On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (H.R. 1, Pub. L. No. 111-5) (the "Act"), also known as the "Stimulus Bill." The Act contains approximately $300 billion of taxation relief for individuals, businesses and governments. Some of the tax provisions are changes that add a new credit or deduction or enhance an existing credit or deduction. Most of them are extensions of provisions that were set to expire in 2008 or 2009, some of which were created by the Emergency Economic Stabilization Act of 2008 ("EESA").
The new law makes over 300 changes to the Internal Revenue Code ("IRC"), and most of the tax incentives involved are retroactive to January 1, 2009. We have summarized in this article the key provisions most likely to affect businesses in the manufacturing industry.
Net Operating Losses
Current law provides that net operating losses may be carried back to the two years before the year in which the loss arises and forward to each of the twenty years after the loss year. For businesses that have $15 million or less in gross receipts, the Act extends from two to five years the carryback period for net operating losses for any tax year beginning or ending in 2008. The extended carryback period may be used by businesses that granted equity interests to the U.S. Government in connection with the Troubled Asset Relief Program of EESA.
Bonus Depreciation and IRC 179 Expensing
Current law generally allows businesses to recover the cost of capital expenditures over time according to a depreciation schedule. The new law extends the 50-percent first-year bonus depreciation benefit granted last year which allows businesses to recover the costs of capital expenditures made in 2008 faster than tax depreciation rules otherwise would allow. It permits the immediate write-off of 50 percent of the cost of depreciable property acquired in 2008 (assuming such property is used in the United States).
The benefit is extended through 2010 for property with a recovery period of 10 years or longer, for transportation property (tangible personal property used to transport people or property), and for certain aircraft. Also extended through 2009 is the temporary increase to $250,000 of the amount of depreciable property which small and medium size businesses immediately can expense under IRC 179 (note that the $800,000 qualifying property ceiling effectively limits IRC 179 expensing to small businesses).
Refundable Credits in Lieu of Bonus Depreciation
The Act allows businesses to monetize accumulated alternative minimum tax ("AMT") and research credits in lieu of taking bonus depreciation. The law extends through 2009 (2010 for certain aircraft and long-production-period property) the option to elect to forgo bonus depreciation and instead claim the additional credits, which they may not otherwise be able to use because of limitations on the use of such credits.
Under this provision, the research or AMT credit limitation for electing corporate taxpayers is increased by 20 percent of the bonus depreciation that otherwise could be claimed. The bonus depreciation amount is limited to the lesser of: (1) $30 million; or (2) research and AMT credits accumulated for years before January 1, 2006. A taxpayer that made the election under the prior act for the first tax year ending after March 31, 2008, may elect to not have the election apply to that property which was eligible for the election solely by reason of the amendments made by the Act.
Government Contractor Withholding
Current law requires withholding at a 3 percent rate on certain payments made after December 31, 2010 by Federal, State and local governments to contractors providing property or services to the government. The withholding is required regardless of whether the government entity making the payment is the recipient of the property or services, although those with less than $100 million in annual expenditures for property or services are exempt. The Act delays for one year (through December 31, 2011) the application of the 3 percent withholding requirement on government payments for goods and services to allow the Treasury Department to study the impact of the provision on government entities and taxpayers.
Cancellation of Indebtedness Income Deferral/Original Issue Discount Rules Modified
Under present law, a taxpayer generally recognizes income when the taxpayer cancels or repurchases a debt for an amount less than its adjusted issue price or when debt is forgiven. However, the Act allows certain businesses to elect to defer recognition of cancellation income on the reacquisition of business debt instruments during 2009 or 2010. The business can elect to recognize the income over five years, beginning in 2014, for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011.
A debt instrument is defined as a bond, debenture, note, certificate, or any other instrument or contractual arrangement constituting indebtedness and issued by a C corporation or any other "person" in connection with the conduct of a trade or business by such person. A "reacquisition" is an acquisition of a debt instrument by the debtor that issued (or is otherwise the obligor under) the debt instrument or a related person to such debtor.
