News & Insights

February 18, 2009
By Phillip L. Jelsma

Congress has passed the American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act), which provides several incentives for business investment in capital and equipment, loss companies and tax incentives for renewable energy. Here is a brief summary of these provisions:

Cost Recovery Provisions.

These provisions extend prior law increases in the limitation on expense deductions for depreciable assets and allowable 50% bonus depreciation on new equipment for the year it is placed in service. More specifically, the 2009 Recovery Act extends the available expense deduction limitation under Code Sec. 179 of $250,000, and the phase-out amount of $800,000, through tax years beginning in 2009. Bonus depreciation is also extended through 2009 (through 2010 for certain longer-lived and transportation property).

Because these extensions are temporary and generally apply only to tax years beginning in 2009, new purchases should be made and placed in service accordingly. The increased expense deduction will revert back to $125,000 (as indexed for inflation) for qualifying assets after 2009. Further, the $125,000 deduction (as adjusted for inflation) is scheduled to revert back to $25,000 for tax years beginning after 2011. Similarly, in 2010, the phase-out amount, which begins with every dollar spent over $800,000, reverts back to $500,000, as adjusted for inflation, and is scheduled to revert to $200,000 after 2011.

Net Operating Losses.

Under current law net operating losses (“NOLs”) can generally be carried back two years and forward 20 years. The carryback and carryover periods are determined by the law applicable to the year in which the NOL arises, rather than any of the years to which it is carried back or forward. An NOL that is not utilized within its statutory timeframe expires without providing any tax benefit.

The 2009 Recovery Act provides relief for small businesses by extending the maximum carryback period for 2008 net operating losses (NOLs) from two years to any number of years greater than two and less than six (i.e., three, four, or five years). The number of years selected for the carryback is discretionary within these parameters, but the election must be properly executed in a timely manner and cannot be revoked. An eligible small business is defined as a corporation or partnership that meets a $15 million gross receipts test for the tax year in which the loss arose (or a sole proprietorship that would meet such test if the proprietorship were a corporation) The $15 million gross receipts test would be met for any prior tax year if the average annual gross receipts for the business for the three-taxable-year period ending with such tax year does not exceed $15 million For purposes of the gross receipts test, if the business was not in existence for the entire three-year period, then the test shall be applied for the period during which the business was in existence. Gross receipts for a short tax year of less than 12 months should be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.

Fiscal-year businesses can apply these rules either to NOLs generated in tax years ending in 2008, or to NOLs generated in tax years beginning in 2008. If a small business has already waived an NOL carryback for the applicable 2008 tax year, the election can be revoked in order to obtain NOL carryback relief under the 2009 Recovery Act provisions. However, the prior election must be revoked and the new election executed within 60 days of the legislation’s enactment.

Renewable Energy Production Facilities.

The 2009 Recovery Act extends the placed-in-service date for renewable energy production facilities and allows certain facilities placed in service in 2009 and 2010 to elect to claim the investment tax credit in lieu of the production credit.

Qualified facilities are generally facilities that generate electricity using qualified energy resources. Qualified energy resources include wind, refined coal, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, and qualified hydropower production. To be eligible for the renewable electricity production credit (REPC), electricity produced from qualified energy resources at qualified facilities must be sold by the taxpayer to an unrelated person. In addition, these facilities must be placed in service by a certain date.

Highlights of the 2009 Recovery Act provisions related to renewable energy production facilities include the following:

Long-term extension and modification of renewable energy production tax credit. The 2009 Recovery Act extends the placed-in-service date for wind facilities for three years, through December 31, 2012. The 2009 Recovery Act also extends the placed-in-service date for closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities for three years, through December 31, 2013.

Temporary election to claim the investment tax credit in lieu of the production tax credit. Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable energy are eligible for the production credit. However, the 2009 Recovery Act allows wind property that is placed in service between 2009 and 2012, and other renewable energy property placed in service between 2009 and 2013, an election to claim the investment tax credit in lieu of the production tax credit.

Subsidized energy financing limitation on the investment tax credit repealed. The 2009 Recovery Act repeals the subsidized energy financing limitation on the investment tax credit even if such property is financed with industrial development bonds or through any other subsidized energy financing. This provision is in effect for periods after December 31, 2008.

Residential Energy Credits.

The 2009 Recovery Act provides benefits to homeowners by reinstating the Credit for Nonbusiness Energy Property (CNEP) for 2009 and 2010, and enhancing the Residential Energy Efficient Property (REEP) credit.

The CNEP can be taken when qualified energy efficient improvements or expenditures are made for your principal residence, including new insulation; replacement windows, skylights and doors; central air conditioners; certain water heaters, furnaces or boilers; and a new metal or asphalt roof specifically treated to reduce heat loss. The CNEP, which was not available for the 2008 tax year, has been reinstated for eligible property placed in service after December 31, 2008, and before January 1, 2011. The 2009 Recovery Act also:

• eliminates the lifetime limitation for the CNEP (previously $500);
• increases the credit from 10 percent to 30 percent of qualified expenses; and
• increases the maximum CNEP amount for 2009 and 2010 installations to $1,500.

