TAX INCENTIVES AVAILABLE UNDER THE AMERICAN RECOVERY AND REINVESTMENT ACT (ARRA) FEDERAL INDIVIDUAL TAX PROVISIONS “Making Work Pay” Tax Credit Find further details The ARRA provides a refundable tax credit of up to $400 for working individuals at: IRS Information and $800 for working families.1 Taxpayers can receive this benefit through a Related to the reduction in the amount of income tax withheld from their paychecks, or by American Recovery claiming the credit on their tax returns. and Reinvestment Act of 2009 Economic Recovery Payment to Benefit Recipients The ARRA provides a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs.2 Refundable Credit for Certain Federal and State Pensioners The ARRA provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. 3 Increase in Earned Income Tax Credit (EITC) The ARRA temporarily increases the EITC for working families with three or more children. Working families with three or more children qualify for an earned income tax credit equal to 45% (previously 40%) of the family’s first $12,570 of earned income. This threshold for credit phase out has also been raised by $1,880 from previous levels for all families, regardless of the number of children. Increased Eligibility for the Refundable Portion of Child Credit For 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000 (previously $8,500). “American Opportunity” Education Tax Credit The bill provides financial assistance for individuals seeking a college education. For 2009 and 2010, the ARRA provides taxpayers with a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the taxable year.4 1 This tax credit is calculated at a rate of 6.2% of earned income, and phases out for taxpayers with adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). 2 The one-time payment is a reduction to any allowable Making Work Pay credit. 3 The one-time payment is a reduction to any allowable Making Work Pay credit. 4 Under this new tax credit, taxpayers will receive a tax credit based on one hundred percent (100%) of the first $2,000 of tuition and related expenses (including books) paid during the taxable year and twenty-five percent (25%) of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent (40%) of the credit would be refundable. This tax credit will be subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). FEDERAL INDIVIDUAL TAX PROVISIONS (continued) Computers as Qualified Education Expenses in 529 Education Plans Computers and computer technology now qualify as qualified education expenses under section 529 education plans. Refundable First-time Home Buyer Credit Taxpayers that purchase homes after January 1, 2009 and before December 1, 2009 are no longer required to payback the refundable tax credit offered to first time homebuyers (provided the house is not sold within 3 years of purchase). The maximum value of the credit has been increased to $8,000 (previously $7,500), and the prohibition on financing by mortgage revenue bonds has been removed. Sales Tax Deduction for Vehicle Purchases Taxpayers may deduct state and local sales and excise taxes paid on the portion below $50,000 of the purchase price of new cars, light truck, recreational vehicles, and motorcycles through 2009.5 Temporary Suspension of Taxation of Unemployment Benefits For the taxable year 2009, federal income taxation on the first $2,400 of unemployment benefits per recipient is suspended. Any benefits over $2,400 will be subject to federal income tax. Extension of Alternative Minimum Tax (AMT) Relief for 2009 The AMT exemption amount has been raised to $70,950 for joint filers and $46,700 for individuals; AMT relief for nonrefundable personal credits has likewise been extended. FEDERAL BUSINESS TAX PROVISIONS Extension of Bonus Depreciation Businesses may utilize bonus depreciation for capital property acquired in 2009 for use in the U.S. Election to Accelerate Recognition of Historic Alternative Minimum Tax (AMT) or Research and Development (R&D) Through 2009, businesses may accelerate recognition of a portion of their historic AMT or R&D credits in lieu of bonus depreciation. The amount that can be accelerated is calculated based on the amount that each taxpayer invests in property that would otherwise qualify for bonus depreciation.6 Extension of Enhanced Small Business Expensing Small business taxpayers may elect to write-off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over time through depreciation.7 5 This deduction is subject to a phase-out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return). 6 This amount is capped at the lesser of six percent (6%) of historic AMT and R&D credits or $30 million. 7 For 2009, small business taxpayers are allowed to write-off up to $250,000 (indexed for inflation) of capital expenditures, subject to a phase-out once capital expenditures exceed $800,000 (indexed for inflation) For 2010 those amounts revert to $125,000 for write-offs and a $500,000 phase-out. FEDERAL BUSINESS TAX PROVISIONS (continued) 5-Year Carry-back of Net Operating Losses for Small Businesses Small businesses with gross receipts of $15 million or less may carry back Net Operating Losses (“NOLs”) to the 5 (previously 2) taxable years before the year that the loss arises (the “NOL carry-back period”). Delayed Recognition of Certain Cancellation of Debt Income (CODI) Certain businesses may recognize cancellation of debt income (CODI) over 10 years for specified types of business debt repurchased after December 31, 2008 and before January 1, 2011. 8 Incentives to Hire Unemployed Veterans and Disconnected Youth Unemployed veterans9 and disconnected youth10 are added to the groups for which businesses may claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to employees. Small Business Capital Gains For stock issued after February 17, 2009 and before January 1, 2011, a 75% exclusion for the gain from the sale of certain small business stock held for more than 5 years is allowed.11 Temporary Small Business Estimated Tax Payment Relief The ARRA reduces the 2009 required estimated tax payments for certain small businesses. Owners generally will qualify for the reduced payments if their adjusted gross income (AGI) for 2008 was less than $500,000 and if more than 50% of their 2009 gross income is generated from a "small business," which is defined as a business that, on average, had fewer than 500 employees during 2008. Temporary Reduction of S Corporation Built-In Gains Holding Period Following conversion from a taxable to an S corporation, the S-corp must hold its assets for 7 years (previously 10) to avoid a tax on built-in gains that existed at conversion. This applies to sales occurring in 2009 and 2010. Loss Offsets from Acquired Affiliates Treasury section 382, Notice 2008-83, which prevented taxpayers from claiming losses of an acquired company if those losses were incurred prior to the acquisition, is now repealed prospectively. 