subject: Summary of Key Tax-Related Provisions of the American Recovery and Reinvestment Act of 2009 by:Gary L. Marsh [print this page] The American Recovery and Reinvestment Act of 2009 ("ARRA") was enacted as Pub. L. 111-5 in February, 2009 by the 111th Congress. Based largely on proposals made by President Obama, ARRA was intended to furnish a stimulus package to the U.S. economy in the form of various measures having a nominal value of approximately $787 billion. These measures include a variety of federal tax cuts, increases in unemployment benefits, and spending in the areas of health care, education, social welfare, and infrastructure projects. ARRA is much more far-reaching than were the provisions of the Economic Stimulus Act of 2008, the provisions of which were principally limited to increases in tax rebates.(1)
This article summarizes the various tax-related provisions of ARRA. These provisions can be broken down into two separate areas, namely, those which primarily affect individuals, and those which primarily affect businesses.
The ARRA provisions that relate primarily to individuals include:
Health Coverage Tax Credit. This credit increases from 65% under prior law to 80% under ARRA of qualified health insurance premiums. Additionally, more taxpayers fall within the scope of the eligibility requirements for the credit.
New Vehicle Purchases. Purchasers of certain new vehicles during 2009 can deduct the state and local sales taxes paid on such purchases or, in states with no sales tax, certain other taxes and fees.
First Time Homebuyers. New homebuyers who purchase their property prior to December 1, 2009 can be eligible for a credit of up to $8,000 with no payback requirement.
Enhanced Tax Credits for 2009 and 2010. Both the earned income credit and the additional child tax credit have been expanded for the tax years 2009 and 2010.
The "Making Work Pay" Provision. This tax credit results in more take-home pay for many taxpayers by reducing the amount that would previously have been withheld by employers from paychecks.
Education Benefits. ARRA provides for a new "American opportunity credit" as well as enhanced benefits for Section 529 college savings plans in an effort to assist families to find additional mechanisms to fund higher education expenses.
Transportation Subsidies. Employer-provided benefits for transit and parking have been increased for 2009.
Unemployment Benefits. Taxpayers are, under ARRA, able to receive up to $2,400 in unemployment benefits tax-free during 2009. In light of this provision, the IRS is advising employees to check their tax withholding amounts as established by Form W-2 to ensure that over-withholding does not take place.
Bonus for Recipients of Certain Benefits. ARRA provides for a $250 bonus for the recipients of Social Security, veterans, and railroad retirees' benefits. This "Economic Recovery Payment" will be paid directly by the Social Security Administration, the Department of Veterans Affairs, and the Railroad Retirement Board, as the case may be.
Energy Efficiency and Renewable Energy Incentives. Tax incentives in the form of a "Residential Energy Property Credit," a "Residential Energy Efficient Property Credit," a "Plug-In Electric Vehicle Credit," a credit for certain "Conversion Kits," and a provision allowing the Alternative Motor Vehicle Credit to be applied against the Alternative Minimum Tax are all available under ARRA beginning in 2009.
The ARRA provisions that relate primarily to businesses include:
Net Operating Loss Carryback. Small businesses can offset losses by obtaining refunds on taxes paid up to five years ago. An "eligible small business" is a taxpayer that meets a $15,000,000 gross receipts test, i.e., whose gross receipts were less than $15,000,000 during a particular taxable year.
Revised Section 179 Deduction. The deduction under Section 179 relates to qualifying property which a taxpayer may elect to expense entirely in the year of acquisition rather than depreciating over a period of years. Under the law prior to ARRA, there was a temporary increase in the maximum amount a taxpayer could expense during the taxable year 2008 (a provision that was a part of ESA) up to $250,000 of the cost of qualifying property placed in service during that taxable year. ARRA extends the $250,000 maximum through 2009. This extension is a temporary increase; for the taxable year beginning in 2010, the limitation reverts to $125,000, indexed for inflation. For taxable years commencing in 2011 and thereafter, the limitation drops back to $25,000 and is not indexed for inflation.
