On February 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“2009 Economic Stimulus Act”). Unfortunately, there is very little in the new law that is going to directly benefit business. The main provisions simply maintain the status quo; the hyped provisions (i.e., the new net operating loss (NOL) carryback rules) look much better on paper than they do in reality. Here is a quick summary of the business provisions included in the new law. Later this week, I will summarize those provisions most affecting individuals.
Bonus depreciation extended one more year. Last year, Congress temporarily allowed business to immediately write off 50% of the cost of new original use depreciable property acquired in calendar 2008 for use in the United States. The new law extends this temporary benefit for qualifying property purchased and placed into service in calendar 2009. This provision simply maintains the status quo. If this provision had not been enacted, businesses benefiting from last year’s tax break would have had to an increase in tax this year because the amount of depreciation deductible in 2009 would have been reduced from what it otherwise would have been had the bonus depreciation provisions not been in effect in 2008. This provision applies only to new, original use property placed in service during calendar 2009.
Enhanced small business expensing extended one more year. Small business taxpayers may elect to write off the cost of a certain amount of capital expenditures 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 tax years beginning in 2008 from $125,000 (adjusted for inflation) to $250,000 and increased the phase-out threshold from $500,000 (adjusted for inflation) to $800,000. The new law extends these temporary increases for capital expenditures incurred in tax years beginning in 2009. This provision applies to new or used property placed in service in tax years beginning in 2009.
Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, 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 NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less. This provision applies to an NOL for any tax year ending in 2008 or at the small business’ election, any tax year beginning in 2008. If the return for 2008 is April 20, 2009. There are three special transition elections that must be made on or before April 16, 2009, if the small business has an NOL for a tax year ending before February 17, 2009.
The $15 million limitations is based on average annual gross receipts for the three tax year period ending with the tax year in which the loss arose. Receipts of all related business entities must be aggregated for purposes of applying the average annual gross receipts test. Because the stringent single employer and affiliated service group aggregation rules apply, it is likely that a large number of otherwise qualifying businesses structured as S corporations, partnerships and limited liability companies (LLCs) will not qualify for the extended carryback period.
Monetization of accumulated alternative minimum tax (AMT) and research and development (R&D) credits in lieu of bonus depreciation extended one more year. 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% 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.
Incentives to hire unemployed veterans and disconnected youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The new law expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.
Delayed recognition of certain cancellation of debt income. To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income (“COD”) over 10 years (defer tax on COD 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% to 75% 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 10 years to seven years.
Repeal of IRS's 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.
Long-term extension and modification of renewable energy production tax credit. The new law extends the placed-in-service date for wind facilities for three years (through December 31, 2012). It also extends the placed-in-service date through December 31, 2013 for certain other qualifying facilities: closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities.
Temporary election to claim the investment tax credit in lieu of the production tax credit. Facilities that produce electricity from solar facilities are eligible to take a 30% investment tax credit in the year the facility is placed in service. Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit, payable over a ten-year period. The Act provides a temporary election to claim the investment tax credit in lieu of the production tax credit.
Business energy credit. The new law enhances the business energy credit by eliminating the cap on small wind property and repealing the basis reduction requirement for subsidized energy financing.
Credit for investment in advanced energy facilities. The new law establishes a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.
Vehicles. The new law provides a tax credit for purchases of plug-in electric drive vehicles ranging from $2,500 to $7,500 depending on battery capacity. The new law also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits.