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The Recovery Act and Your Clients

Working Your Clients Through the Recovery Act

From stimulus payments to various tax credits, the American Recovery and Reinvestment Act of 2009 (ARRA) and the California budget bills cover a lot of ground and have something for just about everyone. The following highlights are from a CalCPA Education Foundation webcast featuring Gary McBride, CPA, and Tom Daley, CPA. McBride is an accounting professor and director of the Graduate Tax Program at California State University East Bay, and Daley is a partner with Bowers, Narasky & Daley, LLP.

2009 Stimulus Payments and Credits
Clients might ask, “Where is my stimulus payment?” Well, this year is different than last. In May, a $250 Economic Recovery Payment went to people receiving benefits from the Social Security Administration, Railroad Retirement Board or the Veteran’s Administration.

Your clients may also receive a stimulus payment if they will receive a government pension benefit anytime in 2009. This will earn them a $250 refundable tax credit when a tax return is filed.

Taxpayers that receive both a government pension and social security benefits should have received the economic recovery payment of $250 and will not get the credit. One offsets the other.

For non-retired taxpayers, there is the Making Work Pay Tax Credit, which is going to be a refundable credit on 2009 and 2010 tax returns. This refundable credit is equal to the lesser of 6.2 percent of earned income or $400. This means clients will get the credit on their first $6,450 of earned income. However, it applies to earned income not subject to FICA or SE tax (e.g., government workers). This credit is not available for nonresident aliens and dependents, and phases out beginning at an adjusted gross income of $75,000 ($150,000, married filing jointly).

This credit is reduced by the aforementioned $250 refund/credit if received as well.

Federal First-Time Homebuyer Credit
This credit, enacted in 2008, has been extended to the end of November and increased to 10 percent of the purchase price up to a maximum amount of $8,000. The 15-year repayment requirement associated with this credit has been replaced by a three-year occupancy and recapture rule, so that the credit is now truly a credit, rather than merely an interest-free loan. For a 2009 home purchase, the credit may be claimed on an amended 2008 tax return using the new rules.

Important guidance related to this credit is published in IRS Notice 2009-12, which includes allocating the credit between unmarried co-tenants. The rules adopted in this notice will allow parents to fund home purchases for a child, with the child claiming the credit.

Sales Tax Deduction on Purchase of Qualified Motor Vehicles
This allows taxpayers to deduct the sales tax on up to $49,500 of the purchase price on a new qualified motor vehicle acquired after Feb. 17, 2009, and before the end of 2009. A QMV is a passenger auto, light truck or motorcycle with a gross vehicle weight rating of not more than 8,500 pounds, or a motor home of any weight. Motor homes and motorcycles are defined in Fed. Reg. 571.3 Title 49.

There are AGI phaseouts of this deduction. For married taxpayers filing jointly, the phaseout occurs from $250,000–$260,000; all other filers incur a phaseout from $125,000–$135,000. It is allowed in addition to the standard deduction and for AMT purposes. It is not allowed for taxpayers that deduct state and local sales tax, instead of income tax, as an itemized deduction.

Recently released IRS Notice 2009-60 states that taxpayers that purchase a new motor vehicle in states that do not incur sales tax are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.

Tax Credit for Electric Vehicles
The tax credit for electric vehicles in Sec. 30D, enacted in 2008, is modified in the ARRA. The 2008 Act created a credit for a qualified plug-in drive motor vehicle that draws propulsion using a traction battery with at least four kilowatt-hours of capacity and is capable of being recharged from an external source of electricity. It also must have four wheels. The credit is $2,500, plus an additional $417 for each kilowatt-hour of battery in excess of four kilowatt-hours, with a maximum of $7,500 for vehicles weighing less than 10,001 pounds.  

