Publications

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With 65 percent spending provisions and 35 percent tax benefits, the landmark American Recovery and Reinvestment Act of 2009 (ARRA) is intended to devote $787 billion in an attempt to stimulate the economy and create jobs.

ARRA includes a series of tax provisions under the name of the American Recovery and Reinvestment Tax Act of 2009 (the Act). Set forth below is an executive summary of some of the more significant provisions of the Act.

Relief for Distressed Businesses, Capital Formation Incentives and Other Business Tax Provisions

Deferral of cancellation of debt income. Current law requires taxpayers realizing cancellation of debt income (CODI) to recognize the CODI as ordinary income in the year of the discharge, subject to certain exceptions.

The Act allows taxpayers to elect to recognize certain CODI ratably over five years, beginning five years after the CODI is realized for CODI realized in 2009 or beginning four years after the CODI is realized for CODI realized in 2010.

The deferral election is available only with respect to CODI arising from a debt instrument issued by a C corporation or any other person in connection with the conduct of a trade or business by that person. The election applies to CODI arising from an acquisition of a debt instrument by the obligor or a related party, including an acquisition for cash, in exchange for another debt instrument (including a modification treated as an exchange), in exchange for corporate stock or a partnership interest, or as a contribution to capital. The election also applies to a complete forgiveness of indebtedness. Note: A buyer of the stock of a corporation should exercise diligence to determine whether the corporation made the election to defer COD income which would create a tax liability in the future.

If a taxpayer elects to defer the recognition of CODI under this provision, then the exclusion of CODI under the statutory exceptions for bankruptcy, insolvency, qualified farm indebtedness and qualified real property business indebtedness do not apply to the discharge of that indebtedness for the current year or any subsequent year. Thus, a taxpayer must carefully consider whether this trade-off will be beneficial in his particular circumstances.

If a new debt instrument is issued in exchange for an existing debt instrument and the debtor elects to defer the recognition of CODI under the new law described above, then all, or a portion, of the debtor’s deduction for any original issue discount (OID) that accrues under the new debt instrument before the CODI is first recognized (Pre-Recognition OID) is deferred. Pre-Recognition OID, up to the amount of CODI resulting from the exchange, is deductible ratably over the five years in which the CODI is recognized. If Pre-Recognition OID exceeds the amount of CODI, then the excess is deductible under normal OID accounting rules. For this purpose, if an issuer issues a new debt instrument and the proceeds of the new instrument are used to acquire an existing debt instrument, then the new instrument is treated as issued in exchange for the instrument acquired, and the deduction of any resulting OID is subject to this deferral.

Reduced recognition period for built‑in gains tax. Under current law, if a C corporation elects to become an S corporation, the S corporation must pay corporate income tax on any built‑in gains at the time the S election is effective that are recognized during the ten‑year period following the effective date of the S election. The same rule applies to C corporations that become RICs or REITs.

The Act provides that, in the case of built‑in gains that are recognized in any tax year beginning in 2009 or 2010, the tax on built‑in gains will not be imposed if seven years have expired since the S election became effective.

While the Act simply amends these rules contained in Subchapter S of the Internal Revenue Code (the Code), it appears that the change would apply equally to REITs and RICs since the built‑in gains tax is applied to these entities by reference to the Subchapter S provisions.

Suspension of AHYDO limitations. Current law limits the deduction by corporations of interest accruing as original issue discount on certain high-yield debt obligations called AHYDOs.

The Act suspends these limitations for new debt obligations issued from September 1, 2008, through December 31, 2009, if the new obligation is issued in exchange for an obligation that is not an AHYDO and has the same issuer or obligor as the new obligation. For this purpose, exchanges include modifications of debt instruments that are treated as exchanges for income tax purposes.

Five-year carryback of net operating losses for small businesses. Under current law, taxpayers can generally carry a net operating loss (NOL) back two years and forward 20 years to offset taxable income in those years. NOLs must be applied to taxable years in the chronological order of the taxable years to which they may be carried, unless the taxpayer elects to waive the carryback.

The Act allows small businesses to elect to carry back NOLs arising in taxable years ending in 2008 for up to five years. Eligible taxpayers may elect to apply this provision to tax years beginning (instead of ending) in 2008. Eligible taxpayers can elect to carry back these NOLs to any of the third, fourth or fifth preceding taxable year.

Corporations and sole proprietorships are eligible for the election if the entity’s annual gross receipts do not exceed $15 million. A partner of a partnership the annual gross receipts of which do not exceed $15 million is also eligible with respect to an NOL attributable to his distributive share of the partnership's loss.

