American Recovery and
Reinvestment Act of 2009
Reduced estimated tax burden in 2009 for individuals with small businesses.
To the extent that tax isn't collected through withholding, taxpayers generally are required to make quarterly estimated payments of tax, in an amount determined by the required annual payment. The required annual payment is the lesser of 90% of the tax shown on the return or 100% of the tax shown on the return for the prior tax year. However, under Code Sec. 6654(d)(1)(C), the prior-year percentage is 110% if adjusted gross income (AGI) for the preceding year exceeded $150,000).
Taxpayers are not liable for a penalty for the failure to pay estimated tax in certain circumstances (e.g., for U.S. persons who did not have a tax liability the preceding year; if the tax shown on the return for the tax year, or (if no return is filed, the tax), reduced by withholding, is less than $1,000; or the taxpayer is a recently retired or disabled person who satisfies the reasonable cause exception).
New law. Effective on Feb. 17, 2009, the Recovery Act provides that notwithstanding Code Sec. 6654(d)(1)(C), for any tax year beginning in 2009, in computing the amount of the required annual installments of estimated income tax of any qualified individual, "required annual payment" means the lesser of (1) 90% of the tax shown on the return for the tax year, or (2) 90% of the tax shown on the return of the individual for the preceding tax year.
A qualified individual is any individual if the AGI on the tax return for the preceding tax year is less than $500,000 ($250,000 if married filing separately) and the individual certifies that at least 50% of the gross income shown on the return for the preceding tax year was income from a small trade or business. For estates and trusts, AGI is determined under Code Sec. 67(e). A small trade or business is one that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding tax year.
Targeted group added to work opportunity tax credit.
The work opportunity tax credit is available before September 2011 on an elective basis for employers hiring individuals from one or more of nine targeted groups.
New law. For individuals beginning work for the employer after Dec. 31, 2008, the Recovery Act creates a new targeted group for the work opportunity tax credit, consisting of unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010.
An unemployed veteran is as an individual certified by the designated local agency as someone who: (1) has served on active duty (other than for training) in the Armed Forces for more than 180 days or who has been discharged or released from active duty in the Armed Forces for a service-connected disability; (2) has been discharged or released from active duty in the Armed Forces at any time during the 5-year period ending on the hiring date; and (3) has received unemployment compensation under State or Federal law for not less than four weeks during the one-year period ending on the hiring date. A disconnected youth is defined as an individual certified by the designated local agency as someone: (a) at least age 16 but not yet age 25 on the hiring date; (b) not regularly attending any secondary, technical, or post-secondary school during the six-month period preceding the hiring date; (c) not regularly employed during the six-month period preceding the hiring date; and (d) not readily employable by reason of lacking a sufficient number of skills.
Deferral of debt forgiveness income on repurchase of debt.
Gross income generally includes income realized by a debtor from the discharge of debt, subject to certain exceptions (debtors in Title 11 bankruptcy, insolvent debtors, certain student loans, certain farm debt, and certain real property business debt). Where discharge of debt is excluded from gross income under the exceptions to the general rule, taxpayers generally must reduce certain tax attributes, including net operating losses, general business credits, minimum tax credits, capital loss carryovers, and basis in property, by the amount of the discharge of debt.
These rules generally apply to the exchange of an old obligation for a new obligation, including a modification of debt that is treated as an exchange (a debt-for-debt exchange). Similarly, a debtor that repurchases its debt instrument for an amount that is less than the "adjusted issue price" of such debt instrument realizes income equal to the excess of the adjusted issue price over the repurchase price.
New law. For debt discharges in tax years ending after Dec. 31, 2008, a taxpayer can elect to have debt discharge income from the reacquisition of an applicable debt instrument after Dec. 31, 2008, and before Jan. 1, 2011, included in gross ineoma.wah4,oveT -five tax years beginning with:
(1) for repurchases occurring in 2009, the fifth tax year following the tax year in which the repurchase occurs, and
(2) for repurchases occurring in 2010, the fourth tax year following the tax year in which the repurchase occurs.
Illustration: In 2009, ABC Corp. repurchases for $6 million notes that it issued with an adjusted issue price of $10 million. ABC realizes $4 million of debt discharge income, but doesn't recognize that income in 2009. Instead, it recognizes $800,000 of debt discharge income ($4 million = 5) in each of the five years from 2014 to 2018, inclusive.
Observation: Although all of the deferred debt discharge income will eventually be recognized, the taxpayer benefits from the deferral of tax to later years. None of the taxpayer's tax attributes have to be reduced.
For purposes of the new deferral-of-income rule, "applicable debt instrument" means any debt instrument that was issued by a C corporation, or any other person in connection with the conduct of a trade or business by such person.
The term "debt instrument" is broadly defined to include a bond, debenture, note, certificate, or any other instrument or contractual arrangement constituting indebtedness within the meaning of Code Sec. 1275(a).
A "reacquisition" means, for any applicable debt instrument, any acquisition of the debt instrument by the debtor that issued (or is otherwise the obligor under) the debt instrument, or a person related to that debtor.
The term "acquisition" for any applicable debt instrument includes:
... an acquisition of the debt instrument for cash,
... the exchange of the debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument),
... the exchange of the debt instrument for corporate stock or a partnership interest,
... the contribution of the debt instrument to capital, and
... the complete forgiveness of the indebtedness by the holder of the debt instrument.
Whether a person is related to another person is determined in the same manner as under the related person acquisition rules of Code Sec. 108(e)(4).
