The new law is set to jump start the U.S. economy with direct spending and tax incentives. While this Act has been touted as a financial markets rescue plan, it also contains a number of tax provisions that impact businesses and individuals and provides tax planning opportunities. The new law makes over 300 changes to the Internal Revenue Code. We have summarized some of the significant provisions below.
Extended bonus depreciation – extends the 50% bonus depreciation deduction for an additional year to include property placed in service before January 1, 2010.
Increased Section 179 expensing deduction – for tax years beginning in 2009 the Section 179 expense limitation continues to be $250,000 and the overall investment limit is increased to $800,000.
Increased time period for Net Operating Loss carrybacks – allows small business taxpayers (three year average annual gross receipts of $15 million or less) to increase the NOL carryback period from 2 to 5 years for losses incurred in 2008.
Decreased time period for S corporation built-in gain holding period – the current 10 year holding period is temporarily decreased to 7 years. This reduction applies to C corporations that convert to S corporations in tax years beginning in 2009 and 2010.
One year optional extension of election to forego accelerated depreciation for otherwise deferred credits – allows the taxpayer to opt out of taking bonus depreciation in order to currently take deferred AMT and research & development credits.
Expansion of the Work Opportunity Tax Credit – increases the "targeted groups" for which the credit applies. It allows the credit for employers of unemployed veterans and "disconnected youths".
Increased exclusion for Qualified Small Business Stock – temporarily increases the gain exclusion from 50% to 75% on the sale of QSBS.
Making Work Pay Credit - Refundable tax credit of up to $400 per worker ($800 per couple filing jointly) – low and moderate income workers receive the credit which equals 6.2% of an individual’s earned income or $400 ($800 for a joint return). The credit begins to phase out at modified adjusted gross income of $75,000 ($150,000 for a joint return) and completely phases out at modified AGI of $95,000 ($190,000 on a joint return).
American Opportunity Tax Credit - Increased tax credits for higher education – the Act modifies the Hope Credit and increases the maximum amount of the credit to $2,500 per year for the first four years of post-secondary education. The credit begins to ratably phase-out at modified AGI of $80,000 and completely phases out at $90,000 ($160,000 and $180,000 respectively for a joint return).
Enhanced tax credit for first-time homebuyers – first-time buyers of a principal residence qualify for a maximum $8,000 refundable credit on a home purchased between April 9, 2008 and November 30, 2009. In addition, it waives the earlier provision that the credit would be repaid for purchases after December 31, 2008 unless the home is sold or ceases to be a principal residence within a 36 month period. The credit will phase-out at modified AGI starting at $75,000 ($150,000 for joint filers).
Tax deduction for sales and excise taxes paid on the purchase of new cars - for purchases after the date of enactment, taxpayers may deduct state and local sales and excise for the purchase of a new passenger automobile. The deduction will phase-out for taxpayers with a modified AGI exceeding $125,000 ($250,000 for a joint return).
AMT relief – increased AMT exemption amounts for 2009 ($46,700 for unmarried individuals and $70,950 for married couples filing a joint return). In addition, nonrefundable credits may offset AMT and regular tax for 2009.
Nonbusiness Homeowners Energy Credit – this credit was extended for one year through December 31, 2010 and the credit rate is increased from 10% to 30%. In addition, the $500 lifetime cap (and the $200 lifetime cap for windows) is eliminated and replaced with an aggregate cap of $1,500.
In addition to the major changes outlined above, there are numerous other changes that may affect specific taxpayers. Please contact us on the web or by phone at 800-832-3008.