Reduced 2009 estimated taxes for small businesses. Current law requires individuals to pay estimated taxes of at least the lesser of (i) 90 percent of the tax due for the current year or (ii) 110 percent of the tax owed for the preceding year. In the case of individuals whose adjusted gross income for the preceding year was not more than $150,000, 100 percent is substituted for 110 percent in clause (ii) above.

For 2009, the Act reduces to 90 percent the percentage of tax owed for the preceding year in the case of “qualified individuals.” An individual is a qualified individual if the individual’s adjusted gross income for the preceding year is less than $500,000 and more than 50 percent of the individual’s gross income for the preceding year was from a small business. For this purpose, a small business is any business that had fewer than 500 employees for the preceding year.

Exceptions to NOL limits after ownership change under federal financing. Code Section 382 limits the ability of a corporation to deduct losses if there has been a change in its ownership of more than 50 percent.

The Act provides that this limitation will not apply to an ownership change pursuant to a restructuring plan that is required under a loan agreement or a commitment for a line of credit entered into with the Department of the Treasury under the Emergency Economic Stabilization Act of 2008, that is intended to result in a rationalization of the costs, capitalization and capacity with respect to the manufacturing work force of, and suppliers to, the corporation.

This provision of the Act will not apply (and therefore the Section 382 limit will apply) if immediately after the ownership change any one person (together with related parties) owns 50 percent or more of the stock of the corporation.

Repeal of Notice 2008‑83. On September 30, 2008, the IRS issued Notice 2008‑83, which suspended the Section 382 limitation with respect to acquisitions of financial institutions. The Act repeals Notice 2008‑83, effective January 16, 2009. Ownership changes occurring on or before January 16, 2009 (or pursuant to a binding contract entered into on or before that date) are grandfathered.

Extension of bonus depreciation. The first-year bonus depreciation of 50 percent of the adjusted basis of qualified property that presently exists for property placed in service during 2008 is extended to apply to qualified property placed in service before January 1, 2010, or in the case of certain transportation property and property with a recovery period of 10 years or greater, before January 1, 2011. In lieu of the first-year bonus depreciation, the taxpayer may elect to claim additional research or minimum tax credits.

Extension of election to accelerate AMT and R&D credits in lieu of bonus depreciation. The existing election to increase the limitation on the use of R&D credits under Code Section 38(c) or minimum tax credits under Code Section 53(c) in lieu of the first year bonus depreciation under Code Section 168(k) is extended to property for which bonus depreciation was extended as described above. The amount of the increase in the credit limitation is the 20 percent of the bonus depreciation, but limited to the lesser of $30 million or 6 percent of the sum of the R&D credits carried over from and minimum credits allocable to the adjusted minimum tax imposed for taxable years beginning before January 1, 2006. The amount of the increase in allowable credits is refundable.

Temporary increase in limit on expensing depreciable property. Code Section 179 generally allows a taxpayer to treat the cost of depreciable property placed in service during the taxable year as a deductible expense up to an annual amount limitation which was $250,000 for 2008 but was scheduled fall to $125,000 in 2009 and thereafter. The Act extends the $250,000 limitation to taxable years beginning in 2009.

Energy Tax Incentives

Extension of the renewable energy production tax credit. The placed in service date for allowance of credit for wind facilities is extended through December 31, 2012 (from 2009). The placed in service date for open- and closed-loop biomass, geothermal or solar energy, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities is extended through December 31, 2013 (from 2010, or 2011 in the case of marine and hydrokinetic renewable energy facilities).

Election to take the Investment Tax Credit rather than the Production Tax Credit. The investment tax credit for energy property (section 48) is amended to permit the taxpayer to irrevocably elect to take the investment tax credit rather than the production tax credit (PTC) for a qualified investment credit facility placed in service between January 1, 2009 and December 31, 2013. In the case of wind facilities, the election is available to property placed in service between January 1, 2009 and December 31, 2012. The amount of the credit will be 30 percent of the property's basis. Property that qualifies for the election includes open- and closed-loop biomass, geothermal or solar energy, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities, for which no PTC has been taken under section 45. No PTC under section 45 shall be permitted in any year for property subject to the election.

Limitations on certain investment tax credit property repealed. The $4,000 investment tax credit limitation on qualified small wind energy property (section 48(c)(4)(B)) is repealed. The special rule (section 48(a)(4)) applicable to reduce the amount of the investment tax credit for property financed by subsidized energy financing and industrial development bonds is also repealed.