If a taxpayer elects to defer debt discharge income from a reacquisition of an applicable debt instrument, the exclusions for title 11 bankruptcy, insolvency, qualified farm indebtedness, and qualified real property business indebtedness won't apply to the debt discharge income for the tax year of the election or any later tax year.
In the case of the taxpayer's death, the liquidation or sale of substantially all the taxpayer's assets (including in a Title 11 or similar case), the cessation of business by the taxpayer, or similar circumstances, any item of income or deduction that is deferred under the above rules (and hasn't previously been taken into account) is taken into account in the tax year in which that event occurs (or in a Title 11 case, the day before the petition is filed). This acceleration rule also applies in the case of the sale or exchange or redemption of an interest in a partnership, S corporation, or other pass-through entity by a partner, shareholder, or other person holding an ownership interest in the entity.
Exclusion for qualified small business stock increased to 75% of gain.
Under pre-Act law, non-corporate taxpayers can exclude 50% of any gain realized on the sale or exchange of qualified small business stock (QSBS) held for more than five years. For QSBS in a corporation that is a qualified business entity (QBE) during substantially all of the taxpayer's holding period, non-corporate taxpayers can exclude 60% of the gain realized on the sale or exchange of that QSBS, if held for more than five years. This rule does not apply to gain attributable to periods after Dec. 31, 2014. A QBE is a corporation that meets the requirements of a qualified business under the empowerment zone rules during substantially all of the taxpayer's holding period.
New law. For QSBS acquired after Feb. 17, 2009 and before Jan. 1, 2011, the Recovery Act provides that: (1) the 50% gain exclusion is increased to 75%, and (2) none of the 60% gain exclusion rules for QBE QSBS apply.
Thus, under the Recovery Act, the percentage exclusion for QSBS sold by an individual is increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011.
S corporation built-in gain holding period shortened temporarily to seven years.
Where a corporation that was formed as a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gains are recognized during *he recognition period. Under pre-Act law, the recognition period was the first ten S corporation years (or during the ten-period after the transfer). Under a special exception, the recognition period was unlimited for distributions by thrift institutions that were deemed to be out of pre-'88 reserves. Gains are not built-in gains to the extent they are shown to have arisen while the S election was in effect or are offset by losses.
New law. For tax years beginning in 2009 and 2010, no tax is imposed under the Recovery Act on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. This rule applies separately for property acquired from C corporations in carryover basis transactions. Thus, for the 2009 and 2010 tax years, the recognition period is reduced to seven years.
The unlimited recognition period for distributions by thrift institutions that are deemed to be out of pre-'88 reserves remains unchanged.
Notice 2008-83 repealed prospectively.
After an ownership change, such as in a takeover, Code Sec. 382 limits the amount of a corporation's taxable income in a post-change year that can be offset by pre-change losses. However, on Sept. 30, 2008, IRS issued Notice 2008-83, 2008-42 IRB 905, which provided that a bank's losses on loans or bad debts (including deductions for a reasonable addition to a reserve for bad debts) wouldn't be treated as pre-change losses. IRS was roundly criticized in Congress for implemented this administrative action, which resulted in major tax savings for the banks (and lost tax revenue for the government), on its own.
New law. The Recovery Act provides that Notice 2008-83, shall be deemed to have the force and effect of law with respect to any ownership change (as defined in Code Sec. 382(g) occurring on or before Jan. 16, 2009, and with respect to any ownership change (as so defined) which occurs after that date, if the change (1) is pursuant to a written binding contract entered into on or before Jan. 16, 2009 or (2) is pursuant to a written agreement that was entered into on or before Jan. 16, 2009, and was described on or before that date in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change, but shall otherwise have no force or effect with respect to any ownership change after Jan. 16, 2009. (Act Sec. 1261) Thus, Notice 2008-83 will have no effect for ownership changes after Jan. 16, 2009 unless one of the above exceptions applies.
Other Changes Affecting Business
... Under pre-Act law, for payments made after 2010, the federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision (including multi-state agencies) making certain payments to a person providing any property or services would have been required to deduct and withhold tax from that payment in an amount equal to 3% of the payment. The Recovery Act delays the implementation of the 3% withholding requirement by one year to apply to payments after Dec. 31, 2011.
... A publicly held corporation can't deduct more than $1 million per year of applicable employee remuneration paid to a covered employee. Under Code Sec. l62(m)(5), the $1 million deduction limit is reduced to S500,000 for remuneration paid to covered executives generally, the chief executive officer (CEO), chief financial officer (CFO), and the three highest paid other officers of an "applicable employer." Under pre-Act law, the $500,000 limit also applied to financial institutions from whom troubled assets were acquired under the Troubled Assets Relief Program (TARP) established by the 2008 Emergency Economic Stabilization Act, if the aggregate amount of acquired assets exceeded $300 million. But if all the acquisitions were direct purchases, the Code Sec. 162(m)(5) $500,000 limit didn't apply. Effective Feb. 17, 2009, the Recovery Act provides that each TARP recipient is subject to the Code Sec. 162(m)(5) $500,000 compensation deduction limit during the period in which any obligation arising from TARP financial assistance remains outstanding. (Recovery Act Sec. 7001) A TARP recipient is any entity that has received or will receive financial assistance under TARP. The period in which any obligation arising from TARP financial assistance remains outstanding doesn't include any period during which the federal government only holds warrants to purchase the TARP recipient's common stock.