American Recovery and Reinvestment Act of 2009: A summary of selected business and energy tax provisions
H.R. 1, the American Recovery and Reinvestment Act of 2009, was signed into law by President Obama on Feb. 17, 2009. In addition to extending and expanding tax benefits available to renewable energy and energy conservation projects, the Act makes several changes designed to stimulate the economy through accelerated cost recovery, reduced tax rates and income deferral for taxpayers engaged in certain other businesses. In most cases, the enacted tax benefits are only available for a short window of time.
Selected business provisions
A. Bonus depreciation extended through 2009
Prior law provided a depreciation deduction equal to 50 percent of the adjusted tax basis of qualified property placed in service in 2008 (or in 2009 for certain longer-lived and transportation property) in addition to the generally applicable depreciation deductions calculated after adjusting the basis of the property for the 50 percent depreciation deduction.
Qualified property is generally any property (1) to which the Modified Accelerated Cost Recovery System (MACRS) rules apply that has a recovery period of 20 years or less, certain computer software, water utility property and qualified leasehold improvements, (2) the original use of which begins with the taxpayer after Dec. 31, 2007, and (3) that is acquired during 2008.
Corporate taxpayers were provided with an election to increase their general business credit (including R&D credit) or Alternative Minimum Tax (AMT) credit limitation by the bonus depreciation amount in lieu of claiming the additional bonus depreciation deduction. The bonus depreciation amount is 20 percent of the amount by which the depreciation deduction calculated with bonus depreciation exceeds the depreciation deduction otherwise allowed.
The Act extended the placed-in-service date for property eligible for 50 percent bonus depreciation to 2009 (2010 for certain longer-lived and transportation property). In addition, the Act extended the election to increase the general business credit or AMT credit limitation in lieu of claiming bonus depreciation to apply to property placed in service in 2009 (or 2010 for certain longer-lived and transportation property).
B. Extension of increased limitations on Section 179 expensing of certain depreciable business property
Prior law allowed a deduction for up to $250,000 of qualifying property placed in service in 2008, which deduction was reduced as the cost of qualifying property placed in service during the year exceeded $800,000. Qualifying property is property that is: (1) tangible property to which the general MACRS rules apply or certain computer software, (2) Section 1245 property, and (3) acquired by purchase for use in the active conduct of a trade or business.
The Act extends this deduction for qualifying property placed in service in 2009, subject to the same reduction for costs of qualifying property exceeding $800,000. The $250,000 and $800,000 limits are reduced significantly in 2010 and 2011.
C. Five-year net operating loss carryback election for small businesses
In general, net operating losses can be carried back two years and carried forward 20 years. The Act allows a business with gross receipts of $15 million or less to elect to carryback for up to five years the net operating loss for any taxable year ending in 2008 (or, if elected, any taxable year beginning in 2008). This provision applies to net operating losses arising in taxable years ending after Dec. 31, 2007.
D. Two new groups for work opportunity tax credit
The work opportunity tax credit is available to employers hiring individuals from one of several targeted groups. It is equal to a percentage of qualified wages paid to such individuals. The Act adds two targeted groups, unemployed veterans and disconnected youth, who if hired during 2009 or 2010, will entitle the employer to a credit.
E. Built-in losses of banks subject to limitation
In 2008, the Internal Revenue Service released a notice (IRS Notice 2008-83) exempting certain bank losses with respect to loans or bad debts from limitations that would otherwise apply to the losses upon a change of ownership of a bank and which continued to apply to corporations in other industries. The Act prospectively (as of Jan. 17, 2009) rescinds IRS Notice 2008-83.
F. Losses of certain taxpayers undergoing restructuring not subject to limitation
The Act provides an exception from the limitations that would otherwise apply to preexisting losses of corporations that undergo ownership changes if the ownership change occurs pursuant to a restructuring plan that is required under a loan agreement or commitment for a line of credit entered into with the Treasury Department under the Emergency Economic Stabilization Act of 2008.
G. Deferral of income from discharge of indebtedness
Gross income generally includes income from the discharge of indebtedness. A taxable discharge can occur as a result of the taxpayer issuing new debt instruments in satisfaction of outstanding debt instruments, a related person acquiring the debt instruments, the exchange of the taxpayer's stock for outstanding debt instruments, or a modification of outstanding debt instruments. Discharges that occur in bankruptcy or other specified circumstances do not generate taxable income, but result in the reduction of other tax attributes, such as net operating losses, tax credits and tax basis.
The Act allows a taxpayer to elect to defer income from the discharge of indebtedness incurred as a result of the reacquisition of applicable debt instruments by the taxpayer (or by a person related to the taxpayer) after Dec. 31, 2008, and before Jan. 1, 2011. A reacquisition includes an acquisition of a debt instrument for cash, the exchange of a debt instrument for another debt instrument, the exchange of stock or partnership interests for a debt instrument, the contribution of a debt instrument to the capital of the issuer, and the complete forgiveness of a debt instrument.