Under the provision, if the taxpayer elects to apply the deferral provisions to an applicable debt instrument, the taxpayer may not apply any of the major exceptions to cancellation income for the taxable year of the election or any subsequent year, e.g., the taxpayer could not apply the insolvency exception, the bankruptcy exception, the qualified farm indebtedness exception or qualified real property business indebtedness exception for the taxable year of the reacquisition or the following year. Once made, the election is irrevocable.
The law also provides for acceleration of deferred items in triggering circumstances, such as the liquidation or sale of substantially all the assets of the taxpayer, or the cessation of business by the taxpayer. Finally, the new law modifies the rules for original issue discount on certain high yield obligations.
Refundable First-Time Home Buyer Credit
Last year, Congress provided taxpayers with a refundable tax credit equivalent to an interest-free loan equal to 10 percent of the purchase of a principal residence (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or earlier under certain circumstances (for example, when the home is sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).
The new law eliminates the repayment obligation for taxpayers that purchase homes on or after January 1, 2009, raises the current maximum value of the credit to $8,000, allows financing of the home purchase by mortgage revenue bonds (which was prohibited under the prior credit requirements), and extends the period for which home purchases are eligible through November 30, 2009. The Act requires a taxpayer to pay back the amount of the credit if the house is sold within three years of purchase. The Act does not eliminate the requirement that a homebuyer must be a "first time" homebuyer to qualify for the credit. A purchase is considered to have taken place when title closes rather than when a contract of sale is executed.
Recovery Zone Bonds
The Act creates two new categories of bonds for investment in national recovery zones: (1) recovery zone economic development bonds; and (2) recovery zone facility bonds. Recovery zone economic development bonds are a new type of tax credit bond that may be issued for the promotion of development or other economic activity in a recovery zone. Recovery zone facility bonds are a new type of tax-exempt private activity bond for capital investments in national recovery zones.
The Act authorizes a $10 billion total allocation for recovery zone economic development bonds and a $15 billion total allocation for recovery zone facility bonds, either of which can be issued during 2009 and 2010. Each state would receive a share of the national allocation based on that state's job losses in 2008 as a percentage of national job losses in 2008. The State allocation then would be allocated to local municipalities.
Financial Institution Tax-Exempt Interest Expense Rules Modified
"Qualified small issuers" enjoy an exception to the rule that financial institutions are not permitted to deduct the portion of their interest expense allocable to investments in tax-exempt municipal bonds. Bonds issued by qualified small issuers are not taken into account as investments in tax-exempt municipal bonds. The Act increases the dollar threshold from $10 million to $30 million in making the determination of whether an entity is a "qualified small issuer," defined as any issuer that reasonably anticipates that the amount of its tax-exempt obligations will not exceed the applicable amount, in making the determination of whether a tax-exempt obligation issued in 2009 and 2010 qualifies for the exception.
The Act also provides a de minimis (2 percent) safe harbor for the interest disallowance rule for financial institutions, under which tax-exempt obligations issued during 2009 and 2010 that do not exceed 2 percent of the adjusted basis of the financial institution's assets are not taken into account for purposes of the interest disallowance rule.
Qualified School Construction Bonds
The Act provides for a new category of state and local government-issued tax-credit bonds, known as qualified school construction bonds, to be utilized for the construction, rehabilitation, or repair of public school facilities or for the acquisition of land on which a public school facility will be constructed. There is a national limitation on the amount of qualified school construction bonds that may be issued by State and local governments of $22 billion ($11 billion allocated initially in 2009 and the remainder in 2010).
Allocations of the national limitation of qualified school construction bonds are divided between the States and certain large school districts. The States receive 60 percent of the national limitation for a calendar year and the remaining 40 percent of the national limitation for a calendar year is allocated to certain large local educational agencies.
Qualified school construction bonds must meet the following three requirements: (1) 100 percent of the available project proceeds of the bond issue is used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a bond-financed facility is to be constructed; (2) the bond is issued by a State or local government within which such school is located; and (3) the issuer designates such bonds as a qualified school construction bond.
