The American Recovery and Investment Act of 2009

“Bonus” First Year Depreciation and Section 179 Expensing


The 2009 Recovery Act provides several incentives for business investment in capital and equipment. 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 Act extends the available expense deduction limitation under Code Sec. 179 of $250,000, and the phase-out amount of $800,000, through 2009. Bonus depreciation is also extended through 2009 (through 2010 for certain long-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. Also please note that these deductions may not apply at the state level.


Small Business Estimated Tax Payment Relief
Individuals who own small businesses and do not pay taxes through income-tax withholding are required to make estimated tax payments throughout the year. Generally, the estimated tax should be the lesser of (1) 90% of the tax shown on the current year’s return or (2) 100% of the tax shown on the previous year’s return (110% for certain high income taxpayers).  The 2009 Act allows qualifying taxpayers to pay 90% of the tax liability shown on the previous year’s return. This could help many taxpayers lower their estimated payments.

Qualified individuals with prior year adjusted gross income less than $500,000 ($250,000 for married individuals filing separately) and who derived more than 50% of the gross income from a small business with 500 employees or less, will not be subject to underestimated tax penalties if they pay at least 90% of last year’s tax through withholding and estimated tax.


Net Operating Loss Carryback


The carryback period for net operating losses has been extended from two to five years for businesses with average revenues less than $15 million over the three years before the year of the loss. The result is that for qualifying businesses with a NOL in 2008, the loss can be carried back to 2003 rather than just to 2006. Carryback elections made previously can be changed once but must be made within 60 days after February 17, 2009.


Qualified Small Business Stock
Prior to the 2009 Act, non-corporate taxpayers could exclude from income a portion of capital gain realized when they disposed of qualified small business stock. The Act increases the 50% gain exclusion to 75% for stocks issued between February 17, 2009 and January 1, 2011.


Cancellation of Indebtedness


Eligible businesses will be able to recognize cancellation of certain indebtedness over five years, beginning in 2014, under the new law. This treatment applies to specified types of business debt repurchased or forgiven by the business after December 31, 2008 and before January 1, 2011.


Energy Tax Incentives for Business
The Act allows for several energy-related incentives for producing and conserving energy through renewable sources:


  • Non-business energy credit for certain energy-efficient improvements to qualified residential property.
  • Removal of limits on certain energy credits relating to small wind energy, solar water heating and qualified geothermal heat.
  • Renewable electricity production credit for production of electricity from qualified energy sources.
  • Qualified advance energy manufacturing project credit.
  • Plug-in electric vehicle credit


Making Work Pay Credit

The new law allows a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual’s earned income or $400 ($800 for married couples filing jointly). Income limitations apply so the credit will not be available to taxpayers with adjusted gross income in excess of $75,000 (or $150,000 for married couples). Most taxpayers who are eligible for this credit will be able to claim it through the reduction in withholding tax, thus increasing their take home pay.

Cobra Insurance Continuation

The Act states that individuals who are involuntarily terminated, as well as that individual’s beneficiaries, are only required to pay 35% of the premium to continue COBRA coverage under a group health plan for up to nine months. Prior to the Act, the employee had to pay 100% of the premium to the employer. The employer is required to pay the remaining 65% of the premium. The employer will be reimbursed by claiming a credit against withholding taxes on wages owed.

Deduction for Taxes on Car Purchases
When purchasing a new “qualified motor vehicle,” an income tax deduction may be available for state and local sales taxes paid. The vehicle purchase date must fall on or after February 17, 2009, and before January 1, 2010.
A qualified vehicle may be an automobile, light truck, motorcycle or motor home. The deduction is only for new car purchase up to $49,500 for taxpayers who do not elect to claim state and local sales taxes as an itemized deductions. There is a phase-out at certain income levels.

Economic Recovery Payment
There is a one-time payment for adults who are eligible for Social Security benefits, Railroad Retirement benefits, veteran’s disability compensation or pension benefits, or qualifying individuals who are eligible for Supplemental Security Income benefits. This is only for those who were eligible for one of the programs in any of the three months prior to the Act’s enactment. The maximum benefit is $250. If the taxpayer is also eligible for “Making Work Pay,” that credit will be reduced by any economic recovery paid.

First-time Homebuyer Credit

The new law extends and enhances a tax credit put in place last year to encourage home sales. The credit gives first-time homebuyers a temporary refundable tax credit equal to 10 percent of the purchase price of a home up to $8,000 ($4,000 for married individuals filing separately) The credit begins to phase out for higher-income taxpayers. Initially, the credit was effective for homes purchased on or after April 9, 2008, and before July 1, 2009. The new law extends the credit through November 30, 2009. Moreover, the new law eliminates the repayment requirement for homes purchased after December 31, 2008 and before December 1, 2009. This is a significant enhancement.

Energy Incentives for Individuals

The new law enhances several energy tax incentives that reward taxpayers for installing energy-efficient property and alternative sources of energy in their homes. Among the types of energy-efficient property that may qualify for a tax break are certain heat pumps, furnaces, windows and doors. There is also a tax break for purchasers of plug-in electric vehicles.

Exclusion for Unemployment Compensation
The Act allows for the first $2,400 of unemployment benefits received in 2009 to be excluded from gross income.

Child Tax Credit
Congress has tinkered with the current $1,000 child tax credit many times in recent years. The new law increases the refundable portion of the child tax credit for 2009 and 2010. Taxpayers are eligible for a refundable credit equal to 15 percent of their earned income in excess of $3,000 subject to certain restrictions and phase-outs.

