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On February 17, 2009, the American Recovery and Reinvestment Act
of 2009 was signed into law. This
new law is comprised of tax incentives for individuals and businesses,
which are highlighted below.
Business Incentives
Bonus Depreciation. The new law provides for 50% first-year bonus
depreciation on original use property with a recovery period of 20
years or less acquired by a taxpayer and placed in service before
January 1, 2010. There is no
limit on the amount of bonus depreciation a taxpayer can take. Also, good news in applying bonus
depreciation to vehicles, the new law raises the first-year
depreciation cap limits by $8,000.
The new law also allows eligible businesses to utilize
accumulated AMT and Research & Development tax credits in lieu of
taking bonus depreciation for 2009.
Code Section 179 Expensing. Under the new law, Code Section 179 expensing for
tax years beginning in 2009, is $250,000. This amount is reduced as purchases
start to exceed $800,000.
Net Operating Losses. The Tax Code generally allows eligible taxpayers to
carry back net operating losses (NOLs) two years with some
exceptions. The new law
increases the carryback period up to five years for small businesses
(which the new law defines as businesses with average annual gross
receipts of $15 million or less).
The treatment is also temporary, applying only to 2008
NOLs. Businesses that qualify
can apply for an immediate refund of taxes paid during the extended
carryback period.
Work Opportunity Tax Credit. The new law creates two
new categories of targeted groups under the existing Work Opportunity
Tax Credit: unemployed veterans and disconnected youth. These new categories apply to
individuals who are hired and begin work in 2009 or 2010.
COBRA Benefits.
The new law allows an individual who
was involuntarily separated from employment between September 1, 2008
and January 1, 2010 to elect COBRA health insurance coverage and only
be required to pay 35% of the bill.
The former employer will be required to pay the remaining 65%,
but will take a credit for that amount against payroll taxes due to the
federal government.
More Business Incentives. The new law also allows qualified individuals to
exclude 75% of the gain from the sale of certain small business stock. Additionally, Congress shortened the
holding period for the S corp built-in gain period from ten years to
seven years.
Individual Incentives
Making Work Pay Credit. Starting later this year, eligible wage earners
will see an increase in their take-home pay. The new law provides a credit against
income tax in an amount equal to the lesser of 6.2% of the individual's
earned income or $400 ($800 for married couples filing jointly). The credit begins to
phase out with a modified adjusted gross income of $75,000 (or $150,000
for joint filers). The
Making Work Pay Credit will be applied retroactively to January 1,
2009, and prospectively to December 31, 2010.
Seniors and Others. Individuals receiving Social Security benefits,
disabled veterans and others on fixed incomes, will receive one-time
payments of $250. If the
individual also qualifies for the Making Work pay credit, his or her
credit will be reduced by the $250 payment. The logistics for distributing these
checks has not yet been announced.
First-Time Homebuyer Tax Credit. In 2008, Congress enacted the first-time homebuyer
tax credit. Unlike other
credits, this one had to be repaid, making it unattractive to many
taxpayers. The new law removes
the repayment requirement for homes purchased by first-time buyers
between January 1, 2009 and December 1, 2009, as long as the owners
live in the home for 36 months.
The enhanced credit equals 10% of the purchase price up to
$8,000 ($4,000 for married individuals filing separately). This credit begins to phase out with
a modified adjusted gross income of $75,000/$150,000 joint.
New Car Sales Tax Deduction. Congress has
created an above-the-line deduction for state and local sales taxes or
excise taxes paid on qualified purchases of new motor vehicles. This deduction is effective from
February 17, 2009 to December 31, 2009.
Income thresholds and other limitations apply.
AMT Patch. The
new law increases the AMT exemption amounts in 2009 to $70,950 for
joint filers and $46,700 for singles.
It also allows taxpayers to take most personal credits to reduce
AMT liability.
Unemployment Compensation. The new law excludes up to $2,400 in unemployment
compensation from a recipient's gross income in 2009.
Education. The
new law expands the current Hope Education Credit (and renames it the
American Opportunity Tax Credit).
More individuals will be able to take advantage of this credit
because of expanded income phase-outs (to $80,000 single/$160,000 joint
filers). The new law also raises
the maximum credit to $2,500 per year, extends it over four years of
post-secondary school education, and makes 40 percent of the credit
refundable. In a related
development, the new law also permits beneficiaries of qualified
tuition plans (known as "529" plan) to use tax-free
distributions to pay for computers and computer technology.
Residential Energy Property Credit. The new law brings back this credit after a one
year absence. It increases the
credit from 10% to 30%, and raised the maximum cap to a $1,500 total
amount for 2009 and 2010.
Improvements eligible for this credit include insulation,
exterior windows, exterior doors, furnaces, hot water heaters and
central air conditioners. The
new cap affords taxpayers who previously received the cumulative $500
credit in 2006 and 2007 to claim an additional $1,500 credit.
Estimated Tax of Qualified Individuals. Qualified
individuals may base estimated tax payments in 2009 on 90% of the prior
year's tax. An individual is
qualified if the adjusted gross income shown on the individual's return
for the preceding tax year is less than $500,000 and more than 50% of
the gross income from the preceding tax year is from a business which
employed less than 500 people.
The scope of the American Recovery and Reinvestment Act of 2009
is extremely broad. Please
contact our office at (315) 234-1100 to discuss how the tax incentives
in the new law may benefit you.
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