Qualified Zone Academy Bonds
The Act allows an additional $1.4 billion of Qualified Zone Academy Bonds ("QZABs") for State and local governments in 2009 and 2010, which can be used to finance renovations, purchase equipment, develop course material, and train teachers and personnel at a qualified zone academy. A qualified zone academy generally includes any public school (or academic program within a public school) below the college level that is located in an empowerment zone or enterprise community and is designed to cooperate with businesses to enhance the academic curriculum and increase graduation and employment rates. QZABs are a form of tax credit bonds which offer the holder a Federal tax credit instead of tax-free interest.
Industrial Development Bonds
The new law temporarily extends the scope of state and local government-issued industrial development bonds to facilities manufacturing intangible property. The Act expands the definition of "manufacturing facility" to include any facility used to create, produce or manufacture intangible property, including any patent, copyright, formula, process, design, knowhow, format, or other similar item. The provision also treats any functionally related and subordinate manufacturing facility that is located on the same site as the manufacturing facility as a "manufacturing facility" for these purposes.
Tribal Economic Development Bonds
The Act allows tribal governments to issue up to $2 billion of tax-exempt "tribal economic development bonds" to economically develop tribal lands. The bonds cannot be used to finance any portion of a building where certain gaming activities are conducted or housed, or where property used to conduct gaming activities is housed.
Alternative Minimum Tax
Under the Act, interest on private activity bonds issued during 2009 and 2010 will not be treated as a preference item for purposes of calculating alternative minimum taxable income, and thus will not be included in income for purposes of calculating the alternative minimum tax.
Tax Credit Bonds
The Act provides State and local governments with the option of issuing a tax credit bond instead of a tax-exempt bond during 2009 and 2010. Such bonds are known as Build America Bonds. The Act provides that until a state provides otherwise, the interest on any taxable governmental bond and the amount of any credit under such bond is treated as exempt from Federal income tax for state income tax law purposes. The Act also adds a new IRC section that permits regulated investment companies to pass through to their shareholders credits from tax credit bonds. Further, the new provision allows the tax credits from tax credit bonds to pass through to beneficiaries of real estate investment trusts (REITS).
Clean Renewable Energy Bonds
The Act authorizes an additional $1.6 billion of clean renewable energy bonds to finance facilities that generate electricity from the following sources: wind, closed-loop biomass open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewables and trash combustion facilities. The authorization is distributed as follows: 1/3 will be available for qualifying projects of State/local/tribal governments; 1/3 for qualifying projects of public power providers; and 1/3 for qualifying projects of electric cooperatives.
Qualified Energy Conservation Bonds
The Act authorizes an additional $2.4 billion of qualified energy conservation bonds to finance State, municipal and tribal government programs and initiatives designed to reduce greenhouse gas emissions and for other qualified conservation purposes.
The term "qualified conservation purpose" mean a purpose related to the following: (1) capital expenditures incurred for purposes of reducing energy consumption in publicly owned buildings by at least 20 percent, implementing green community programs, rural development involving the production of electricity from renewable energy resources, or any facility eligible for the production tax credit under IRC. § 45 (other than Indian coal and refined coal production facilities); (2) expenditures with respect to facilities or grants that support certain types of research; (3) mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting; and (4) demonstration projects designed to promote certain types of commercialization.
Energy Investment Credit
EESA expanded the IRC § 48 energy investment credit to include small wind energy property and extended the expiring provisions of the IRC § 48 energy credit through December 31, 2016. The Act removes the credit cap for qualified small wind energy property, and establishes a new 30 percent investment tax credit for qualified investment in a "qualifying advanced energy project."
A qualifying advanced energy project is a project that re-equips, expands or establishes a manufacturing facility for the production of: (i) property designed to be used to produce energy from renewable resources; (ii) fuel cells, microturbines, or energy storage systems for use with electric or hybrid electric motor vehicles; (iii) electric grids to support the transmission of intermittent sources of renewable energy; (iv) property designed to capture and sequester carbon dioxide emissions; (v) property designed to refine or blend renewable fuels or to produce energy conservation technologies; (vi) new qualified plug-in electric drive motor vehicles, qualified plug-in electric vehicles or components designed for use with such vehicles; or (vii) other advanced energy property designed to reduce greenhouse gas emissions. The credits are available only for projects certified by the Secretary of the Treasury and a competitive bidding process applies.
