The American Recovery and Reinvestment Act of 2009 ("Stimulus Act") recently signed into law by President Obama contains numerous tax incentives geared towards stimulating the U.S. economy. While many of the tax incentives and tax relief provisions are aimed at individuals or certain industries such as renewable and alternative energy, the Act includes several significant tax provisions that apply to businesses in general.
50% Bonus Depreciation and §179 Expense Election
The Stimulus Act extends the 50% bonus depreciation allowance to qualified property acquired and placed into service after December 31, 2007 and before January 1, 2010. The 50% bonus depreciation allowance allows taxpayers a deduction of 50% of the adjusted basis of qualified property in addition to the regular depreciation allowance. The 50% depreciation allowance is taken in the year the qualified property is placed into service. Qualified property includes most types of property and is defined as: (i) property with a recovery period of 20 years or less; (ii) computer software; (iii) water utility property; or (iv) qualified leasehold improvements.
The Stimulus Act also extends the §179 expense limitations and phase-out amounts enacted by the Economic Stimulus Act of 2008. Under §179, taxpayers may elect to expense, rather than depreciate over time, depreciable business assets, subject to certain expense limits and phase-outs. For 2008, a taxpayer could elect to treat the costs of a depreciable business asset as an expense in an amount up to $250,000. This $250,000 expense limitation is reduced by the amount which the cost of the business asset exceeds $800,000. The Stimulus Act extends these 2008 limits and phase out amounts to depreciable assets purchased in 2009.
Net Operating Losses
The Stimulus Act provides immediate relief to eligible small businesses incurring a net operating loss ("NOL") in 2008 by extending the carryback period of a NOL from two to five years. Generally, a business that incurs a NOL can, with some exceptions, elect to carry back the NOL to the two years preceding the loss year and forward to the twenty years following the loss year to offset taxable income in the years to which the loss is carried. The Stimulus Act extends the NOL carryback period from two years to five years. The extended carryback period is limited to those businesses meeting the definition of an "eligible small business," defined as a business with average gross receipts of $15,000,000 or less.
Not only is the extended carryback period of NOLs limited to small businesses, it applies only to taxable years ending in 2008. Fiscal year taxpayers, however, can apply the extended carryback period to NOLs generated either in tax years ending in 2008 or beginning in 2008. If an eligible small business has already waived a NOL carryback for the applicable 2008 tax year, the election can be revoked to obtain NOL carryback relief under the Stimulus Act. However, the prior election must be revoked and the new election executed within 60 days of the date of enactment of the Stimulus Act.
Deferral of Debt Forgiveness Income
If you can not exclude income, what is the next best thing? Deferral of course. The Stimulus Act allows taxpayers to defer income they would otherwise have to recognize as the result of the discharge of debt. The exclusion applies to debt discharged in 2009 and 2010. In each case, the deferred income is recognized ratably over a five year period, beginning with the fifth year after a discharge occurring in 2009 and fourth year after a discharge occurring in 2010. The deferral applies to debt instruments issued by a C corporation or any other person in connection with the conduct of a trade or business. Certain events will result in the acceleration of the deferred income, such as the death of the taxpayer, liquidation or sale of substantially all of the assets of the taxpayer or the cessation of business by the taxpayer.
S Corporation Built-In-Gains Tax
An S corporation that was previously taxed as a regular corporation is subject to a built-in-gains tax on the sale of any of its assets that were held on the date of the S election and are sold during the 10 year period following the effective date of the S election. The Stimulus Act reduces this period to seven years but only with respect to the sales in 2009 and 2010.
Alternative Minimum Tax for Individuals
Every year, bills are introduced to eliminate the alternative minimum tax ("AMT"). This year is no different; yet again, AMT has not been eliminated. The Stimulus Act does, however, increase the exemption amounts and allows taxpayers to take most personal credits to reduce AMT liability for 2009.