Unlike other motor vehicle credits, the 2008 Act allows the Sec. 30D credit for a personal use vehicle to offset both regular tax and AMT, but with no carryover of an unused credit. For a business use vehicle, or portion of the vehicle, the credit is part of the general business credit, is not allowed against AMT and is subject to the existing rules and limits on the general business credit, including the rule that allows for a one-year carryback and a 20-year carry forward (see Sec. 39).
Beginning in 2010, the 2009 ARRA modifies the Sec. 30D credit. The maximum credit will be $7,500 regardless of vehicle weight and will be eliminated for plug-in vehicles weighing 14,000 pounds or more.

A new Sec. 30 credit for small plug-in electric vehicles applies to vehicles that are low-speed (four kilowatt hour battery), two- or three-wheeled (2.5 kilowatt hour battery) and were acquired after Feb. 17, 2009. The credit is 10 percent of the cost up to $2,500 and the vehicle must be manufactured primarily for public streets, roads and highways.

A “low-speed vehicle” is a four-wheeled motor vehicle, other than a truck, which can attain a speed of more than 20 mph in one mile and not more than 25 mph on a paved level surface. The gross vehicle weight rating must be less than 3,000 pounds. These cars are illegal on a street with a speed limit greater than 35 mph.
Recently released IRS Notice 2009-54 says that a low-speed vehicle is not a passenger vehicle or light truck, and it’s not required to receive a certificate of conformity under the Clean Air Act to qualify for the credit. A purchaser of a motor vehicle may rely on the manufacturer’s certification concerning the vehicle and the amount of the credit allowable with respect to the vehicle.

There is also a new Sec. 30B 10 percent credit, capped at $4,000, of the cost of converting any four-wheeled motor into a qualified plug-in drive motor vehicles in an amended Sec. 30B. The conversion must take place between Feb. 18, 2009, and Dec. 31, 2011.

Both of the new vehicle credits—Sec. 30 dealing with smaller electric vehicles and Sec. 30B governing conversions to a plug-in electric—can offset AMT in the same manner as Sec. 30D (discussed above): for a personal use vehicle, it is a personal credit allowed against AMT, but with no carryover. For a business use vehicle (or portion of the vehicle), the credit folds into the general business credit (and as such is not allowed against AMT).  

Unless extended by Congress, 2009 is the last year for the Sec. 30B credit with respect to gas-electric hybrids (unless they plug in and meet Sec. 30D requirements). Thanks to the 2009 ARRA, this year is also the first year that the Sec. 30B hybrid credit for personal use cars can offset AMT. Note: Sec. 30B does permit credits for other types of energy efficient vehicles beyond 2009 (such as vehicles running on natural gas).

Increased Credit for Alternative Fuel Vehicle Refueling Property
Qualified refueling property is property (not including a building or its structural components) used for storing or dispensing of a clean-burning fuel or electricity into a vehicle’s fuel tank or battery.

For a business property placed in service in 2009 or 2010, the credit rate increases to 50 percent (up from 30 percent) and the maximum credit is $50,000 (up from $30,000). There’s a $200,000 maximum for hydrogen refueling properties.

The credit rate is also increased for a nonbusiness property to 50 percent, but with a maximum of $2,000.

Regarding AMT treatment, credits for qualified refueling property for personal use cannot offset AMT [IRC Sec. 30C(d)(2)]. Credits for qualified refueling property used in a trade or business are part of the general business credit and cannot offset AMT.

Residential Energy Credits (Sec. 25C and 25D)
Both of these credits are allowed against AMT.

For amounts that are paid or incurred in taxable years beginning after Dec. 31, 2008, the Sec. 25C credit is 30 percent of the cost (maximum of $1,500) for building envelope components (insulation materials, exterior windows, doors, skylights, etc.) and qualified energy property (electric pumps, water heaters, air conditioners, etc.). If these things are installed after Feb. 17, 2009, they must meet new energy efficiency standards not previously required. This credit only applies to a principal residence and is only available for existing homes (IRS Notice 2009-53).

The Sec. 25D credit, applicable to both a principal residence and a vacation home, provides a separate credit for the purchase of specific energy efficient improvements: qualified solar electric, solar water, fuel cell, small wind and geothermal heat pump properties.

