“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.
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.
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
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.
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.
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.