualified energy projects are projects that equip, expand, or establish manufacturing facilities that produce certain renewable and alternative energy property. This credit will be administered by the Treasury Department in consultation with the Energy Department.

If you would like more information or have questions about the new changes under the 2009 Economic Stimulus Act, please contact Thomas E. Dew or any of our tax law attorneys for assistance.