The various caps for this credit have been eliminated and, as a result, the credit is 30 percent of the cost (except for qualified fuel cell property) for residential energy efficient property installed in 2009 and 2010. Qualified fuel cell property has a limit based upon the capacity—$500 for each half kilowatt—of the qualified fuel cell property. This credit applies to both new homes and existing homes (IRS Notice 2009-53).

COBRA Subsidy
Individuals who elect COBRA (or Cal-COBRA) coverage may be eligible to pay a reduced health insurance premium. Eligible individuals pay only 35 percent of the full COBRA premiums under their plans for up to nine months. The employer pays the remaining 65 percent of the premium. The employer will be reimbursed by the federal government for this amount by claiming a credit on its quarterly payroll tax return.

The Department of Labor has published extensive guidance on this new law on its website at www.dol.gov/ebsa/COBRA.html. The IRS website has additional guidance, including Notice 2009-27, which addresses 58 questions regarding the operation of the subsidy rules.

NOL Carryback
The ARRA gives certain taxpayers the option to elect to carryback a net operating loss incurred in 2008 to the third, fourth or fifth year preceding the 2008 taxable year, instead of to the second preceding year [Sec. 172(b)(1)(H)]. This is designed to help taxpayers who suffered major losses in 2008 that exceed the taxable income they earned in 2006 and 2007, the years to which they could carry the NOL under the prior law general rules.

The extended NOL carryback period is available to an “eligible small business,” defined as a business with average annual gross receipts for the three-year period
ending with the loss year of no more than $15 million. In determining whether a partnership or S Corporation qualifies as an eligible small business, the gross receipts test applies at the entity level.

Commonly controlled (more than 50 percent) businesses are aggregated to determine whether the partnership, S corp. or sole proprietorship is under the $15 million gross receipts limit, using the rules in Sec. 448(c)(2). The extended carryback election is made at the owner level, once it is determined that a partnership or S corp. is an eligible small business.

For eligible small businesses with noncalendar tax years, the extended carryback period may be elected for the tax year ending or beginning in 2008, but not both. Therefore, for fiscal year taxpayers, “applicable 2008 NOLs” can include NOLs for tax years beginning as early as Feb. 1, 2007, or ending as late as Nov. 30, 2009.
For ESBs using a calendar year the extended carryback period may be elected only for 2008.

The extended carryback elected for the 2008 NOL also applies for AMT purposes.

New California Jobs Credit
This credit is designed for small employers that increase their workforce in 2009. This includes companies with 20 or fewer employees in the preceding tax year and have a net increase in full-time employees during 2009.

The credit equals $3,000 for each additional employee hired. The credit does not reduce the allowable wage deduction and is not allowed for employees eligible for any other state hiring credit.

This credit is limited to $400 million in the aggregate and is allowed only for tax returns filed by a cutoff date: the end of the quarter in which the FTB estimates it has received returns totaling $400 million credit claims.

More Relief for Debt Discharge Income
For certain discharge of indebtedness income occurring in 2009 and 2010, taxpayers may elect to include the debt cancellation in gross income ratably over the 5-taxable-year period beginning with:

• In the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs; and
• In the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.

These timing rules will result in the deferred cancellation of debt income being recognized over five taxable years beginning with 2014.

A taxpayer who elects to defer cancellation of debt income under this new rule may not exclude that deferred cancellation of debt income from gross income under:

• Sec. 108(a)(1)(A), relating to bankruptcy
• Sec. 108(a)(1)(B), relating to insolvency
• Sec. 108(a)(1)(C), relating to qualified farm debt; or
• Sec. 108(a)(1)(D), relating to qualified real property debt for the taxable year of the election or any subsequent taxable year.

While it may seem unlikely that a taxpayer would elect to give up an exclusion from income in favor of a deferral, taxpayers excluding cancellation of debt income under Sec. 108 are generally forced to reduce their NOLs and/or other tax attributes. The loss of these future tax benefits may turn what appears to be an exclusion into a form of deferral.

More Guidance to Come
Keep checking the Education Foundation website for more information on the ARRA as the IRS and the FTB will likely issue further clarifications and guidance this year.