Daily Tax Update - January 23, 2009

WAYS AND MEANS PASSES STIMULUS BILL:  Last night, the House Ways and Means Committee approved a $303.7 billion stimulus tax package (the “American Recovery and Reinvestment Tax Act of 2009”) on a 24 to 13 party-line vote.

The business tax provisions in the bill include:

  • Extension of bonus depreciation.  Businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Last year, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off fifty percent of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 for use in the United States. The bill would extend this temporary benefit for capital expenditures incurred in 2009.
  • Extension of enhanced small business expensing.  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. Until the end of 2010, small business taxpayers are allowed to write-off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation). 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 bill would extend these temporary increases for capital expenditures incurred in 2009.
  • 5-year carryback of net operating losses.  Under current law, net operating losses may be carried back to the two years before the year that the loss arises (the “carryback period”) and carried forward to each of the succeeding twenty years after the year that the loss arises (the “carryforward period”). Losses that are carried back may generally only be used to offset ninety percent (90%) of a taxpayer’s alternative minimum tax liability. For 2008 losses and 2009 losses, the bill would extend the maximum carryback period for net operating losses from two years to five years and would allow net operating loss carry backs to be used to offset one hundred percent (100%) of the taxpayer’s alternative minimum tax liability. The 2008 losses and 2009 losses eligible for this carry back provision will be, at the election of the taxpayer, for either (1) losses incurred in taxable years ending in 2008 and 2009 or (2) losses incurred in taxable years beginning in 2008 and 2009. The net operating losses of companies electing this carry back provision will be reduced by ten percent (10%). This benefit would be denied to companies that received money from the Temporary Asset Relief Program, Fannie Mae, and Freddie Mac.
  • Repeal of Treasury Section 382 Notice.  Last year, the Treasury Department issued Notice 2008-83, which liberalized rules in the tax code that are intended to prevent taxpayers that acquire companies from claiming losses that were incurred by the acquired company prior to the taxpayer’s ownership of the company. The bill would repeal this Notice prospectively. This is the only revenue raiser in the bill and the Joint Committee on Taxation estimates that this provision would raise approximately $7 billion.
  • The bill would also:
    • waive the repayment requirement of the first-time home buyer tax credit;
    • increase the earned income tax credit for 2009 and 2010;
    • modify the HOPE scholarship credit to create a new American Opportunity tax credit;
    • extend the increased small-business expensing under section 179 through 2009;
    • provide relief to state and local governments through the issuance of tax-preferred bonds; and
    • provide several energy-related tax incentives.
  • House Majority Leader Steny Hoyer said that he expects the bill to come to a floor vote on January 28 and a final bill to be presented to the President before February 16.
  • The summary of the Ways and Means bill can be accessed here
  • The text of the bill can be accessed here.  

SENATE FINANCE COMMITTEE RELEASES ECONOMIC STIMULUS PROPOSAL:  Senate Finance Chairman Max Baucus unveiled his panel's $455 billion portion of the stimulus package today, including $275 billion in tax cuts for families and businesses as well as $180 billion in aid to the poor, unemployed, and cash-strapped state governments. The Senate Finance Committee is scheduled to mark up the bill on January 27th.

According to the Committee, the bill contains the following tax relief provisions for businesses:

