The American Recovery and Reinvestment Act of 2009: key business and individual tax provisions

On February 17, 2009, President Barack Obama is signing into law The American Recovery and Reinvestment Tax Act of 2009 (the “Act”). This Alert summarizes the key provisions of the Act affecting businesses and individuals.

Business Provisions

Business Indebtedness. The Act permits a debtor that reacquires its own debt at a discount (directly or indirectly through a related party) during 2009 or 2010, including as a result of the complete forgiveness of the debt, to elect to defer recognizing income resulting from that reacquisition. The deferral election is effective until the debtor’s 2014 taxable year, at which point the deferred income must be recognized ratably over a five-year period.

NOL Carrybacks. The Act allows “small businesses” (corporations or partnerships with average annual gross receipts of no more than $15,000,000 over the preceding three years) to carry back 2008 or 2009 net operating losses (NOLs) for up to five years. This provision is more restrictive than the original versions of the stimulus bill passed by the House and Senate, which would have permitted five-year NOL carrybacks by a broader range of business taxpayers.

Small Business Stock Gain Exclusion. The Act permits a noncorporate taxpayer acquiring qualified small business stock between the Act’s enactment and December 31, 2010 to exclude 75% (rather than 50% as under current law) of any gain on the sale or exchange of such stock.

Built-In Gains Tax. The Act shortens the recognition period for certain assets subject to the S corporation built-in gains tax from 10 years to 7 years, as long as (i) the sale of such assets occurs during the S corporation’s taxable year beginning in 2009 or 2010, and (ii) the S corporation has been an S corporation for more than 7 years before the builtin gain is triggered.

Business Expenses: Alternative Benefits. The Act extends business tax benefits adopted in 2008 by (i) permitting “bonus depreciation” for assets placed in service during 2009, allowing an immediate deduction of up to 50% of the cost of applicable assets with depreciable lives of 20 years or less; and (ii) permitting businesses to elect to deduct up to $250,000 of capital asset acquisitions during their taxable years beginning in 2009, subject to a phaseout beginning at $800,000 of capital asset acquisitions. In lieu of bonus depreciation, businesses may elect to receive 20% of the value of unused alternative minimum tax (AMT) or research and development credits.

Repeal of Treasury Section 382 Notice. The Act prospectively repeals Treasury Notice 2008-83, which had loosened restrictions on deductions for losses associated with loans and bad debts by banks experiencing ownership changes.

Individual Provisions

First-Time Homebuyer Tax Credit. Eligible homebuyers can claim a refundable tax credit of 10% of a home’s purchase price, with the maximum credit set at $8,000. The home must be purchased after December 31, 2008, and before December 1, 2009. The credit phases out for taxpayers whose modified adjusted gross income exceeds $75,000 ($150,000 for married couples filing joint returns). The credit applies to any individual who has not owned (and, if married, whose spouse has not owned) an interest in a principal residence for the three years ending on the date of the applicable purchase. In contrast to the credit for purchases made in 2008, the credit for applicable purchases in 2009 is not subject to recapture unless the taxpayer sells the residence or ceases to use it as his or her principal residence within three years of the purchase date.

Home Energy Efficiency Incentives. The Act extends tax credits for residential energy efficiency improvements through 2010. For 2009 and 2010, the credit will be 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the taxable year, up to an aggregate cap of $1,500.

Sales Tax Deduction for Vehicle Purchases. The Act allows individuals to deduct state and local sales and excise taxes paid on the purchase of new vehicles (including cars, light trucks, motor homes, and motorcycles) between the date of enactment and December 31, 2009. That deduction is not subject to the limits on miscellaneous itemized deductions and is not affected by the AMT; however, the deduction phases out for taxpayers whose modified adjusted gross income exceeds $125,000 ($250,000 for married couples filing joint returns).

Alternative Minimum Tax. The Act “patches” the AMT for 2009 by raising the exemption levels to $46,700 for individual filers and to $70,950 for joint filers.

Section 529 Plans. The Act permits 529 plan funds to be used to purchase computer technology and equipment, Internet access, and related services during 2009 or 2010, for use by the plan beneficiary and the beneficiary’s family while the beneficiary is enrolled at an eligible educational institution.