American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 was signed by President Obama in early February.  The $787 billion law contains approximately $300 billion in tax relief.  Much of the tax relief was directed at individuals but small businesses will also benefit.

In addition to tax cuts, construction companies stand to benefit from other parts of the bill:

• Tax credits aimed at home buyers should help the struggling housing market.
• The 3% withholding requirement on government contracts has been postponed one more year to 2012.
• Spending provisions in the new bill provide for modernization of the country's electric grid, energy efficiency upgrades for homes and federally supported public housing, road and bridge construction, water infrastructure, public transit infrastructure and high-speed rail investments.

Listed below are brief descriptions of some of the provisions affecting small businesses and their owners.  For more information on these provisions, please contact your tax advisor.

• The Refundable First-Time Home Buyer Credit was enacted last year.  The credit was for 10% of the purchase price of the home up to $7,500.  The credit phased out for taxpayers with an AGI over $75,000 ($150,000 for married taxpayers filing jointly) and was re-payable over 15 years essentially giving the homebuyer a $7,500 interest free loan.  The new law raises the credit to $8,000 and eliminates the repayment requirement for homes purchased after January 1, 2009 and before December 1, 2009.  If the house is sold within three (3) years the credit must be reported in income.  An election may be made to treat a qualifying 2009 purchase as being made on December 31, 2008 allowing the credit to be claimed on a 2008 return.  The credit does not apply to a related party purchase.
• Bonus Depreciation equal to 50% of the cost of new qualifying property is extended through 2009.
• Enhanced Section 179 Expensing of Depreciable Property is extended until the end of 2009.  Limits are the same as 2008, $250,000 of expensing allowed with a phase-out of the deduction once total qualifying purchases exceed $800,000.
• Five (5)- year Net Operating Loss (NOL) Carryback Provision was enacted for small businesses incurring a NOL in 2008.  For this purpose, a small business is a business with less than an average of $15 million in gross receipts from 2005, 2006 and 2007.  Fiscal year filers can elect to apply the rule to a tax year beginning in 2008 instead of a tax year ending in 2008.
• Delayed Recognition of Certain Cancellation Of Debt (COD) income occurring in 2009 and 2010 is allowed.  Instead of having to recognize the COD income in the year of cancellation, qualifying businesses will be able to defer tax for the first four (4) years (for COD transactions occurring in 2010) or five (5) years (for COD transactions occurring in 2009) and then report the income ratably over the following five (5) years.
• Work Opportunity Tax Credit is expanded to include unemployed veterans and disconnected youths.  The credit is equal to 40% of the first $6,000 wages paid to qualifying employees.  An unemployed veteran qualifies if they were released from active duty within the last five (5) year period prior to hire and have received unemployment compensation for more than four (4) weeks in the year prior to being hired.  A disconnected youth is between ages 16 and 25 and not been regularly employed or attended school in the past six (6) months.
• 2009 Estimated Tax Payment Relief.  For qualifying individuals owning small businesses, estimated taxes for years beginning in 2009 can be based on 90% of the prior year liability.  Qualifying individuals have less than $500,000 of AGI on their prior year tax return and more than 50% of their gross income is from a business which employed less than 500 employees on average during the preceding year.
• A temporary reduction in the 10-year built in gains recognition period for S-corporations was enacted moving the recognition period to seven (7) years for tax years beginning in 2009 or 2010.
• The bill authorizes tax credit bonds for certain recovery zones to be used in areas where there has been significant poverty, unemployment or home foreclosures.  The bonds could be issued during 2009 and 2010 for invest in infrastructure, job training, education and economic development within the designated areas.
• 3% withholding tax on government contracts will be delayed for one year to apply to payments made after December 31, 2011.
• The act provides for a new category of tax credit bonds for the construction, rehabilitation or repair of public school facilities.  The national limit on these bonds is $22 billion ($11 billion in 2009 and the remainder in 2010).  An additional $1.4 billion of Qualified Zone Academy Bonds are allowed to finance renovations, equipment purchases and other expenses at public schools located in an empowerment zone or enterprise community.
• For 2009, the act allows taxpayers to receive a grant from the Treasury Department in lieu of tax credits for low-income housing projects.
• COBRA continuation coverage for unemployed workers will be subsidized with a 65% subsidy for up to nine (9) months.  Qualifying workers must have been involuntarily terminated between September 1, 2008 and December 31, 2009.  If an otherwise qualifying employee did not elect COBRA because it was unaffordable, they will be given an additional 60 days to elect COBRA.  Participants must attest that their income will not exceed $125,000 for individuals or $250,000 for families.

For additional information or questions about how this act may affect you or your business, contact your tax professional or Dave Phelps today.