Grants provided for energy property in lieu of tax credits. In lieu of taking a credit pursuant to sections 45 or 48, a taxpayer may apply for a grant from the Secretary of Energy for specified energy property placed in service during 2009 or 2010, or prior to a credit termination date if construction commences during 2009 or 2010. The amount of the grant is 30 percent of the basis of energy property, with the exception of geothermal property, qualified microturbine property, combined heat and power systems, and geothermal heat pump property, each of which is available for a grant equal to 10 percent of its basis. Additionally, certain limitations apply to qualified fuel cell property, microturbine property, and combined heat and power system property. The credit termination date is January 1, 2013 for wind facilities, January 1, 2014 for open- and closed-loop biomass, geothermal or solar energy, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities, and January 1, 2017 for all energy property qualifying for the investment tax credit under section 48. The amount of the grant is not includible in gross income of the taxpayer, but is taken into account in determining the basis of the property to which it relates. The grant is not available to federal, state or local governments, organizations exempt from federal tax under section 501(c) or cooperative electric companies.

Increase in the amount of new Clean Energy Bonds. The national limitation on the aggregate amount of bonds that may be designated by the Secretary as "new clean renewable energy" bonds is increased from $800 million to $2.4 billion. The Davis-Bacon labor standards are imposed on projects funded with these New Clean Energy Bonds.

Increase in the amount of Energy Conservation Bonds. The national limitation on the aggregate amount of bonds that may be designated by the Secretary as "qualified energy conservation" bonds is increased from $800 million to $3.2 billion. Bonds to implement green community initiatives shall not be treated as private activity bonds, subject to the existing allocation limitation. The Davis-Bacon labor standards are imposed on projects funded with these Energy Conservation Bonds.

Modification and one-year extension of the Nonbusiness Energy Property Credit. The nonbusiness energy property credit for individuals is increased to provide a credit (section 25C) equal to 30 percent of the sum of the amount paid or incurred by the taxpayer during the taxable year for qualified energy efficient improvements and residential energy property expenditures. The aggregate amount of the credits allowed for taxable years beginning in 2009 and 2010 shall not exceed $1,500, replacing the individual limitations for different types of property. This limitation applies to taxable years beginning after December 31, 2008 and to property placed in service prior to December 31, 2010. The standards for certain energy efficient property are modified.

Modification of the Residential Energy Efficient Property Credit. Effective for tax years beginning after December 31, 2008, the dollar limitations on the 30 percent credit (section 25D) for residential qualified solar water heating property, small wind energy property, and geothermal heat pump property expenditures are removed. The $500 individual limitation ($1,667 aggregate for all individuals in the case of expenditures during a year for a dwelling unit occupied by two or more individuals) per half kilowatt of capacity for qualified fuel cell property is retained.

Increase in credit for alternative refueling property. The existing credit for qualified alternative fuel vehicle refueling property is increased from 30 percent to 50 percent of the cost of such property placed in service during 2009 and 2010. The limitation on the credit is also increased to $50,000 in the case of businesses and $2,000 in all other cases. An exception is provided for hydrogen related property, for which the credit remains 30 percent and is capped at $200,000.

Increased monitoring and verification of carbon capture and sequestration. The existing carbon dioxide sequestration credit (section 45Q) is amended to provide that carbon used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project must be disposed of in secure geological storage. This subjects carbon qualifying for the $10 per metric ton credit to the same regulatory oversight currently applicable to $20 per metric ton credit.

New Qualified Plug-in Electric Drive Motor Vehicle Credit revised. The existing credit for "new qualified plug-in electric drive motor vehicles” is revised to provide a credit equal to $2,500 plus $417 for each kilowatt-hour of capacity in excess of 5 kilowatt-hours for such vehicles placed in service after December 31, 2009. The amount of credit is capped at $7,500, regardless of the weight class of the vehicle. The phase-out period is adjusted to begin in the second calendar quarter after the date when 200,000 vehicles have been sold in the United States by the particular manufacturer since December 31, 2009. The basis of the vehicle is reduced by the amount of the credit and the amount of credit or deduction permitted under any other section is reduced by the amount of the credit. The credit is allowed to businesses and individuals and is creditable against the alternative minimum tax.

New credit for certain plug-in electric vehicles. The existing electric vehicle credit in section 30 is replaced with a credit equal to 10 percent of the cost, up to $25,000, of two- or three-wheeled and low-speed motor vehicles. These new vehicles are generally subject to the existing requirements of "new qualified plug-in electric drive motor vehicles," except that two- or three-wheeled motor vehicles must draw power from a battery with at least 2.5 kilowatt-hours of capacity. The basis of the vehicle is reduced by the amount of the credit and the amount of credit or deduction permitted under any other section is reduced by the amount of the credit. The credit is permissible to businesses and individuals and is permitted against the alternative minimum tax.

Modification of the Alternative Motor Vehicle Credit. The Alternative Motor Vehicle Credit is amended by adding a credit equal to 10 percent of the cost of converting a motor vehicle to a qualified plug-in electric drive motor vehicle, as defined in section 30D. The credit for such conversions is capped at $4,000. This credit is also modified to be permissible as a personal credit against the alternative minimum tax.

