American Recovery and
Reinvestment Act of 2009
Post-2008 election to trade bonus and accelerated depreciation for otherwise-deferred credits is allowed if an earlier election wasn't made.
For property placed in service after Dec. 31, 2008, in tax years ending after that date, the Recovery Act provides that if a taxpayer didn't make the Code Sec. 168(k)(4) election for its first tax year ending after Mar. 31, 2008:
... the taxpayer may make the Code Sec. 168(k)(4) election for its first tax year ending after Dec. 31, 2008 and each later year; and
... in that case, the election applies only to eligible qualified property that is "extension property."
Boosted Code Sec. 179 expensing for 2009.
Under pre-Act law, the non-indexed annual expensing limit under Code Sec. 179 for tax years beginning in 2008 was $250,000, but it dropped to $125,000 for tax years beginning after 2008 and before 2011, with this amount annually adjusted for inflation (for tax years beginning after 2008). For tax years beginning after 2010, the maximum amount will be $25,000, with no annual adjustment for inflation. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of a specified investment ceiling. For tax years beginning in 2008, the investment ceiling limitation was $800,000, but under pre-Act law, for tax years beginning after 2008 and before 2011, it dropped to $500,000, as annually adjusted for inflation (starting in tax years beginning after 2008). For tax years beginning after 2010, the investment ceiling limit will be $200,000, with no annual adjustment for inflation.
The maximum regular Section 179 expensing election amount is increased by $35,000 for: (a) qualified zone property of an enterprise zone business under Code Sec. 1397(a)(1); and (b) qualified renewal property acquired after 2001 and before 2010, and placed in service in a renewal community, under Code Sec. 1400J. In addition, the amount taken into account under the investment-ceiling phaseout rule is 50% of the cost of such property. Under Code Sec. 179(e), the expensing allowance is increased by $100,000, and the investment ceiling limit is increased by $600,000, for qualified disaster assistance property placed in service after Dec. 31, 2007, with respect to disasters declared after that date and before Jan. 1, 2010.
New law. For tax years beginning in 2009, the Recovery Act increases the expensing limit to $250,000 and the investment ceiling limit to $800,000. The $250,000 and $800,000 amounts are not indexed for inflation.
Observation: Under the Recovery Act, most small businesses, and even some moderate sized businesses with moderate capital equipment needs, may be able to claim a full deduction for the cost of business machinery and equipment purchased in 2009, thereby reducing their effective cost for the assets. What is more, there is no alternative minimum tax adjustment for property expensed under Code Sec. 179.
Observation: The increased expensing and ceiling limits under the Recovery Act also affect the special expensing rules for enterprise zone property, renewal property, and for qualified disaster assistance property. Thus, the maximum expensing allowance for qualified disaster assistance property is $350,000 for 2009 ($250,000 +$100,000), and the investment ceiling limit is $1,400,000 for 2009 ($800,000 + $600,000). The maximum expensing allowance for qualified enterprise zone and renewal property is $285,000 for 2009 ($250,000 + $35,000), with only 50% of the property taken into account in applying the investment ceiling limit.
Small businesses may elect longer NOL carryback period.
In general, net operating losses (NOLs) may be carried back two years and forward 20 years. Different rules apply for certain types of losses. For example, a three-year carryback is -allowed for an "eligible loss," including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. A five-year carryback is allowed for a "farming loss," a "qualified disaster loss," and certain
amounts related to specified disasters. Certain NOLs can't be carried back at all- e.g., NOLs attributable to interest allocable to a corporate equity reduction transaction (CERT) (so-called "excess interest losses").
New law. For NOLs arising in tax years ending after Dec. 31, 2007, the Recovery Act permits small businesses to elect to increase the NOL carryback period for an applicable 2008 NOL (the "applicable NOL") from 2 years to any whole number of years which is more than 2 and less than 6.
A small business for this purpose is defined as a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (under Code Sec. 448(c), as modified) for the three-tax-year period (or shorter period of existence) ending with the tax year in which the loss arose are $15 million or less.
Observation: The increased carryback period can generate a refund for a small business because it allows the taxpayer to offset income that has already been taxed. Under pre-Act law, a taxpayer couldn't use the NOL to offset the taxable income for the fifth, fourth, and third tax years preceding the NOL year, and so couldn't have received a refund of the tax paid on those amounts.
An applicable 2008 NOL is the taxpayer's NOL for: (1) any tax year ending in 2008; or (2) at the taxpayer's election, any tax year beginning in 2008.
If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an "excess interest loss" (i.e., interest allocable to the CERT) for a "loss limitation year," the loss is an NOL. It's subject to the regular NOL carryback and carryover rules, except that it can't be carried back to a tax year before the year in which the CERT occurred. The "loss limitation year" is generally the tax year in which the CERT occurred (the "CERT year") and each of the next two tax years. Under the Recovery Act, if an eligible small business makes a Code Sec. 172(b)(1)(H) election to increase the carryback for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines "loss limitation year") is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of "two.”
The Recovery Act also provides that Code Sec. 172(b)(1)(F) (3-year NOL carryback for "eligible losses," including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters) doesn't apply to an applicable 2008 or 2009 NOL for which a small business taxpayer has made a Code Sec. 172(b)(1)(H) election.
Transition rules. Act Sec. 1211(d)(2) provides that for a NOL from a tax year ending before Feb. 17, 2009:
... any election made under Code Sec. 172(b)(3) to waive the carryback period with respect to such loss may be revoked before Apr. 18, 2009 (the date which is 60 days after the Feb. 17, 2009 enactment date);
... any election to increase the carryback period under Code Sec. 172(b)(1)(H) is treated as timely made if made before Apr. 18, 2009; and
... any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed before Apr. 18, 2009.