Higher AMT Exemption Amounts
The alternative minimum tax (AMT) was created to ensure that very wealthy individuals pay their fair share of federal taxes. Over time, the AMT has encroached on middle income taxpayers, largely because it was not indexed for inflation. To help middle income taxpayers avoid the AMT, the new law increases the AMT exemption amounts and allows taxpayers to take most personal credits to reduce AMT liability for 2009.

The End of US GAAP?

While U.S. companies have followed the guidelines of U.S. Generally Accepted Accounting Principles (GAAP) for years, there is a shift toward future transition of International Financial Reporting Standards (IFRS) as a single set of global accounting standards. Until recently, foreign companies who used IFRS were required by the SEC to reconcile their reports to GAAP in order to be listed on the U.S. exchanges.

In November 2007, the SEC announced that IFRS statements will be accepted from foreign registrants for 2007 and later years. The SEC is also considering whether U.S. companies should be allowed to use IFRS in lieu of GAAP. Would this mean the end of U.S. GAAP? The SEC is working to eliminate the current reconciliation requirement and continues to explore the option of allowing U.S. companies to report financial results using international standards.

In recent years, much attention has been given to the idea of defining one set of standards, thereby eliminating differences between these two reporting standards. This would cut costs greatly for the foreign companies, who in effect have to keep two sets of books. The long-term goal would be a single set of standards, but in the meantime there are still some inherent issues with having two sets of standards. If foreign companies are allowed to use IFRS, then many have suggested that U.S. firms should also have that option. Given that option, then GAAP and IFRS would have to exist side by side in the U.S. In order for this to work, the SEC would have to recognize IASB as an authoritative body for setting accounting standards, which could cause conflict with the Sarbanes-Oxley Act.

The goal of getting to a global set of accounting standards is achievable, yet the timeframe is difficult to predict. The single set of standards would simplify the world of accounting, but it will take a process to achieve it. In the next few issues, we will be taking a closer look at this so-called “convergence” of U.S. GAAP and IFRS and its status.

IFRS is Coming

Mandatory Phase-In Set in Motion

The SEC recently proposed a “roadmap” for phasing in mandatory International Financial Reporting Standards (IFRS) by U.S. public companies. The initial proposed mandate for this transition is scheduled to begin for certain filers for years ending on or after December 15, 2014. Does this mean the end of US GAAP, and what effect will this have on private companies?

No one at this point knows the answers to these critical questions. One thing is for certain: the transition from US GAAP to IFRS will be very costly and will require a tremendous amount of expertise in both areas, regardless of whether the company is a multinational publicly traded conglomerate or a privately held business.

Assuming that IFRS does in fact become GAAP for public companies in the future, it is logical that the same requirements, or a hybrid of the requirements, will follow for private companies. If so, every family-owned enterprise in America could potentially be affected by this transition.

Is this push for global uniform accounting standards going to be worth it considering the estimated time and costs involved to change, especially for family-owned enterprises? Only time will tell.

Tom Breedlove is the firm’s expert in International Financial Reporting Standards. This year Tom completed continuing professional education on this subject both abroad in Berlin, Germany and here in the United States. If you need any further details regarding IFRS, please contact Tom directly.

Red Flags for Audits

As tax season comes to a close, many taxpayers put the IRS out of their mind until the next tax season rolls around. However, some taxpayers aren’t so lucky as they are recipients of dreaded IRS letter stating, “Dear Taxpayer, Some of the information that you provided to us does not agree with information we received from other sources.”

In actuality, the percentage of taxpayers who will face an audit is fairly small compared to the number of tax returns filed — overall, the examination rate of tax returns in 2006 was just under 1 percent. However, some taxpayers are more likely than others to face an audit based on the information provided on their tax return. So what triggers a red flag for the IRS? While audits can be done for a number of reasons, often the IRS will take a closer look if the following applies:

  • Higher incomes.
  • Income other than basic wages, for example, contract payments.
  • Unreported income, such as investment returns.
  • Home-based businesses, especially when in addition to salary income and home-office deductions.
  • Noncash charitable deductions.
  • Large business meal and entertainment deductions.
  • Excessive business auto usage.
  • Losses from an activity that could be viewed as a hobby rather than a business.
  • Large casualty losses.

Identifying Your Corporate Culture

Have you ever wondered why some companies are perceived as more successful than others? Product mix? Customer base? Leadership? While there are many reasons why some companies outperform others, it is increasingly clear that some success is tied to an organization’s “corporate culture.”

Culture is a set of shared attitudes, values, goals and practices that characterize a company or corporation. Every organization has its own unique culture. Most organizations don’t consciously try to create a certain culture. Rather, it develops naturally, based on the values of top management of the organization. What management pays attention to is often the strongest indicator of the organization’s culture. Their view of the organization’s culture is often based more on hope than grounded in objective fact. Culture drives the organization and its actions. It is somewhat like “the operating system” of the organization.

Why would an organization be interested in assessing its culture? If an organization wants to maximize its strategic objectives, it must understand whether the existing culture supports and drives the actions necessary to achieve goals. It allows you to identify the gap between the real and ideal culture. Here are some signs that your culture is in trouble:

  • No clear belief about how to succeed
  • Morale problems
  • Complaints pertaining to communications
  • Attrition greater than prior years
  • Office politics
  • Dissatisfied Customers/ Customer Complaints

So what can you do once you have recognized that your culture needs help? Create a vision that is embraced by everyone. Have a set of values and a way to define what those values are.

There needs to be two-way communication between management and employees to share and receive feedback on the corporate culture. Management must lead by example in changing the current culture. A plan should be in place to recognize and reward the activities that support and promote the corporate culture. Recognize that the current culture did not happen overnight and it will take time to change old habits.

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