Bonus Depreciation. ESA provided for a temporary first-year depreciation "bonus" deduction in the amount of 50% of the adjusted basis of qualified property placed in service during 2008 (and 2009 for certain property having a longer estimated useful service life). ARRA extends the temporary bonus deduction through 2009 for property purchased and placed in service before January 1, 2010.
Built-In Gains for Certain "S" Corporations. Under pre-ARRA law, if a business converted from an ordinary "C" corporation to a Subchapter "S" corporation, a corporate level tax, at the highest marginal rates applicable to corporations, was imposed on an "S" corporation's gain that arose prior to the conversion of the "C" corporation to an "S" corporation. This gain was recognized by the "S" corporation during the "recognition period," meaning the first 10 taxable years that the Subchapter "S" election is in effect. ARRA provides that for any taxable year beginning in 2009 or 2010, no tax is imposed on an "S" corporation if the seventh taxable year in the corporation's "recognition period" preceded such taxable year. The effect of prior law was that in the case of a Subchapter "S" corporation holding appreciated assets, it was necessary to hold such assets for at least 10 years after converting to "S" corporation status; the penalty for not holding the assets for the minimum 10-year period was the imposition of additional tax on any profits from the sale of the assets. Under ARRA's provisions, no tax will be imposed as a consequence of any gain that arose prior to the conversion of a "C" corporation to an "S" corporation, so long as any appreciated assets are held at least seven years beginning in the year when the corporate conversion took place.
Work Opportunity Tax Credit. The expanded ARRA version of this already-existing credit adds returning veterans and "disconnected youth" to the list of new employee hires that businesses may claim.
COBRA Health Insurance Continuation Subsidy. Form 941 has been substantially revised in view of the enactment of this new ARRA subsidy.
Energy Efficiency and Renewable Energy Incentives. In 2006, approximately $550 million in tax credits were provided to 450 businesses. Under ARRA, this amount has been substantially increased to approximately $3 billion. "The departments of treasury and energy expect a fast acceleration of businesses applying for the energy funds in lieu of the tax credit," according to a July 9, 2009 joint announcement by these departments.
Estimated Taxes of Small Businesses. Pre-ARRA law provided that the required annual payment for estimated taxes was 90% of the tax shown on the return or 100% of the tax shown on the return for the prior taxable year (or 110% if the adjusted gross income for the preceding year exceeded $150,000). ARRA provides that the annual estimated tax payments of a "qualified individual" for taxable years commencing in 2009 will not be greater than 90% of the tax liability shown on the tax return for the preceding taxable year. To be a "qualified individual," the taxpayer's adjusted gross income shown on the tax return for the preceding taxable year must be less than $500,000 (or $250,000 in the case of individuals that are married filing separately), and the individual certifies that at least 50% of the gross income shown on the return for the preceding taxable year was income from a "small trade or business." A "small trade or business" is defined as any enterprise that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding taxable year.
Municipal Bond Programs. ARRA provides for a variety of new ways to finance school construction, energy projects, and other public infrastructure as well as non-infrastructure projects.
Most of ARRA's tax-related provisions will affect 2009 individual tax returns filed in 2010 and due April 15, 2010. However, the law could also affect some 2008 returns due in 2009.
Footnotes:
(1) The Economic Stimulus Act of 2008 (Pub.L. 110-185, 122 Stat. 613, enacted February 13, 2008) ("ESA") provided for several kinds of economic stimuli intended to boost the U.S. economy in 2008 and to avert, or at least minimize the impact of, a recession. The law provided for tax rebates to low- and middle-income U.S. taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). The total cost of this bill was projected at $152 billion for 2008 - an amount dwarfed by ARRA's estimated $787 billion estimated cost.
About the author
Gary L. Marsh is the Senior Managing Editor of Legal Writing & Research, Inc. He is a graduate of Loyola Law School and, since 1981, has been a member of the California Bar, as well as the Bars of the United States Court of International Trade, the United States Tax Court, the United States Court of Appeals for the Ninth Circuit, the United States District Court for the Central District of California, and the United States Court of Appeals for the Armed Services. Visit his website at: www.LegalWritingandResearch.com