  • Increase of the Net Operating Loss Carry Back Period. The proposal would extend the carry back period for NOLs from 2 years to 5 years for NOLs arising in taxable years ending in 2008 and 2009. This provision would not apply to entities that received funding from TARP (Troubled Asset Relief Program). This proposal is estimated to cost $17.2 billion over ten years.
  • Delayed Recognition of Certain Cancellation of Debt Income.  Certain businesses will be allowed to recognize cancellation of indebtedness income over 4 years for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011. This proposal is estimated to cost $511 million over ten years. 
  • Extension of Elective Expensing (Section 179).  The February 2008 stimulus bill increased the expensing limit to $250,000 and the phase-out to $800,000 for 2008. The proposal would extend the provisions to 2009. This proposal is estimated to cost $41 million over ten years.
  • Extension of Bonus Depreciation.  The February 2008 stimulus bill allowed a trade or business to depreciate an additional 50 percent of the cost of an asset acquired and placed into service in 2008. This proposal would extend bonus depreciation for calendar year 2009 at 50 percent. This proposal is estimated to cost $5.3 billion over ten years.
  • Extension of Monetization of Accumulated AMT and R&D Credits in Lieu of Bonus Depreciation.  This provision 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 research and development (R&D) credits to the extent such taxpayers invest in assets that qualify for bonus depreciation. The amount is capped at the lesser of 6 percent of outstanding and unused AMT and R&D credits or $30 million. This proposal is estimated to cost $805 million over ten years. 
  • Expansion of the Work Opportunity Tax Credit (WOTC).  The proposal would add homeless veterans and disadvantaged youth as qualified target groups for WOTC. This proposal is estimated to cost $208 million over ten years.
  • New Markets Tax Credit.  The proposal would authorize an additional $1.5 billion for the 2008 allocation round and an additional $1.5 billion for the 2009 allocation round. Tax credits for 2009 allocations made after the date of enactment would be allowed against the alternative minimum tax. This proposal is estimated to cost $1.05 billion over ten years. 
  • Industrial Development Bonds.  The proposal would modernize certain tax exempt qualified small issue bonds or industrial development bonds (IDBs) for facilities that create or manufacture intangible property. The proposal would also clarify which physical components of any given facility are eligible for such tax exempt financing. This proposal is estimated to cost $203 million over ten years.
  • Duty Refund Recollection.  This proposal would prohibit US Customs and Border Protection (CBP) from demanding that US lumber, steel, and other companies repay duties that CBP collected on Canadian and Mexican imports, and then distributed to the companies between 2001 and 2005. This proposal is estimated to cost $90 million over ten years.
  • Small Business Capital Gains.  The provision increases the exclusion for individuals on the gain from the sale of certain small business stock held for more than five years from 50 percent to 75 percent. These changes are for stock issued after the date of enactment and before January 1, 2011. This provision is estimated to cost $829 million over ten years.
  • A summary of the provisions can be accessed here.  
  • The Joint Committee on Taxation’s description of the bill can be accessed here.

MISCELLANEOUS GUIDANCE ISSUED TODAY:
Revenue Procedure 2009-16 supplements Rev. Proc. 2008-65, 2008-44 I.R.B. 1082 by providing guidance on the time and manner for making the new § 168(k)(4) election, the allocation of the credit limitation increases allowed by this election among members of a controlled group, the effect of the election on partnerships with corporate partners that make the election, the application of § 168(k)(4) to S corporations, and the election under § 3081(b) of the Housing and Economic Recovery Act of 2008 by certain automotive partnerships. 

Corrected version of Notice 2009-15 sets forth the manner in which the Treasury Department and the Internal Revenue Service will determine and announce the credit rates for certain tax credit bonds for purposes of sections 54, 54A, 1400N(l), and similar provisions.

The previous version contained the incorrect effective date of January 22, 2007. The correct effective date is January 22, 2009.

TAX BILLS INTRODUCED JANUARY 22ND:
H.R.638: To amend the Internal Revenue Code of 1986 to exempt from the harbor maintenance tax certain commercial cargo loaded or unloaded at United States ports.
Sponsor: Rep Cummings, Elijah E. [MD-7] (introduced 1/22/2009)      Cosponsors (None)

H.R.650: To amend the Internal Revenue Code of 1986 to increase the credit amount for new qualified alternative fuel motor vehicles weighing more than 26,000 pounds and to increase the credit for certain alternative fuel vehicle refueling properties, and for other purposes.
Sponsor: Rep Kagen, Steve [WI-8] (introduced 1/22/2009)      Cosponsors (None)

H.R.656: To amend the Internal Revenue Code of 1986 to allow certain individuals who have attained age 50 and who are unemployed to receive distributions from qualified retirement plans without incurring a 10 percent additional tax.
Sponsor: Rep Platts, Todd Russell [PA-19] (introduced 1/22/2009)      Cosponsors (None)

S.296: A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.
Sponsor: Sen Chambliss, Saxby [GA] (introduced 1/22/2009)      Cosponsors (3)

S.304: A bill to amend the Internal Revenue Code of 1986 to stimulate business investment, and for other purposes.
Sponsor: Sen Dorgan, Byron L. [ND] (introduced 1/22/2009)      Cosponsors (None)

S.312: A bill to amend the Internal Revenue Code of 1986 to allow a refundable credit against income tax for the purchase of a principal residence by a first-time homebuyer.
Sponsor: Sen Cardin, Benjamin L. [MD] (introduced 1/22/2009)      Cosponsors (1)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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