Renewable Electricity Production Credit Extension
The new law extends the placed-in-service dates for qualified wind and other facilities under IRC § 45, which provides a credit for electricity produced from renewable sources such as wind. The Act includes a three-year extension of the renewable energy production tax credit for wind facilities (through December 31, 2012) and for closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities (through December 31, 2013).
Investment Credit in Lieu of Production Credit
In lieu of producers taking the IRC § 45 production tax credit, the Act allows taxpayers to treat certain qualified alternative energy facilities as energy property eligible for a 30 percent investment credit under IRC § 48. The Act permits taxpayers to receive grants from Treasury in lieu of the production tax credits. Treasury will issue the grant within sixty days of the facility being placed in service or within the date of receipt of application for the grant.
Repeal of Subsidized Energy Financing Limitation on the Investment Credit
The Act repeals the provision that required the investment credit to be reduced if the property qualifying for the credit was financed with tax-exempt industrial development bonds or through any other Federal, State or local government subsidized financing program.
Removal of Dollar Limitation on Residential Energy Efficient Property Credit
The Act removes the individual dollar caps on the IRC § 25D residential energy efficient property credits for solar hot water property, geothermal heat pumps, and wind energy property. However, the Act places a $500 credit limitation on qualified fuel cell property expenses.
Tax Credits for Energy-Efficient Improvements to Existing Homes
The Act increases the IRC § 25C residential energy property tax credit from 10 to 30 percent, raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the $500 lifetime cap and makes other modifications. The changes are effective for eligible property placed in service after December 31, 2008 and before January 1, 2011. Improvements eligible for the credit include insulation materials, exterior windows (including skylights), exterior doors, central air conditioners, natural gas, propane or oil water heaters or furnaces, hot water boilers, electric heat pump water heaters, certain metal roofs and stoves, and advanced main air circulating fans.
Alternative Fuel Pump Tax Credit
For 2009 and 2010, the Act increases the credit for alternative fuel vehicle refueling property for commercial and retail refueling stations. The credit currently equals 30 percent of the cost of property placed in service at each location by the taxpayer during the tax year but is limited to $30,000. The Act increases the credit to 50 percent (capped at $50,000) for property placed in service in 2009 and 2010 (for individuals, the cap is $2,000). The maximum credit for hydrogen refueling property is increased to $200,000, but the 30 percent credit continues to apply to such property.
Plug-in Electric Vehicles
The Act expands and modifies tax credits for plug-in vehicles and accessories. Separate treatment also will be provided for low-speed vehicles. The base amount of the credit is $2,500, and the full amount of the credit will be reduced once the manufacturer records its 200,000th sale. Note that if a vehicle is eligible for the plug-in electric vehicle credit, it is not eligible for the IRC § 30B credit as a personal credit against the alternative minimum tax for tax years beginning after 2009.
Carbon Dioxide Capture Tax Credit
The Act modifies the carbon dioxide capture tax credit by requiring any taxpayer claiming the credit to ensure that the carbon dioxide is permanently stored in a geologic formation.
Transit Benefits Parity
The Act increases the current $120 per month income exclusion amount for transit passes and van pooling to $230 per month for 2009 (starting in March 2009 and continuing through 2010). This is the tax-free benefit employers can provide for transit and parking as a qualified transportation fringe benefit to employees.
New Energy-Efficient Home Credit Extended
EESA extended the credit available to contractors who manufacture and sell qualified new energy-efficient homes. The credit, under IRC §§ 38(b)(23) and 45L(a), is either $1,000 or $2,000, depending on the level of energy requirements a home meets. The credit now includes homes sold through December 31, 2009.
Work Opportunity Tax Credit
The Act expands the work opportunity tax credit to include credits for hiring 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.
