Digging Through the American Recovery and Reinvestment Act of 2009January 04, 2010
The American Recovery and Reinvestment Act of 2009 ("The Act") was signed into law by President Barack Obama on February 17, 2009. The Act provides an estimated $800 billion in spending to jumpstart our economy, create or save millions of jobs and put a down-payment on addressing long-neglected challenges. The Act includes measures to modernize our nation's infrastructure, enhance energy independence, expand educational opportunities, preserve and improve affordable health care, provide tax relief and protect those in need. The following are incentives that will prove beneficial to businesses and owners in the construction industry.
The Act puts heavy emphasis on increasing spending on infrastructure improvements. New bond programs were created and existing bond programs were enhanced in order to stimulate the spending on infrastructure. The bonds also help provide relief for state and local governments as they confront large budget deficits.
Two new bonds that will affect building contractors are the Qualified School Construction Tax Credit Bonds and the Build America Bonds.
Qualified School Construction Tax Credit Bonds: These tax credit bonds were authorized for issue in 2009 and 2010, with a national volume cap of $11 billion per year. That's $22 billion of bond proceeds that can be used in the new construction, rehabilitation or repair of public schools or for the purchase of land on which a funded school can be built.
Build America Bonds: These taxable bonds may be issued by state and local governments before January 1, 2011. The bonds will provide the bondholders with taxable interest payments and a credit against their federal income tax liability. The issuance of these bonds is to help pay for projects paid for by state and local governments, such as infrastructure improvement.
There is one provision that will specifically affect government contractors. Starting in 2011, the federal government, every state and local government, and all of their political subdivisions were required to withhold tax at the rate of three percent on certain payments made to persons providing any property or services (IRC §3402(t)). The Act delays the withholding and reporting requirement by one year to 2012.
Other bonds that were intended to stimulate infrastructure improvements include the Recovery Zone Economic Development Bonds, Qualified Zone Academy Bonds, Qualified Energy Conservation Bonds and New Clean Renewable Energy Bonds.
The Act provides businesses with approximately $75 billion in tax benefits for 2009 and 2010. The incentives include extending bonus depreciation, increasing the amount of §179 expensing, adjusting the estimated tax requirements for small businesses, providing for workplace hiring incentives and increasing the number of years a net operating loss can be carried back.
Bonus Depreciation: The Act extends the 50 percent first-year depreciation allowed under the 2008 Economic Stimulus Act to assets placed in service before January 1, 2010. In many cases, the taxpayer may be able to deduct 60 percent of the cost basis (for five year property – typically equipment) in the first year. The bonus depreciation provisions were also extended for vehicles.
Thus, the dollar cap for new vehicles placed in service in 2009 is $8,000. Therefore, first year depreciation of $11,160 can be taken on light trucks and vans, while $10,960 can be taken in year one for automobiles.
§179 Expensing: As with bonus depreciation, the amounts from the 2008 Economic Stimulus Act for the §179 expensing have been extended to 2009. Without the extension, the limits on the §179 expensing would have been $125,000, and the threshold for reducing the deduction would have been $500,000. The Act, therefore, allows the taxpayer to expense $250,000 and keeps the $800,000 cap on reducing the amount of the deduction.
Estimated Taxes: Individuals may avoid penalties and interest for failure to pay estimated taxes by paying 100 percent of the prior year's tax liability (110 percent if the adjusted gross income on the prior year tax return exceeds $150,000). For 2009, a qualified individual whose primary income is from a small business may base their estimated taxes on 90 percent of the prior year's tax liability instead of 100 or 110 percent. This will result in much lower estimated tax payments that the small business owner could then put back into their business.
In order to qualify, the individual's adjusted gross income from the previous year's tax return must be less than $500,000, and more than 50 percent of the gross income shown on the return from the previous year must be from a business with less than 500 employees on average during the calendar year that ends with or within the preceding tax year of the individual.
Work Opportunity Tax Credit (WOTC): The Act created two new categories of targetedgroups under the existing WOTC.The two new groups are unemployed veteransand disconnected youth who arehired and begin work in 2009 or 2010.
Net Operating Loss (NOL) Carry Back: Normally NOLs are carried back two years and forward 20 years. The Act allows eligiblesmall businesses to elect to have anNOL carry back period of three, four or five years for losses incurred in 2008. An eligiblesmall business is defined as a corporationor partnership that meets a $15 milliongross receipts test for the tax year in whichthe loss was generated. The gross receiptstest is met if the taxpayer does not averageannual gross receipts of $15 million for thethree taxable year period ending with thetax year the loss was generated.
S Corp Built-In Gain Period: The Act temporarily shortens the built-in gain period from 10 years to seven years. The built-in gain period is the holding period that an S Corporation must hold the assets subject to the built in gains tax upon conversion from a C Corporation. The provision applies to S corporations that recognize built-in gain in tax years beginning in 2009 and 2010.
The increased emphasis on infrastructure improvements and the increased pressure by the federal government on state and local governments to pay for them themselves (see all the bond enhancements) should provide work for the construction industry. The business incentives should help to increase business owners' cash flow and allow them to invest in their businesses in order to promote growth. In addition, the American Recovery and Reinvestment Act of 2009 is filled with numerous individual and energy incentives.
With all of the energy incentives, contractors may see more and more requests for "going green." As the administration moves to build up the economy, the construction contractors will hopefully be taken along for the ride as we try to dig ourselves out of this economic downturn.
As a tax partner, Andrew has experience with tax planning, research and consulting for clients in a variety of industries including aerospace, manufacturing, consumer products, real estate, construction, technology and healthcare, as well as private equity funds. He specializes in federal and state tax returns for individuals, partnerships and privately held businesses. Andrew also has significant experience with domestic and multinational companies, as well as S- and C- corporations. As a consultant, he performs cash flow and liquidation analysis and has experience in research and development credits, mergers, acquisitions and international taxes.