Income deferred must be included in gross income ratably in the five-year period beginning with the fifth taxable year following a reacquisition that occurs in 2009 and with the fourth taxable year for a reacquisition that occurs in 2010. If this election is made, the exception for discharges occurring in bankruptcy and other specified circumstances does not apply.
H. Disallowance of original issue discount on certain applicable high yield discount obligations suspended
The deduction of a portion of the original issue discount on an applicable high yield discount obligation is generally disallowed. The Act suspends this disallowance for certain obligations issued in debt-for-debt exchanges (including significant modifications of outstanding debt) after Aug. 31, 2008, and before Jan. 1, 2010.
I. Increased exclusion for gain from sale of qualified small business stock
For noncorporate taxpayers, 50 percent of the gain from the sale of qualified small business stock that has been held for five years is excluded from gross income. Such gain would otherwise be taxed at a rate of 28 percent. Qualified small business stock is stock acquired at original issuance from a C corporation with gross assets of $50 million or less that is engaged in an active trade or business.
The Act increases the exclusion to 75 percent for qualifying stock issued after Feb. 17, 2009, and before Jan. 1, 2011. Thus, gains from the sale of qualifying stock will be subject to an effective regular tax rate of 7 percent and AMT rate of 12.88 percent.
J. Reduction in built-in-gain period for certain S corporations
An S corporation that converted from C-corporation status, or that acquired property from a C corporation in a carryover basis transaction, is subject to tax at regular corporate rates on built-in gains existing on the date of conversion, or property acquisition, if the prior C-corporation assets are sold within the 10-year built-in-gain recognition period beginning on the date of the conversion or acquisition. The Act reduces this 10-year period to seven years for sales of property in 2009 or 2010 if the built-in-gain recognition period began no later than 2003.
Selected energy provisions
A. Extension of renewable electricity production credit
Internal Revenue Code Section 45 provides a tax credit for electricity produced from qualified energy resources at qualified facilities that is sold to unrelated persons. In 2008, the credit was either 2.1 cents or one cent per kilowatt-hour, depending on the qualified energy resource.
The credit is generally claimed during the 10-year period beginning when the facility is placed in service. The credit is phased out as market prices of electricity exceed threshold levels and is reduced by up to 50 percent for governmental grants, proceeds of tax-exempt financing, subsidized energy financing and other credits allowable with respect to the project. This credit is a component of the general business credit and is generally subject to the limitations and carryback (one year) and carryforward (20 years) periods generally applicable to business credits.
The Act generally extends the placed-in-service date for qualified facilities by three years through the following dates: wind, Dec. 31, 2012; closed-loop biomass, Dec. 31, 2013; open-loop biomass, Dec. 31, 2013; geothermal, Dec. 31, 2013; landfill gas, Dec. 31, 2013; trash combustion, Dec. 31, 2013; qualified hydropower, Dec. 31, 2013; and marine and hydrokinetic, Dec. 31, 2013.
B. Modification of energy investment credit
Internal Revenue Code Section 48 provides an energy credit equal to either 10 percent or 30 percent of the basis of qualifying energy property placed in service. Qualifying energy property includes property producing electricity, heating or cooling, or light, as relevant, from solar energy, fuel cells, small wind energy property, geothermal deposits, microturbines, heat and power systems, and ground water. A proportional share of the tax credit basis of otherwise qualifying energy property was reduced if the project received subsidized energy financing or proceeds from private activity bonds.
In addition, the credit was capped at $4,000 for small wind energy property placed in service during a taxable year. The energy credit is a component of the investment credit, which is a general business credit and is generally subject to the limitations and carryback (one year) and carryforward (20 years) periods generally applicable to business credits.
The Act eliminates the $4,000 cap on the credit for small wind energy property. The Act also eliminates the tax credit basis reduction rule for subsidized energy financing and private activity bond proceeds. Both of these changes are effective for taxable years beginning after Dec. 31, 2008.
C. Election of investment credit in lieu of production credit
The Act provides an irrevocable election to claim a 30 percent investment credit for facilities otherwise eligible for the Code Section 45 production tax credit if they are placed in service after Dec. 31, 2008, and before the extended dates for the production tax credit. For this purpose, eligible facilities are limited to tangible personal property and other tangible property (but not buildings or structural components) that is depreciable and used as an integral part of a qualified facility.
D. Grants for specified property in lieu of tax credits
The Act creates a new grant program to be administered by the Treasury Department that will award cash grants to qualifying facilities in lieu of the production tax credit (Code Section 45) and the energy investment credit (Code Section 48).
