First-Time Home Buyer Tax Credit

The Housing and Economic Recovery Act of 2008 provided a new refundable tax credit generally available for qualifying first-time homebuyers of a principal residence in the U.S. For 2008, the credit applies to a principal residence purchased by the taxpayer after April 8, 2008, and on or before December 31, 2008. Qualifying homebuyers are allowed a one-time credit of up to $7,500, subject to a phase out for taxpayers with modified adjusted gross income between $75,000–$95,000 ($150,000–$170,000 for joint filers). The credit, however, must be repaid over a 15-year period, effectively giving the taxpayer the benefit of an interest free loan.

In order to stimulate the housing market further, the American Recovery and Reinvestment Act of 2009 made changes to the credit for purchases made in 2009. For qualifying firsttime homebuyers who buy a principal residence after December 31, 2008, the credit amount is increased to up to $8,000, and, of most importance, the taxpayer does not have to repay the credit, provided the home remains the taxpayer’s principal residence for 36 months after the purchase date.

As the credit was to expire, the Worker, Homeownership and Business Assistance Act of 2009 was signed into law on November 6, 2009. This Act (i) extends the deadline for qualifying purchases from November 30, 2009 to April 30, 2010 (and up to June 30, 2010, if a buyer enters into a binding contract by April 30, 2010); (ii) increases the phase out limit to $125,000 to $145,000 ($225,000 to $245,000 for joint filers); and (iii) provides a smaller credit of up to $6,500 for existing homeowners (generally including a homeowner who has used the same home as a principal residence for at least five consecutive years during an eight-year period ending on the date of purchase).

Net Operating Loss Carryback

A corporation’s net operating loss (“NOL”) is generally calculated as the excess of deductions over gross income. If a corporation has an NOL, it may “carry back” the NOL to offset income earned during the prior two years and “carry forward” the NOL to offset income earned during the next 20 years. To stimulate small businesses, the American Recovery and Reinvestment Tax Act of 2009 extended the carryback period from two years to up to five years for small businesses (generally defined as those that have $15 million or less in annual gross receipts) for NOLs arising in 2008. When the law was being passed, there was some debate as to whether to extend the relief to medium and large businesses.

The Worker, Homeownership and Business Assistance Act of 2009 extends the NOL carryback relief for an additional year and expands the credit to medium and large businesses. NOLs incurred in 2008 or 2009 can be used to recover taxes paid up to the prior five years, at the election of the taxpayer (specifically, the new law allows a taxpayer to elect to carry back an applicable NOL for a period of three, four, or five years to offset taxable income in those preceding years; an applicable NOL means the taxpayer’s NOL for a taxable year ending after December 31, 2007, and beginning before January 1, 2010). However, if the taxpayer elects to carry back the NOL to the fifth taxable year, the amount of offset is limited to 50% of the taxable income for the carryback taxable year. Another important limitation to note is that the extended carryback relief is not available to TARP recipients. Accordingly, the major U.S. banks (which have received TARP assistance) are not eligible for the expanded carryback. On November 20, 2009, the IRS published Rev. Proc. 2009-52, which principally discusses when and how to make the NOL carryback election.

Extension of Temporary Suspension of AHYDO Rules

Section 163(e)(5) prevents a corporation from deducting the "disqualified portion" of the OID on an “applicable high yield discount obligation” (“AHYDO”), and the corporation’s deduction for the remaining portion of OID is deferred until paid. As discussed in our previous issue (see MoFo Tax Talk, Volume 2, Issue 1), the American Recovery and Reinvestment Tax Act of 2009 temporarily suspended the AHYDO rules with respect to exchanges of existing debt for new debt of the same issuer if (i) the new debt is issued between August 31, 2008 and January 1, 2010; (ii) the existing debt is not an AHYDO; and (iii) the new debt is not issued to a related party. The Act also granted the Treasury the authority to extend the suspension if deemed appropriate. Notice 2010-11, issued on December 24, 2009, extends the suspension of the AHYDO rules to December 31, 2010 for qualified obligations (as defined under the Notice).