 

The REEP credit is allowed for qualified expenditures that produce energy for home use, such as for solar energy and fuel cell energy property. The REEP was previously extended through the 2016 tax year, and applies not only to a principal residence, but also to a vacation home. Although the maximum credit for qualified fuel cell property remains unchanged ($500 for each half kilowatt of capacity), the 2009 Recovery Act removes the maximum credit amounts for the following qualified property expenditures for tax years beginning after December 31, 2008:

• solar electric (previously capped at $2,000);
• small wind energy (previously capped at $500 for each half kilowatt of capacity of wind turbines (not to exceed $4,000)); and
• geothermal heat pump (previously capped at $2,000).

Alternative Fuel Property Incentives.

The 2009 Recovery Act increases the credit for alternative fuel vehicle refueling property for businesses and individuals. Before this increase, the credit equaled 30 percent of the cost of qualified alternative fuel vehicle (QAFV) refueling property placed in service during the tax year, limited to $30,000 per property for property subject to depreciation, and $1,000 per property for other property.

QAFV refueling property is property, excluding buildings and structures, the original use of which begins with the taxpayer, and that is not used predominately outside of the United States. The property must be subject to depreciation or installed on property that is used as the taxpayer’s principal residence. Use of the property must be either for storing alternative fuel at the point where the fuel is delivered into the fuel tank of a motor vehicle propelled by the fuel, or to dispense alternative fuel at that point into the fuel tank of a motor vehicle propelled by the fuel.

Under the 2009 Recovery Act, the credit for QAFV refueling property placed in service in 2009 and 2010 by businesses is increased to 50 percent for a maximum credit of $50,000. For individuals, the credit is also increased to 50% for 2009 and 2010, for a maximum credit of $2,000. For hydrogen refueling property, the 30% rate continues to apply, but the maximum credit is raised to $200,000.

New Market Tax Credits.

For calendar years 2008 and 2009, the new markets tax credit is modified to increase the maximum amount of qualified equity investments from $3.5 billion to $5 billion and provide rules for the allocation of the $1.5 billion increase to qualified community development entities. Our firm has extensive experience in this credit.

Work Opportunity Tax Credits.

Unemployed veterans or disconnected youth who begin work for an employer during 2009 or 2010 will be treated as members of a targeted group for whom the employer may claim the work opportunity tax credit as added by the 2009 Recovery Act.

For this purpose, an unemployed veteran includes any individual who is certified by the designated local agency as:

1. having served on active duty in the Armed Forces for more than 180 days or having been discharged or released from active duty in the Armed Forces for a service-connected disability;
2. having been discharged or released from active duty in the Armed Forces at any time during the five-year period ending on the hiring date; and
3. having received unemployment compensation under state or federal law for at least four weeks during the one-year period ending on the hiring date.

Disconnected youth includes any individual certified by the designated local agency as:

1. having attained age 16, but not age 25, on the hiring date;
2. not regularly attending school secondary, technical, or post-secondary school during the six-month period preceding the hiring date;
3. not being regularly employed during the six-month preceding the hiring date; and
4. not being readily employable due to the lack of a sufficient number of basic skills.

Cancellation of Indebtedness Income.

At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument is includible in gross income ratably over the five-tax-year period beginning with:

• The fifth tax year following the tax year in which the reacquisition occurs for a reacquisition occurring in 2009; and
• The fourth tax year following the tax year in which the reacquisition occurs for a reacquisition occurring in 2010.

 

An applicable debt instrument is any debt instrument issued by: (i) a C corporation, or (ii) any other person in connection with the conduct of a trade or business by such person. A debt instrument for these purposes is broadly defined to include bonds, debentures, notes, certificates, or any other instrument or contractual arrangement constituting indebtedness.

Reacquisition for these purposes includes any acquisition of an applicable debt instrument by (i) the debtor which issued (or is otherwise the obligor under) the debt instrument, or (ii) a related person to such debtor. The election is to be made on an instrument by instrument basis. Once made, the election is irrevocable. A taxpayer makes an election with respect to a debt instrument by including with its return for the tax year in which the reacquisition of the debt instrument occurs a statement that: (a) clearly identifies the debt instrument, and (b) includes the amount of deferred income under this provision, plus any other information that may be prescribed by the Secretary of the Treasury.

Built-In Gains Tax Period for S Corporations.

For a tax year beginning in 2009 or 2010, no tax will be imposed on the net recognized built-in gain of an S corporation if the seventh tax year in the 10-year recognition period preceded that tax year. The reduction in the recognition period applies separately with respect to any asset acquired in a carryover Thus a C corporation that converted to S corporation status before January 1, 2002 would not be subject to a built-in gains tax.

Individual Estimated Tax Penalties.

In the case of a tax year of a “qualified individual” that begins in 2009, the exception to the estimated tax penalty that is based on paying 100 percent (or 110 percent) of the tax shown on the prior year’s return will be satisfied if the qualified individual paid at least 90 percent of the tax shown on the prior year’s return.

A qualified individual means any individual if:

1. the adjusted gross income shown on the individual’s return for the preceding tax year is less than $500,000 ($250,000 for a married person filing separately in the tax year that the installment is being determined), and
2. the individual certifies that more than 50 percent of the gross income shown on the return for the preceding tax year was “income from a small business”.

Income from a small business means income from a trade or business with an average number of employees of less than 500 persons for the calendar year ending with or within the preceding tax year of the individual.