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10 Significant Changes in Tax Incentives Made By New Stimulus Law

By: Gardiner Thomsen CPAsemail

The latest economic stimulus law, enacted on February 17, 2009, contains tax incentives designed to get the stagnant U.S. economy moving again. Here are 10 significant changes that might have an impact on your business.

Change #1: Some Businesses Can Carry Back 2008 Losses Up to Five Years

Under the new law, eligible businesses can elect to carry back 2008 net operating losses (NOLs) for either three, four, or five years to claim refunds of federal income taxes paid for earlier years. Certain deadlines apply, and the election privilege is only allowed for businesses with average annual gross receipts of $15 million or less for the three-year period that precedes the loss year for which the election is made.

Change #2:  Extension of $250,000 Section 179 Depreciation Allowance

The new law extends the Section 179 first-year depreciation write-off by one year, increasing the maximum deduction from $133,000 to $250,000 for 2009. The new law also extends the phase-out threshold for new qualifying property by one year, increasing the threshold from $530,000 to $800,000 for 2009. For tax years beginning in 2010, the maximum deduction amount and the threshold will fall back to much lower amounts unless Congress takes further action.

Change #3:  Extension of 50 Percent First-Year Bonus Depreciation

The Recovery Act extends the beneficial 50 percent first-year bonus depreciation provision to cover qualifying new assets that are placed in service by December 31, 2009. (A later deadline applies to limited assets described below.) To be eligible for 50 percent first-year bonus depreciation, an asset must be new qualified property and must be placed in service by December 31, 2009 or by December 31, 2010 for certain long-lived assets, transportation equipment, and aircraft.

Change #4:  Bigger First-Year Write-offs for Autos and Light Trucks

For a new passenger auto or light truck that falls under the luxury auto depreciation limitation rules, the 50 percent first-year bonus depreciation benefit translates into an $8,000 increase in the maximum write-off obtained in the first year. Assuming 100% business use of the vehicle, for new cars placed in service in 2009, the estimated maximum first-year depreciation deduction is $10,960. For new light trucks the estimated maximum first-year depreciation deduction is $11,060.

Change #5:  Favorable AMT Depreciation Side Effect

Fortunately, 50 percent first-year bonus depreciation applies equally for both regular tax and Alternative Minimum Tax (AMT) purposes. Just as good, there are no AMT adjustments necessary for depreciation deductions claimed for the remaining 50 percent of depreciable basis left after subtracting the bonus depreciation write-off. In other words, when 50 percent first-year bonus depreciation is claimed for an asset, the rules are the exactly the same for both regular tax and AMT purposes.

Change #6:  Corporate Option to Claim Certain Credits Instead of Bonus Depreciation

Under prior rules, corporations could elect to forego claiming 50% first-year bonus depreciation deductions, for qualified assets that were purchased after March 31, 2008 and placed in service by December 31, 2008 (or December 31, 2009 for certain assets), in lieu of using other credits, allowing the company to offset both regular tax and AMT liabilities.

The new law extends these deadlines to December 31, 2009 and December 31, 2010, respectively, and it also provides electing corporations with three options for choosing the best mix of available credits and bonus depreciation.

Change #7:  Income Triggered by Reacquiring Taxpayer’s Own Debt at a Discount Can Be Deferred

Under the new law, a business that reacquires its own debt at a discount in calendar years 2009 and 2010 can defer the resulting taxable debt discharge income (DDI) and spread the DDI over five years after the deferral period is over. This may allow financially stressed businesses to restructure their debts in a tax-favored manner.

Change #8:  Tax Break for Some S Corporation Built-In Gains

When a C corporation switches to S corporation status, the built-in gains tax (BIG tax) applies to assets that have built-in gains as of the C-to-S corporation conversion date. The new law grants a temporary BIG tax exemption for gains recognized from an S corporation’s tax years beginning in 2009 and 2010, but only if seven years have passed since the conversion date.

Change #9:  Subsidized COBRA Coverage for Terminated Workers.

COBRA (Consolidated Omnibus Budget Reconciliation Act) Assistance eligible individuals who were involuntarily terminated as of September 1st, 2008 are now provided a new 60-day period to elect coverage if they had previously declined it. All COBRA eligible individuals as of March 1st will only be required to pay 35 percent of the health plan premiums while the federal government will subsidize the remaining 65 percent. The government subsidy will generally come in the form of a federal payroll tax credit for the employer on its quarterly employment tax return. This change is explained in more detail in a separate article in this newsletter.

Change #10:  Liberalized Gain Exclusion for New Issues of Small Business Stock

Under Section 1202 of the tax code, non-C corporation sellers of qualified small business corporation stock can potentially exclude up 50 percent of their gains from federal income taxation (subject to several limitations).

To encourage more investment in qualified small business corporations, the Recovery Act increases the gain exclusion percentage from 50 to 75 percent. This beneficial change only applies to qualifying sales of eligible shares that are issued between February 18, 2009 and December 31, 2010.

This is just an overview of only 10 important changes made by the new Stimulus Law. For further detail on these and additional changes potentially affecting the tax liability of your company, please call us. We’re here to help.