Tax Update: Business Tax Changes in the American Recovery and Reinvestment Act of 2009

By: Christopher D. Speer

Apr 23, 2009

In an effort to stimulate business and provide incentive for capital investment, the recently enacted American Recovery and Reinvestment Act of 2009 (the "Act") includes numerous changes to tax provisions affecting individuals and businesses. The following is an overview of certain tax provisions which may impact your business.

Extension of Bonus Depreciation

Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedules would allow by permitting these businesses to immediately write off 50 percent of the cost of depreciable property acquired in 2008 for use in the United States. The Act extends this temporary benefit for qualifying property purchased and placed into service in 2009. Qualified property includes property subject to accelerated depreciation recovery periods of 20 years or less, computer software, water utility property and qualified leasehold improvement property (i.e. certain improvements made to a building or its structural components by a lessee, sublessee or lessor to nonresidential property more than three years after the building was first placed in service). Qualified property does not include residential or nonresidential real property subject to straight-line depreciation. For example, developer constructs a multifamily project for a total cost of $10 million and pursuant to a cost segregation study, $1.5 million of the costs are properly allocated to depreciable property with an accelerated depreciation recovery period of 20 years or less. In such case, the $1.5 million of costs allocated to depreciable property with an accelerated depreciation recovery period of 20 years or less, may qualify for the bonus depreciation election.

Extension of Enhanced Small Business Expensing (Section 179)

In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase out threshold for 2008 to $800,000. The Act extends these temporary increases for capital expenditures incurred in 2009.

Extension of Monetization of Accumulated Alternative Minimum Tax (AMT) and Research and Development (R&D) Credits in Lieu of Bonus Depreciation

The Act extends the provision contained in the Foreclosure Prevention Act of 2008 and allows AMT and loss taxpayers in 2009 to receive 20 percent of the value of their old AMT or R&D credits to the extent such taxpayers invest in assets that qualify for bonus depreciation.

Expanded Carryback of Net Operating Losses for Small Businesses

Under pre-Act law, net operating losses (NOLs) could be carried back to the two years before the year that the loss arose and carried forward to each of the succeeding 20 years thereafter. For 2008, the Act extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Delayed Recognition of Certain Cancellation of Debt Income (CODI)

To benefit certain businesses that buy their own debt at a discount, the Act lets such businesses recognize CODI over 10 years (defer tax on CODI for the first four or five years then recognize the CODI ratably over the following five tax years) for specified types of business debt purchased in 2009 or 2010.

Qualified Small Business Stock

The Act increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50 to 75 percent for stock issued after the enactment date, February 17, 2009, and before 2011.

S Corporation Holding Period

The Act temporarily shortens the holding period of assets subject to the "built-in gains tax" from 10 years to seven years.

Repeal of Internal Revenue Service's (IRS's) Built-in Loss Rules

The Act prospectively repeals Notice 2008-83, the controversial IRS guidance providing that if a bank recognizes a loss from the disposition of a loan or takes a bad debt deduction under the specific charge-off or reserve method of accounting after a change in ownership, that loss or deduction will not be treated as a built-in loss attributable to the pre-acquisition period for purposes of Code Section 382.

Incentives to Hire Unemployed Veterans and Disconnected Youth

Businesses are allowed to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups. The Act expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past six months.