It's Midnight – Do You Know Where Your Tax Attributes Are?
Congress opened session this year by passing the much-anticipated stimulus law (The American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17), raising taxpayers’ hope for some relief to their economic woes.
However, nine days later, the President presented his fiscal 2010 budget to Congress calling for increased individual tax rates and more limited individual and business tax deductions. As these proposed tax hikes filter through the house and senate, taxpayers should be planning their affairs for the high-tax rate environment that may lie ahead and making the most of the opportunities afforded under the stimulus law.
The stimulus law includes a patch for taxpayers subject to the alternative minimum tax (AMT) in 2009, increasing the exemption to that of 2008 (adjusted for inflation), and a new provision that allows taxpayers to offset both regular and alternative minimum tax with personal tax credits. Taxpayers who have historically paid AMT may not see a reduction in their overall tax liability as compared to prior years.
The elimination of interest from private activity bonds issued in 2009 and 2010 as a tax preference item and as an adjustment for corporate current earnings for the AMT might behoove certain taxpayers who regularly pay AMT include private activity bonds as part of their bond portfolio. The present economic crisis notwithstanding, 2009 and 2010 may be a good time for private businesses to raise financing for specific projects through private activity bond issuances by their local or state government (think Yankee Stadium).
Since cash-strapped taxpayers renegotiating their debt due to the current economic crisis probably can’t afford the resulting tax bill, the stimulus law allows them to pay the tax over a five year period beginning in 2014.
Clean energy tax credits and tax exempt bond issuances are plentiful in the law. Those producing energy from certain renewable sources are afforded increased tax credits. Taxpayers can also look for an increase in the amount of tax exempt bonds and tax credit bonds that may be issued to further energy conservation, production of clean, renewable energy and high-speed intercity rail. Limitations on certain nonrefundable personal tax credits for residential energy efficient products purchases were removed.
In addition to the aforementioned proposals, there were also extensions to a number of expiring provisions. The 50 percent bonus depreciation allowance was extended one year to assets placed in service through 2009. Those taxpayers contemplating an aircraft purchase may receive the 50 percent bonus depreciation for such purchases made through 2010. Corporations may increase their 2009 and 2010 research credit or minimum tax credit limitation by the lesser of 20 percent of the bonus depreciation amount or 6 percent of the unused pre-2006 research or AMT credit. Corporations in loss positions may thereby convert unused research and development and AMT credits into a refundable credit by electing to forgo the bonus depreciation on certain new property, providing immediate cash benefits to these corporations.
Also extended through 2009 were limits for expensing certain business assets otherwise required to be depreciated over a period of years – the Section 179 deduction. The stimulus law did not remove the $25,000 deduction limit for luxury vehicles, contrary to what GM, Ford and Chrysler had no doubt hoped. Nevertheless, between the $25,000 Section 179 deduction and the 50 percent bonus depreciation allowance, taxpayers can still receive a hefty first-year deduction for automobiles used in a business.
Some of the fiercest debates occurring during the crafting of this law centered on the Net Operating Loss (NOL) carry-back provision. The final law afforded only certain “eligible small businesses” the ability to carry back the NOL an additional three years beyond the two currently allowed. The amount of companies that will be able, logistically speaking, to take advantage of this provision is likely slim because one must elect application of this provision within 60 days of enactment (i.e., April 17, 2009). Determining whether one is an eligible small business is no easy task given the complex aggregation rules for related party receipts. If you think this relief may apply to you, immediate action is necessary.
Taxpayers refinancing their debts for an amount less than what was previously owed received relief under the stimulus law. Reacquiring your own debt at a discount (outside of bankruptcy) generally results in the current recognition of taxable income equal to the amount of that discount. Since cash-strapped taxpayers renegotiating their debt due to the current economic crisis probably can’t afford the resulting tax bill, the stimulus law allows them to pay the tax over a five year period beginning in 2014. Currently, the law only applies to debt reacquired in 2009 and 2010, but there are rumblings in Congress that a permanent form of deferral will find its way into future legislation.
The stimulus law had many other tax provisions that you might consider, such as the built-in-gains tax relief for certain S-corporations, and for taxpayers in lower income tax brackets: the first-time homebuyer credit, making work pay credit, hope credit, health coverage credit, child tax credit, and earned income credit.
The President also proposes to decrease taxes paid by some businesses by eliminating capital gains taxation for small businesses.
Beginning in 2011, President Obama’s tax proposal would increase taxes paid by individuals with incomes over $250,000 (married) and $200,000 (single) by increasing the top individual tax rate to 39.6%, reinstating the limitations on itemized deductions and personal exemptions, and increasing the capital gains and dividend tax rates to 20%.
The President also proposes to decrease taxes paid by some businesses by eliminating capital gains taxation for small businesses, extending the research and experimentation tax credit permanently, and affording big businesses a five year carry-back for NOLs. The budget also proposes to increase tax revenues levied on businesses by taxing carried interests as ordinary income, codifying the economic substance doctrine, repealing LIFO as an acceptable method for accounting for inventories, and eliminating certain preferential tax treatment for oil and gas businesses and producers.
Moving from center stage, many tax bills have been proposed in Congress in addition to those outlined in President Obama’s budget. How these proposals will play out remains to be seen, though we can be fairly certain that the current low-tax-rate environment may be a phenomenon of days of the past. While we don’t know when current economic conditions will change we can only hope that these gloomy days will soon be behind us. We can also hope that proposed tax increases will be deferred. To say the road ahead is murky is an understatement. Call your tax advisor to discuss how you can benefit from the recently enacted legislation and what you should be doing to prepare for the new tax laws that await us.
