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Wondering How the American Recovery and Reinvestment Act of 2009 Affects Your Business?
Rodney K. Fujita, CPA
Principal and Director, Tax Services
February 23, 2009
"Today does not mark the end of our economic troubles. But it does mark the beginning of the end." With that comment, President Obama signed American Recovery and Reinvestment Act of 2009.
At an estimated cost of $787 billion, the American Act is perhaps the most significant economic package of our generation. It will create or save between three and four million jobs over the next two years―75,000 of them in Washington State―according to the Council of Economic Advisors. To create these jobs and stimulate investment, it includes a number of individual and business tax breaks―including more than $100 billion of tax incentives for businesses in 2009 and 2010.
The major business provisions in the legislation include those described below.
Net Operating Loss Carryback for Small Business
Businesses that experience losses in any tax year have generally been allowed to carry their net operating losses (NOLs) back two years, and then forward for 20 years.
For 2008 only, the new Act provides for an election to carry back a 2008 NOL three, four, or five years―but only for small businesses with three-year average gross receipts of $15 million or less. The extended carryback period can result in a tax refund for your small businesses, providing it with additional working capital.
Small Business Expensing (Section 179)
To help small businesses quickly recover the cost of certain capital expenditures, they may elect to write off the cost of the expenses in the year of acquisition rather than recovering the costs over time through depreciation. If your small business buys qualifying machinery and equipment, Section179 of the Internal Revenue Code allows it to deduct the full purchase price for tax purposes―up to a maximum dollar amount.
Congress temporarily increased this maximum deduction amount for capital expenditures incurred in 2008―to $250,000 from $125,000 in 2007―and also increased the limit for qualifying asset purchases to $800,000. However, the enhanced tax deduction expired at the end of the year.
The new Act extends the increased amounts to cover capital expenditures incurred in 2009.
Bonus Depreciation
Last year, Congress temporarily allowed business to recover the costs of certain capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow. It did so by permitting these businesses to immediately write off 50 percent of the cost of depreciable property acquired in 2008 for use in the United States. Generally, qualifying property is machinery and equipment, software, and certain leasehold improvements.
The new Act extends this temporary benefit for qualifying property purchased and placed into service in 2009.
Work Opportunity Tax Credit
Businesses can claim a Work Opportunity credit that is generally equal to 40 percent of the first $6,000 of wages paid to new employees in any of nine targeted groups, including Hurricane Katrina employees, long-term family assistance recipients, and SSI recipients.
The new Act expands the Work Opportunity credit to include a tenth targeted group that includes the following:
 Unemployed veterans discharged or released from active duty from the Armed Forces during 2008, 2009, or 2010 and who received unemployment compensation for more than four weeks during the year before being hired.
Disconnected youth between the ages of 16 and 25 who have not been regularly employed or attending school in the six months before being hired.
To qualify for the credit, employees in this new targeted group must begin work in 2009 or 2010.
Qualified Small Business Stock
Previously, noncorporate taxpayers could exclude 50 percent of the gain that they realized on the sale or exchange of qualified small business stock that they held for more than five years. The exclusion increased to 60 percent if the small business was a qualified business entity.
For this purpose, the small business stock must have been acquired at original issue. Also, the issuing corporation cannot have gross assets that exceed $50 million at the time the stock is issued, and it must also satisfy "active trade or business" requirements.
To encourage investments in small businesses, the new Act increases the exclusion of gain from the sale of qualified small business stock held for more than five years―to 75 percent―for stock issued after February 17, 2009 and before 2011. (Under these provisions there is no longer a distinction for qualified business entities.) As a result, gains are taxed at a maximum effective rate of seven percent under the regular tax rules and 12.88 percent for AMT purposes.
S Corporation Holding Period
S corporations are generally not subject to tax. Instead, their shareholders pay tax on their pro-rata shares of the S corporation's income. However, under certain circumstances, S corporations are taxed on gains that were built in at the time the corporation elected to become an S corporation. For a ten-year period, these built-in gains are taxed, when recognized by the S corporation, at the highest corporate tax rate.
Under the new Act, for tax years beginning in 2009 and 2010, the holding period of assets subject to the built-in gains tax is temporarily shortened from ten years to seven years.
Cancellation of Certain Debt Income
Under most circumstances, when debt is discharged, the debtor must recognize taxable income.
To benefit certain businesses that choose to reacquire their own debt instruments at a discount, the new Act allows those businesses to recognize cancellation-of-debt income over ten years. They can elect to defer recognizing the income for the first four or five years and then recognize the income ratably over the following five tax years. The change applies to specified types of business debt that is repurchased by the business in 2009 or 2010.
Refundable AMT and R&D Credits in Lieu of Bonus Depreciation
Under the Foreclosure Prevention Act of 2008, corporations eligible for 50 percent bonus depreciation as a result of capital expenditures could instead elect to claim certain refundable credits.
The new Act extends this provision. It applies to corporations that are eligible for bonus depreciation as a result of property placed in service during 2009. These corporations can elect to receive 20 percent of the value of their otherwise-deferred, pre-2006 AMT or R&D credits in lieu of the bonus depreciation.
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