Facilities will be eligible for grants if they are otherwise eligible for the production tax credit or energy credit if construction begins in either 2009 or 2010, and they are placed in service by Jan.1, 2013 (wind), Jan.1, 2014 (other renewable energy facilities eligible for the production tax credit), or Jan. 1, 2017 (facilities eligible for the energy credit).
Grants will be equal to 30 percent (10 percent in the case of microturbine, combined heat and power system and geothermal property) of the basis of eligible facilities. Grants will be paid within 60 days of the placed-in-service date or, if later, the date the grant application is received, and will not be includible in the recipient's gross income. The basis of facilities receiving grants will be reduced by 50 percent of the amount of the grant.
Grants will not be awarded to any federal, state or local government (or any political subdivision, agency or instrumentality thereof), any entity exempt from federal income tax under Internal Revenue Code Section 501(c) or any cooperative electric company.
E. Additional new clean renewable energy bonds
Clean renewable energy bonds, a type of qualified tax credit bond, may be issued by public power providers, governmental bodies and electric cooperatives to finance facilities that qualify for the Code Section 45 production tax credit (without regard to the placed-in-service date requirement). Bond proceeds must be used within three years of issuance (extensions may be granted in certain circumstances).
A taxpayer holding a bond on a credit allowance date is entitled to a tax credit, which accrues quarterly, at a rate set by the Treasury Department. The credit is includable in the holder's gross income (as if it were interest) and can be claimed against regular income tax or AMT and carried forward to succeeding taxable years.
The Act authorizes an additional $1.6 billion of new clean renewable energy bonds with no more than one-third of the additional $1.6 billion being allocated to projects of public power providers, governmental bodies or electric cooperatives.
F. Expansion of qualified energy conservation bonds
Qualified energy conservation bonds, another type of qualified tax credit bond, may be issued by state or local governments to finance qualified conservation purposes. Qualified conservation purposes include capital expenditures for: reducing energy consumption in publicly owned buildings by at least 20 percent, implementing green community programs, rural development involving production of electricity from renewable energy resources, or any facility eligible for the Code Section 45 production tax credit.
The Act clarifies that capital expenditures to implement green community programs includes grants, loans and other repayment mechanisms to implement such programs, which will enable states to issue these bonds to finance retrofits of existing private buildings through loans or grants to individual homeowners or businesses without such bonds being treated as private activity bonds. The Act also authorizes the issuance of an additional $2.4 billion of qualified energy conservation bonds.
G. New credit for investment in advanced energy property
The Act adopts a new qualifying advanced energy project credit that will be allocated by the Treasury Department in consultation with the Department of Energy and in consideration of specified selection criteria. Up to $2.3 billion of credits may be allocated. The credit is equal to 30 percent of the basis of eligible property placed in service during a taxable year that is part of a qualifying advanced energy project.
A qualifying advanced energy project is a project that re-equips, expands or establishes a manufacturing facility for the production of certain property, including property designed to produce energy from renewable resources, fuel cells and other energy storage systems for use with electric or hybrid-electric motor vehicles, electric grids to support the transmission of intermittent sources of renewable energy, property designed to capture and sequester carbon dioxide, property designed to refine or blend renewable fuels or to produce energy conservation technologies and new qualified plug-in electric-drive motor vehicles.
The basis of eligible property is reduced by the amount of the credit. To claim the credit, the project must be certified by the Treasury Department in consultation with the Department of Energy. Credit applications must be submitted during the two-year period beginning on the date the Treasury Department establishes the allocation program and applicants must provide the Treasury Department with evidence that certification requirements have been met within one year from the date an application is accepted. Successful applicants will have three years from the issuance of a certification to place the project in service.
H. Extension and modification of credit for nonbusiness energy property
Prior law provided a personal 10 percent credit for the purchase of qualified energy efficiency improvements for existing homes and a specified dollar amount credit for purchases of specific energy efficiency equipment (e.g., qualifying heat pumps, air conditioners, furnaces and water heaters).
Qualifying improvements include insulation, windows, doors and roofs that meet or exceed specified criteria and are installed in or on a dwelling unit in the United States owned and used by the taxpayer as a principal residence and reasonably expected to remain in use for at least five years. Qualifying expenditures did not include amounts spent from subsidized energy financing. Prior law imposed a lifetime credit cap of $500 per dwelling unit with no more than $200 of that credit being attributable to windows.
The Act replaces the 10 percent credit and the specified dollar amount credits with a 30 percent credit of the amount paid for qualifying improvements and equipment and changes the energy efficiency criteria for these improvements. The Act replaces the lifetime credit cap with an aggregate cap of $1,500 in the case of property placed in service after Dec. 31, 2008, and before Jan. 1, 2011, and generally imposes the new efficiency standards only to property placed in service after Feb. 17, 2009. The Act also eliminates the rule that disallows the credit for expenditures from subsidized energy financing.