8 Defer tax on CODI for the first four or five years and recognize this income ratably over the next five taxable years. 9 An individual would qualify as an unemployed veteran if they were discharged or released from active duty from the Armed Forces during the five-year period prior to hiring and received unemployment compensation for more than four weeks during the year before being hired. 10 An individual qualifies as a disconnected youth if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months. 11 This provision is limited to individual investments and not the investments of a corporation. The non-excluded portion of section 1202 gain is taxed at the lesser of ordinary income rates or 28 percent, instead of the lower capital gains rates for individuals. FEDERAL MANUFACTURING RECOVERY PROVISIONS Industrial Development Bonds (IDB) ; Expansion of Tax-Exempt Provisions Certain manufacturing facilities were previously eligible for tax-exempt bond financing, but the definition of manufacturing facility is broadened to include facilities used in the manufacturing, creation, or production of intangible property described in section 197(d)(1)(C)(iii)12. Advanced Energy Investment Credit The ARRA (ARRA) establishes a 30% investment tax credit for facilities manufacturing advanced energy property13. Credits are available only for projects certified through a competitive bidding process. FEDERAL BUSINESS & INDIVIDUAL ENVIRONMENTAL TAX PROVISIONS New Markets Tax Credit The amount available for New Markets Tax Credits (NMTC) for 2008 and 2009 has been increased from $3.5 billion to $5 billion. Long-term extension and Modification of Renewable Energy Production Tax Credit The renewable energy production tax credit has been modified and extended by allowing those claiming the credit to extend the placed-in-service date for wind facilities through December 31, 2012, and for certain other qualifying facilities14 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 facilities are now eligible to take a 30% investment tax credit in the year that the facility is placed in service. Repeal Subsidized Energy Financing Limitation on the Investment Tax Credit The requirement that the investment tax credit must be reduced if the property qualifying for the investment tax credit is also financed with industrial development bonds or through any other Federal, State, or local subsidized financing program has been removed. Removal of Dollar Limitations on Certain Energy Credits The dollar limitations on certain 30% energy tax credits15 have been removed so that each property is now eligible for an uncapped 30% credit. 12 Intangible property is any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar item. 13 Advanced energy property includes technology for the production of renewable energy, energy storage, energy conservation, efficient transmission and distribution of electricity, and carbon capture and sequestration. 14 Closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities. FEDERAL BUSINESS & INDIVIDUAL ENVIRONMENTAL TAX PROVISIONS (continued) Tax Credits for Energy-Efficient Improvements to Existing Homes The tax credits for improvements to energy-efficient existing homes have been extended and increased through 2010.16 Tax Credits for Alternative Refueling Property The alternative refueling property credit provides a tax credit to businesses (e.g., gas stations) that install alternative fuel pumps, including those that dispense E85 fuel, electricity, hydrogen, and natural gas.17 Plug-in Electric Drive Vehicle Credit The ARRA modified and increased a tax credit for each qualified plug-in electric drive vehicle placed in service during the taxable year. 18 An electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit also exists as well as a tax credit for plug-in electric drive conversion kits. Addition of Permanent Sequestration Requirement to CO2 Capture Tax Credit In order to qualify for the credit for capturing and transporting carbon dioxide for use in enhanced oil recovery, the business must ensure that such carbon dioxide is permanently stored in a geologic formation. 15 [A] Business credit for qualified small wind energy property - $4,000 cap [B] Individual credits for (1) qualified solar water heating property - $2,000 cap (2) small wind energy property - $500 per KW of capacity, up to $4,000 (3) qualified geothermal heat pumps - $2,000 cap. 16 Individuals are allowed a tax credit equal to 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the taxable year. There is an aggregate tax credit cap of $1,500 on all property qualifying for the credit. 17 For 2009 and 2010, the 30% alternative refueling property credit for businesses (capped at $30,000) has been increased to 50% (capped at $50,000). Hydrogen refueling pumps remain at a 30% credit percentage; however, the cap for hydrogen refueling pumps is now $200,000. In addition, the former 30% alternative refueling property credit for individuals (capped at $1,000) has been increased to 50% (capped at $2,000). 18 The base amount of the credit is $2,500. If the qualified vehicle draws propulsion from a battery with at least 5 kilowatt-hours of capacity, the credit is increased by $417, plus another $417 for each kilowatt-hour of battery capacity in excess of 5 kilowatt-hours up to 16 kilowatt-hours. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter in which the manufacturer records its 200,000th sale of a plug-in electric drive vehicle. The credit is reduced in following calendar quarters. The credit is allowed against the alternative minimum tax (AMT).
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