Maxfield Peterson

Large number of significant tax provisions expire in 2009

admin — Wed, 11 Mar 2009 16:28:09 +0000

Joint Committee on Taxation’s List of Expiring Federal Tax Provisions 2008-2020 (JCX-20-09), March 9, 2009

A recent report by the Joint Committee on Taxation (JCX-20-09) has provided a list of expired and expiring tax provisions from 2008 through 2020. While it has long been common place for tax provisions to come with sunset dates, the report serves as a reminder that numerous key provisions—many of them only recently extended by the Emergency Economic Stabilization Act (EESA, P.L. 110-343) and the American Recovery and Reinvestment Act of 2009 (Recovery Act, P.L. 111-5)—are currently slated to be on the books only through 2009, while others last only through 2010. While these provisions may ultimately be extended (and some of them surely will be), taxpayers, where possible, should take action now to prevent losing out on tax breaks.

Background. The EESA extended more than 30 tax breaks that either expired at the end of 2007 or had been scheduled to expire soon. The following individual tax breaks were retroactively revived to apply for the 2008 tax year and extended to apply to the 2009 tax year: the election to deduct state and local general sales tax, the above the line deduction for higher education expenses, the above the line deduction for educator expenses, and the ability of taxpayers age 70 1/2 or older to make nontaxable IRA transfers to eligible charities. The extended business tax breaks include the research credit, the 15-year writeoff for qualified leasehold improvements and qualified restaurant property, and enhanced deductions for certain charitable contributions.

The EESA was shortly followed by the Recovery Act which extended boosted alternative minimum tax (AMT) exemption amounts for individuals for 2009 and allowed personal nonrefundable credits to offset AMT and regular tax. It also extended 50% bonus depreciation and increased expensing to 2009.

Some of the provisions expiring in 2009 (generally at the end of 2009, unless otherwise noted) include:

Increased AMT exemption amount under Code Sec. 55. The AMT exemption amounts for 2009 were increased to $46,700 for unmarrieds, to $70,950 for joint filers, and to $35,475 for marrieds filing separately. After 2009, the exemptions drop to $33,750 for unmarrieds, to $45,000 for joint filers, and to $22,500 for marrieds filing separately.
Personal tax credits allowed against regular tax and alternative minimum tax under Code Sec. 26(a)(2). After 2009, the nonrefundable personal credits—other than the adoption expense credit, the child tax credit, the saver’s credit, the residential energy efficient property credit, and the nonbusiness portion of the qualified plug-in electric drive motor vehicle credit—will be subject to the limitation under Code Sec. 26(a)(1) : the aggregate amount of those credits can’t exceed the excess of: (a) the individual’s regular tax liability, over (b) the individual’s tentative minimum tax, determined without regard to the AMT foreign tax credit.
Additional first-year 50% bonus depreciation for qualified property under Code Sec. 168(k)(2). Qualified property is allowed 50% depreciation (bonus depreciation) in the year that the property is placed in service (with corresponding reductions in basis and reductions of the regular depreciation deductions otherwise allowed in the placed-in-service year and in later years). In addition, an $8,000 increase in the first-year depreciation limit for passenger automobiles that are qualified property is also extended through 2009. (Certain aircraft and long-production-period property can continue to be placed in service through 2010.)
Increased expensing election to $250,000 (with a $800,000 investment ceiling limit) under Code Sec. 179. Taxpayers can elect to deduct the cost of any section 179 property placed in service during the tax year as an expense which is not chargeable to capital account. (For 2010, expensing is limited to $125,000 with a $500,000 investment ceiling limit (both figures indexed for inflation)).
Incremental research credit under Code Sec. 41. A taxpayer is generally allowed a research credit of 20% of the amount by which the taxpayer’s qualified research expenses exceed a specific base amount (unless the taxpayer elects the alternative simplified credit computation).
Election to accelerate AMT and research credits in lieu of additional first-year depreciation under Code Sec. 168(k)(4).
Five-year depreciation for farming business machinery and equipment under Code Sec. 168(e)(3)(B)(vii).
Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements under Code Sec. 168(e)(3)(E)(iv), (v), and (ix).
Deduction allowable for income attributable to domestic production activities in Puerto Rico under Code Sec. 199.
New markets tax credit under Code Sec. 45D. A new markets tax credit is allowed for qualified equity investments in a qualified community development entity.
Expensing of “brownfields” environmental remediation costs under Code Sec. 198(h).
Additional standard deduction for state and local real property taxes under Code Sec. 63(c)(1)(C). The real property tax deduction—the lesser of: (1) the amount allowable as a deduction under the itemized deduction rules for state and local real property taxes; or (2) $500 ($1,000 for a joint return)—is included as a component of the standard deduction.
Deduction of State and local general sales taxes under Code Sec. 164(b)(5). At the taxpayer’s election, state and local general sales taxes can be deducted in lieu of a state and local income tax deduction.
First time homebuyer credit under Code Sec. 36 (expiring in 11/30/09). A credit of $8,000 ($4,000 for marrieds filing separately) is allowed for first-time homebuyer (as specially defined). The credit isn’t recaptured unless residence is sold or ceases to be a principal residence within 36 months of purchase.
Deduction for State sales tax and excise tax on the purchase of motor vehicles under Code Sec. 164(b)(6)(G). A new provision in the Recovery Act allows a standard or itemized deduction for sales and excise taxes imposed on most new vehicles purchased on or after Feb. 17, 2009 and before 2010.
Above-the-line deduction for qualified tuition and related expenses under Code Sec. 222.
Deduction for certain expenses of elementary and secondary school teachers under Code Sec. 62.
Credit for construction of new energy efficient homes under Code Sec. 45L. A contractor can claim a credit of $2,000 (for a 50% energy reduction in energy usage) or $1,000 (for a 30% energy reduction in energy usage) for each new energy efficient home he build.
Exclusion of unemployment compensation benefits from gross income under Code Sec. 85(c).
Encouragement of contributions of capital gain real property made for conservation purposes under Code Sec. 170(b)(1)(E) and Code Sec. 170(b)(2)(B). Special higher charitable deduction limitations on qualified conservation contributions by qualified farmers or ranchers expanded to apply to contributions of apparently wholesome food inventory.
Enhanced charitable deduction for contributions of food inventory under Code Sec. 170(e)(3)(C). A deduction is allowed for contributions by a noncorporate taxpayer from its trade or business of apparently wholesome food inventory for the care of the ill, needy, or infants.
Enhanced charitable deduction for contributions of book inventories to public schools under Code Sec. 170(e)(3)(D).
Enhanced deduction for corporate contributions of computer equipment for educational purposes under Code Sec. 170(e)(6)(G).
Waiver of the minimum required distribution (RMD) rules for IRAs and defined contribution plans under Code Sec. 401(a)(9)(H). Under the RMD rules, participants in qualified plans and individual retirement accounts and annuities (IRAs) are generally required to begin taking distributions no later than Apr. 1 of the year after they attain age 70-1/2. (For an employer-provided qualified retirement plan, the required beginning date for an individual who is not a 5% owner of the employer maintaining the plan is delayed to Apr. 1 of the year following the year in which the individual retires.)
Tax-free distributions from individual retirement plans for charitable purposes under Code Sec. 408(d)(8). An up-to-$100,000 annual exclusion from gross income is allowed for taxpayers age 70 1/2 who make otherwise taxable IRA distributions that are qualified charitable distributions. The distributions aren’t subject to the charitable contribution percentage limits and are neither included in gross income nor claimed as a deduction on the taxpayer’s return.