I. Extension and modification of credit for residential energy efficient property
Prior law provided a personal tax credit for the purchase of qualified solar electric property and qualified solar water heating property used exclusively for purposes other than heating swimming pools and hot tubs and also provided a 30 percent credit for the purchase of qualified geothermal heat pump property, qualified small wind energy property and qualified fuel cell property, all for use in dwelling units located in the United States. Qualifying expenditures did not include amounts spent from subsidized energy financing, and the credit for each purchase was capped at a fixed dollar amount.
The Act eliminates the dollar caps for purchases of qualified property and eliminates the rule that disallows the credit for expenditures from subsidized energy financing.
J. Temporary increase in credit for alternative fuel vehicle refueling property
Prior law provided a 30 percent credit for the cost of installing qualified clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. The credit was capped at $30,000, per taxable year per location, for a trade or business and at $1,000, per taxable year per location, for property installed at a principal residence.
Qualifying refueling property is property used for the storage or dispensing of a clean-burning fuel or electricity into the fuel tank or battery of a motor vehicle, but only at the point of delivery of the fuel tank or battery. No credit is allowed for property used outside the United States or for which Code Section 179 expensing is elected.
The Act increases the credit to 50 percent of the cost of installing qualified property and increases the credit caps for property placed in service in 2009 or 2010 at a business to $50,000 ($200,000 for qualified hydrogen refueling property) and at a residence to $2,000. These changes are effective for taxable years beginning after Dec. 31, 2008.
K. Modification of credit for carbon dioxide sequestration
Prior law provided a credit of $20 per metric ton of qualified carbon dioxide captured by a taxpayer at a qualified facility and disposed of by the taxpayer in secure geological storage, and a credit of $10 per metric ton for qualified carbon dioxide captured by a taxpayer at a qualified facility and used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project.
Qualified carbon dioxide is carbon dioxide captured from an industrial source that would otherwise be released into the atmosphere and which is measured at the source of capture and verified at the point(s) of disposal or injection. A qualified facility is any industrial facility in the United States that is owned by the taxpayer and at which carbon capture equipment is placed in service and captures not less than 500,000 metric tons of carbon dioxide during the taxable year.
These credits are part of the general business credit and sunset at the end of the calendar year in which the treasury secretary, in consultation with the administrator of the EPA, certifies that 75 million metric tons of qualified carbon dioxide have been captured and disposed of or used as a tertiary injectant.
The Act requires carbon dioxide eligible for the $10 credit to be sequestered by the taxpayer in secure geological storage (includes oil and gas reservoirs, unminable coal seams and deep saline formations) in order to qualify for the credit. The Act also requires the treasury secretary to consult with the secretaries of energy and the interior in addition to the EPA administrator in promulgating regulations relating to permanent geological storage of carbon dioxide.
L. Modification of plug-in electric-drive motor vehicle credit and creation of new credits for plug-in electric vehicles and conversions
Prior law provided a plug-in electric-drive motor vehicle credit for each qualified plug-in electric-drive motor vehicle placed in service. Eligible vehicles had to have at least four wheels, be produced for use on public roads, meet emission standards, draw propulsion using a traction battery with at least four kilowatt-hours of capacity and be capable of being recharged from an external source of electricity.
After a total of 250,000 credit-eligible vehicles have been sold for use in the United States, the credit phases out over four calendar quarters, and no credit is available for vehicles purchased after 2014.
The Act significantly modifies the plug-in electric-drive motor vehicle credit and imposes a credit limit of $7,500 regardless of vehicle weight class. The Act also eliminates the credit for vehicles weighing 14,000 pounds or more and begins to phase out after a total of 200,000 credit-eligible vehicles have been sold by a manufacturer.
The Act also creates a new 10 percent credit (maximum of $2,500) for low-speed vehicles, motorcycles and three-wheeled vehicles sold before Jan. 1, 2012, and a new 10 percent credit (maximum of $4,000) for converting vehicles into plug-in electric-drive motor vehicles with a plug-in traction battery module capacity of at least four kilowatt-hours for conversions made before Jan. 1, 2012.
M. Parity for qualified transportation fringe benefits
Qualified transportation fringe benefits provided by an employer are excluded from an employee's gross income for income tax purposes and from wages for payroll tax purposes. Such benefits include parking, transit passes, vanpool benefits and qualified bicycle commuting reimbursements. Up to $230 (2009) per month of parking is excludable. Up to $120 (2009) per month of transit and vanpool benefits are excludable. These amounts are indexed for inflation.
The Act increases the monthly exclusion for employer-provided transit pass and vanpool benefits to the same level as the exclusion for parking, effective for months beginning on or after Feb. 17, 2009, and before Jan. 1, 2011.