New Markets Tax Credit
The new markets tax credit under IRC § 45D provides a credit for qualified equity investments to acquire stock in a corporation or an interest in a partnership that is a qualified community development entity. EESA extended this credit through 2009, permitting up to $3.5 billion in qualified equity investments for that calendar year. The Act extends the credit by authorizing an additional $1.5 billion for the 2008 allocations and $1.5 billion for the 2009 allocations, increasing the available credits each year to $5 billion.
Low-Income Housing Grants in Lieu of Tax Credits
The Act allows taxpayers to receive a grant from the Treasury Department in lieu of low-income housing tax credits. State housing agencies would receive grants as a percentage of the state's low-income housing tax credit allocation, in lieu of credits, and the grants would apply to each state's 2009 allocation.
S Corporations and Small Businesses
S Corporation Built-in Gains
The Act temporarily shortens, from ten to seven years, the holding period for assets subject to the built-in gains tax imposed after a C corporation elects to become an S corporation. The provision applies to S corporations that recognize built-in gain in tax years beginning in 2009 and 2010.
Qualified Small Business Stock
The Act increases the exclusion from income for gain on the sale of certain small business stock held by individuals for more than five years from 50 percent to 75 percent. The benefit would apply to stock issued after enactment and before January 1, 2011. A "small business" cannot have assets over $50 million and must conduct an active trade or business.
Estimated Taxes for Small Businesses
The Act reduces the required estimated tax payments for 2009 for individuals receiving income primarily from small businesses. Rather than being required to make quarterly estimated tax payments based on 100 percent of their 2008 returns, the new law allows computation based on 90 percent. The provision applies to an individual if the adjusted gross income shown on the individual's return for 2008 was less than $500,000 and the individual certifies that more than fifty percent of the gross income shown on the individual's return for 2008 was income from a small business (business with an average number of employees of 500 or fewer).
Corporate Ownership Change Losses
Reinstatement of Net Operating Loss Bank Limitations
The Act repeals Treasury Notice 2008-83 effective for ownership changes after January 16, 2009 with respect to which there was no written agreement before that date. The Notice had provided corporations with an exception that allowed them to take greater advantage of the losses of the banks they acquire. Thus, the losses were not limited by the normal IRC 382 loss limitations (Section 382 of the Code limits the use of loss and credit carryovers after certain events resulting in a change in ownership of a corporation).
The new law allows corporations to use the losses if: (i) an "ownership change" in the target bank occurred on or before January 16, 2009; (ii) there was a binding written agreement for such a change entered into on or before such date; or (iii) there was a written agreement and a public announcement of a plan for such change on or before such date.
Section 382 Relief for Certain Loan Arrangements
The new law also amends IRC 382 favorably by providing that the 382(a) limitation generally will not apply in the case of an ownership change under a restructuring plan required by a loan agreement or line of credit entered into with the Treasury Department under EESA. The Act clarifies the application of section 382 to certain companies restructured pursuant to the EESA. The provision does not apply if immediately after the ownership change any person, other than a Voluntary Employment Benefit Association ("VEBA"), owns stock of the corporation possessing 50 percent or more of the combined voting power of all classes of stock entitled to vote.
Sales Tax Deduction for Vehicle Purchases
Under the Act, purchasers of new vehicles in 2009 may take an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase. The deduction is phased out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 for a joint return). Moreover, deductible sales or excise taxes cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle. Both domestic and foreign-made vehicles qualify. Sales taxes paid on a lease agreement are not included.
Extension of AMT Relief for 2009
The Act extends tax relief from the individual alternative minimum tax for 2009 by allowing nonrefundable credits to be claimed against the tax and by increasing the AMT exemption amount to $70,950 for joint filers and $46,700 for individuals. These levels are slightly above the 2008 levels.
Under the Act, an individual who is involuntarily separated from employment between September 1, 2008, and January 1, 2010, may elect to pay 35 percent of COBRA coverage and have it treated as paying the full amount. The former employer will be required to pay the remaining 65 percent but generally will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it otherwise is required to collect and remit.