Source: Federal Tax Updates on Checkpoint Newsstand tab 3/11/09

If you would like more detailed information about the implications of this article, please give us a call. We would be glad to assist you in taking advantage of any relevant tax provisions before they expire.

Stimulus Act Provides Substantial Tax Breaks for Businesses and Individuals

admin — Sat, 28 Feb 2009 20:37:05 +0000

On February 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). While approximately two-thirds of the nearly $800 billion stimulus act is focused on government spending initiatives intended to create jobs and jumpstart the economy, about one-third provides tax breaks for businesses and individuals.

Businesses will enjoy new tax breaks
The act provides some new breaks that will benefit many businesses:

Reduced estimated tax payment requirements
For 2009, ARRA reduces the estimated tax payment requirements for many small business owners. 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.

Deferral of income from cancellation of debt
Taxpayers generally must recognize cancellation-of-debt income (CODI) when they cancel — or repurchase — debt for an amount less than its adjusted issue price. In certain situations, ARRA allows businesses to defer CODI generated from repurchasing business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year 2014 and then report the income ratably over the 2014 through 2018 tax years.

S corporation built-in gains tax relief
Although a C corporation conversion to an S corporation isn’t a taxable event, the S corporation normally must hold on to its assets for 10 years to avoid tax on any built-in gains that existed at the time of the conversion. Under ARRA, for tax years beginning in 2009 and 2010, there generally will be no tax on an S corporation’s net unrecognized built-in gain if the seventh tax year in the recognition period occurred before the 2009 and 2010 tax years.

Other business breaks expanded
The act expands some important tax breaks for businesses:

Net operating loss carryback
Generally, a net operating loss (NOL) may be carried back two years to generate a current tax refund, providing a cash infusion in times of loss. For 2008 (not 2009), ARRA extends the maximum NOL carryback to five years for small businesses with gross receipts of $15 million or less.

Work Opportunity credit
Employers can claim a credit equal to 40% of the first $6,000 of wages paid to employees in certain target groups, such as ex-felons, food stamp recipients and disabled veterans. ARRA expands the eligible target groups to include unemployed veterans and disconnected youth. This expanded benefit applies to such workers hired in 2009 and 2010.

Depreciation breaks extended
To spur additional investment, ARRA extends the increase in the Section 179 limit for initial year expensing to $250,000 (from $125,000 indexed for inflation). The expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000 (up from $500,000 indexed for inflation). The new higher limit applies for calendar year 2009 or a business’ fiscal year that begins in 2009.

Another depreciation-related provision extends the special allowance for certain property, generally if acquired in 2009. For eligible property, the special depreciation amount is equal to 50% of its adjusted basis. For passenger automobiles that are eligible property under the 50% bonus depreciation rules, the $8,000 increase for the first-year limit on depreciation also is extended to new vehicles placed in service in 2009.