New credit for investment in advanced energy property. A new investment tax credit is provided equal to 30 percent of the cost of property placed in service as part of a qualified advanced energy manufacturing project. Qualified advanced energy manufacturing projects re-equip, expand, or establish a manufacturing facility for the production of qualified advanced energy property, which, in addition to certain property listed in sections 45 and 48, includes facilities that manufacture new qualified plug-in electric drive motor vehicles and qualified plug-in electric vehicles and components, as well as other projects determined by the Treasury Secretary to reduce greenhouse gasses. The Secretary may allocate up to an aggregate of $2.3 billion in credits under a certification program for such projects. An application for certification must be submitted within two years from establishment of the program and projects must be placed in service within three years of certification. The basis of qualified property must be reduced by the amount of the credit received.

Increase in the monthly limit for certain qualified transportation fringe benefits. The monthly limit for commuter highway vehicle and transit pass fringe benefits is increased to the amount currently permitted for qualified parking. This provision applies to months beginning on or after enactment of this provision, through 2010.

Community Development Tax Incentives

New Markets Tax Credit. The Act increases the total amount of new markets tax credits (Section 45D) that may be allocated for 2008 and 2009 from $3.5 billion to $5.0 billion (an additional $1.5 billion for each year). Only community development entities that submitted applications for 2008 allocations are eligible to receive the increased allocations for 2008. New markets tax credits arising out of 2009 allocations will be allowable against alternative minimum tax.

Grants in lieu of Low-Income Housing Tax Credits. For 2009 only, the Act permits a state to exchange a portion of the low-income housing tax credits (LIHTCs) that the state would otherwise be authorized to allocate for a grant from the Treasury Department equal to 8.5 times the foregone LIHTCs (8.5 represents 85 percent of the LIHTCs that could have be claimed over 10 years). Generally, a state may exchange up to 40 percent of its 2009 LIHTC allocation ceiling for low-income housing grants. Low-income housing grants will be subawarded by electing states to finance the construction or acquisition and rehabilitation of low-income buildings, in lieu of allocating LIHTCs. Grants may only be made with respect to qualified low-income buildings that would otherwise qualify for LIHTCs, and generally would be made in combination with allocations of LIHTCs. Grant recipients will be subject to the same rent restrictions, use and compliance requirements as applicable to LIHTCs, and grants will be subject to recapture for failure to comply with LIHTC requirements under rules to be developed by the state housing credit agencies and the Treasury Department.

Miscellaneous Tax Provisions

Alternative Minimum Tax (AMT) Temporary Patch. Currently, a taxpayer receives an exemption amount which offsets AMT of $46,200 (individuals) and $69,950 (married filing jointly). Absent Congressional action, these amounts would revert to $45,000 and $33,750 this year. The Act increases the exemption amounts to $46,700 and $70,950, respectively, for 2009 only.

Homeownership Tax Credit. The Act extends the current first-time home buyer tax credit to purchases occurring before September 1, 2009, and waives the recapture requirements with respect to purchases occurring between December 31, 2008, and September 1, 2009.

Small business capital gains. The Act increases from 50 percent to 75 percent the gross income exclusion for individuals on the gain from the sale of certain small business stock held for more than five years. The increase applies to stock issued after the date of enactment and before January 1, 2011.

Modification to the rules for tax-exempt interest expense relating to financial institutions. Under current law, financial institutions are not allowed to take a deduction for the portion of their interest expense that is allocable to such institution's investments in tax-exempt municipal bonds. To increase the marketability of tax-exempt bonds, the Act changes the determination of the portion of interest expense that is allocable to investments in tax-exempt municipal bonds by excluding investments in tax-exempt municipal bonds issued during 2009 and 2010 to the extent that these investments constitute less than 2 percent of the average adjusted bases of all the assets of the financial institution. In addition, the Act increases the so called “bank qualified” small issuer exception (under which certain tax-exempt obligations are excluded from the calculation) to $30 million, from $10 million, and applies the $30 million calculation at the ultimate borrower level if the ultimate borrower would separately qualify for the exception. Thus, the Act permits pooled financings to be evaluated separately at the borrower level and permits small governmental units to both benefit from the “bank qualified” exception for its bonds and also to issue “bank qualified debt” on behalf of qualifying 501(c)(3) organizations.

For more information about the business tax provisions, please contact:

Bruce Wein, Nicholas Minear, Joseph Langhirt, Evan Migdail, Stephen Sharkey, or Frank Mugabi.

For more information about the energy tax and renewable energy tax provisions, please contact:

Bruce Wein, Joseph Langhirt or Drew Young.