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Annette Nellen
Annette Nellen
The Continuation of Yearly Stimulus Legislation

As practitioners continue to review and apply tax provisions from the 2007 and 2008 stimulus and relief acts, yet another set of provisions has been enacted.

February 26, 2009
by Annette Nellen, CPA/Esq.

The American Recovery and Reinvestment Act of 2009 (ARRA) (P.L. 111-5; February 2009) includes numerous provisions intended to stimulate the economy. The spending in this $787 billion stimulus package occurs through both tax provisions and direct appropriations (CBO cost estimate February 2009). ARRA increases the public debt limit to $12.1 trillion. The administration expects ARRA to create three million to four million jobs over two years (White House release February 2009).

This article focuses on tax provisions affecting corporations. Due to its size and details, a review of the ARRA text is recommended (H.R. 1 documents, conference report (PDF) and House Ways and Means tax summary (PDF)).

The Stimulus Theory

One concern in a recession is how long it will last. While it could run its natural course, there is a loss of output during the downturn. Reduced spending, unemployment and idle factories translate to a "shortfall in the nation's output relative to its potential" (Congressional Budget Office (CBO), January 2009 testimony). CBO observes that the current shortfall "would be the largest — in terms of both length and depth — since the Depression of the 1930s." Per the CBO, efforts to increase short-term demand for goods and services, "if well designed, could hasten the economy's recovery and reduce the overall loss of output during the recession."

Tax Provisions

ARRA tax provisions are in the following subtitles of Title I of Division B (PDF) (appropriations are in Division A (PDF)):

A: Tax relief for individuals and families (includes tax credit for workers, temporary increase in earned income tax credit, increase and extension of the §36 first-time homebuyer credit, sales tax deduction for purchase of certain motor vehicles and AMT "patch" for 2009).
B: Energy incentives (includes extension of various incentives, election to claim investment credit rather than production credit).
C: Tax incentives for business (summarized below).
D: Manufacturing recovery provisions (includes a temporary modification of the definition of industrial development bonds for tax exempt financing purposes (§144) to include facilities that create intangible property and a new 30 percent credit at §48C for a "qualifying advanced energy projects").
E: Economic recovery tools (includes recovery zone bonds to be allocated among the states based on unemployment data and a temporary increase in the new market credit at §45D).
F: Infrastructure financing tools (includes various changes to tax-exempt interest expense rules and eliminates the passive activity bond AMT preference item for bonds issued in 2009 and 2010).
G: Other provisions (includes new elective, temporary grant programs administered by Treasury in lieu of the low-income housing credit and certain energy credits).
H: Prohibition on collection of certain payments made under the Continued Dumping and Subsidy Offset Act of 2000.
I: Trade Adjustment Assistance changes.

Business Tax Incentives

  • Bonus depreciation at §168(k) is extended through 2009. The election to accelerate minimum tax and research credits in lieu of claiming bonus depreciation is also extended through 2009 with special rules available for "extension property."
  • Businesses with average annual gross receipts of $15 million or less may elect up to a five year carryback of a 2008 net operating loss (NOL).
  • If more than 50 percent of an individual's 2008 gross income is from a small business and 2008 adjusted gross income (AGI) was under $500,000, the individual may base 2009 estimated tax payments on 90 percent of the prior year's tax rather than 100 percent.
  • The work opportunity credit (§51) is expanded to include unemployed veterans and disconnected youth hired in 2009 or 2010.
  • New §108(i) allows a taxpayer to elect to defer over a 10-year period, cancellation of debt income from certain business debt arising from reacquisition in 2009 or 2010.
  • The original issue discount (OID) limitation rules of §163(e)(5) are temporarily suspended for applicable high-yield discount obligations issued in an exchange after August 2008 and before January 2010. The IRS is given authority to use a rate higher than the Applicable Federal rate (AFR) in applying §163(e)(5) if the obligation is issued after December 2009 in tax years ending after such date, if the higher rate "is appropriate in light of distressed conditions in the debt capital markets" §163(i)(1)).
  • For stock issued after February 2009 and before January 2011, the §1202 qualified small business stock gain exclusion is increased from 50 percent to 75 percent.
  • For sales in tax years beginning in 2009 and 2010, the recognition period for the tax on built-in gains of S corporations (§1374) is reduced from 10 years to seven.
  • Notice 2008-83 on §382 ownership changes does not apply for ownership changes occurring after January 2009. Unlike the other tax changes, this provision is a revenue raiser.
  • New §382(n) provides that the §382 loss limitation does not apply to ownership changes occurring after February 2009 that result from a restructuring plan required per an agreement entered into with the Treasury Department under the Emergency Economic Stabilization Act of 2008 (PL 110-343).

Observations

The number and range of changes in ARRA is significant. Taxpayers and their advisers will want to review the new law closely to be sure they act in time to benefit from the new and extended tax reduction provisions. Many taxpayers though will find that some provisions provide no relief due to dollar limitations or inability to act within the brief window of applicability of most of the changes.

Despite the great number of stimulus provisions, some that arguably meet the stimulus label were overlooked. For example, the §965 temporary dividends received deduction to encourage repatriation of foreign earnings for investment in the U.S. could have been reinstated. Also, the longer NOL carryback period could have been made available to businesses of all sizes. Several ARRA provisions will indirectly affect businesses such as those that produce or sell property that generates a tax benefit for the purchaser such as certain energy property or motor vehicles.

ARRA includes an interesting approach for getting certain tax benefits to taxpayers. ARRA §1603 provides a grant in lieu of credit program for certain energy credits, administered by Treasury. The purpose is to enable a cash benefit even if the taxpayer does not have sufficient tax liability to claim a credit. The grant approach may also get the funds to taxpayers more quickly than the credit avenue. It is not clear why the credits were not made refundable instead or why they were not replaced entirely with grants administered by the Department of Energy.

Finally, state laws should be reviewed to see if they conform to the federal changes or add their own stimulus — or, more likely, impose tax increases, given budget problems in many states.

Tracking

In promoting this sizable stimulus bill, President Obama spoke of the need for accountability and transparency. The White House has established a special Web site, to enable people to obtain information on ARRA and to track how the money is spent.

Conclusion

It remains to be seen what effect ARRA will have on the economy. The extent of the changes included in ARRA and earlier stimulus acts should certainly keep tax practitioners busy through and likely beyond the recession. And we will see more tax changes this year as Congress begins to address expiring tax cuts, an energy plan, health care reform and President Obama's tax policy plan.

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Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San Josť State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA's Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.