Last year, corporate taxpayers were also allowed to accelerate their alternative minimum tax (AMT) and research and development (R&D) credits in lieu of taking the 50% bonus depreciation. That break has now been extended through 2009.

Energy-related breaks for businesses expanded
ARRA creates or expands several energy-related breaks for businesses, such as the:

Advanced energy investment credit,
Renewable electricity production credit, and
Alternative fuel pump tax credit.

Individuals also enjoy new tax breaks
ARRA also provides some new tax breaks for individuals:

New relief for most workers, retirees and other Social Security recipients
For 2009 and 2010, ARRA creates the Making Work Pay credit of up to $800 for joint filers and $400 for other filers. The credit generally is phased out for joint filers with AGIs exceeding $150,000 and for other filers with AGIs exceeding $75,000. Unlike last year’s “recovery rebate,” which was distributed via checks mailed to taxpayers, the new credit will generally be “paid” through a reduction in income tax withholding.

The act also provides a one-time payment of $250 to many people on fixed incomes, such as Social Security recipients and disabled veterans. Similarly, it provides a one-time refundable tax credit of $250 to certain government retirees who aren’t eligible for Social Security benefits. Both the $250 payment and the $250 credit reduce any allowable Making Work Pay credit.

New sales tax deduction for vehicle purchases
ARRA creates a new above-the-line deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motorcycles and recreational vehicles. The deduction is available for vehicles purchased from February 17, 2009, through Dec. 31, 2009.

The deduction is not, however, available for tax attributable to vehicle value in excess of $49,500. The deduction also phases out based on AGI, but the limits are higher than those for the Making Work Pay credit: The phaseout begins for joint filers with AGIs exceeding $250,000 and for other filers with AGIs exceeding $125,000.

Other individual breaks expanded
The bulk of the tax relief for individuals involves expanding existing breaks. Here are the key changes to be aware of:

Credit for first-time homebuyers
Last year, a refundable credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but ARRA extends its availability to purchases made before Dec. 1, 2009. For qualifying purchases made after Dec. 31, 2008, the act also increases the maximum credit from $7,500 to $8,000. Perhaps most significant, the act eliminates the repayment obligation for taxpayers whose qualifying purchase occurs after Dec. 31, 2008 — except in situations where a home is sold within three years of purchase.

American Opportunity education credit (previously called the Hope credit)
For 2009 and 2010, ARRA expands this credit to cover 100% of the first $2,000 of tuition and related expenses (including books) and 25% of the next $2,000 of such expenses. The maximum credit is $2,500 per year for the first four years of post secondary education. (The maximum Hope credit was $1,800 and applied to only the first two years of post secondary education.) The credit phases out for joint filers with AGIs exceeding $160,000 and for other filers with AGIs exceeding $80,000.

529 savings plans
529 plan distributions used to pay qualified education expenses — tuition, room, board, mandatory fees and books — are generally tax free. For expenses paid in 2009 and 2010, ARRA expands the definition of qualified education expenses to include computers and computer technology.

Qualified small business stock gain exclusion
Generally, taxpayers selling qualified small business (QSB) stock are allowed to exclude 50% of their gain as long as they’ve held the stock for at least five years. ARRA increases the exclusion to 75% if the stock is issued after February 17, 2009, and before Jan. 1, 2011.

AMT relief granted early this year
One tax provision affecting individuals that many thought wouldn’t be enacted until later in the year is the extension of alternative minimum tax (AMT) relief. ARRA provides a one-year “patch” that increases the AMT exemption. For married couples filing jointly, the 2009 exemption is $70,950. For singles and heads of households, it’s $46,700, and for married filing separately, it’s $35,475.

The patch also expands the AMT income ranges over which the exemptions phase out and only partial exemptions are available. The 2009 phaseout ranges are now $150,000 to $433,800 for married filing jointly, $112,500 to $299,300 for singles and heads of households, and $75,000 to $216,900 for married filing separately. The exemption is completely phased out if AMT income exceeds the top of the applicable range.

Additionally, ARRA extends a provision through 2009 that allows certain non refundable personal tax credits to provide a benefit against the AMT. These include the dependent care credit, the American Opportunity credit and the Lifetime Learning credit. The act also excludes from the AMT any income from tax-exempt bonds issued in 2009 and 2010, along with 2009 and 2010 refundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.

Energy-related breaks expanded for individuals
ARRA creates or expands several energy-related breaks for individuals, such as:

Transit benefits,
Residential energy property credit,
Residential energy-efficient property credit, and
Plug-in electric vehicles credit.

Help given to laid-off workers
Although much of ARRA focuses on working Americans, it also provides some tax relief for laid-off workers. For 2009, the act suspends federal income tax on the first $2,400 of unemployment benefits per recipient.

Take full advantage
ARRA may significantly affect your tax liability in a variety of ways. If you would like more detailed information about this new tax law, please give us a call. We would be glad to help you determine exactly how ARRA will affect your tax liability — and what you should do to take full advantage of the act.

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