By John R. Bonn
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Tax Act of 2009 ("ARRTA"). ARRTA contains significant potential Federal income tax relief for businesses. Some of the more important provisions are summarized in the remainder of this article.
- Delayed Recognition of Debt Cancellation Income for Debt Repurchased, Replaced or Modified During 2009 or 2010. A corporation or business recognizes cancellation of debt income ("COD") when the taxpayer or a related party repurchases its debt for less than the amount outstanding or modifies or replaces the debt so it has a lower issue price. ARRTA allows the COD to be deferred until 2014 and recognized over the next five years through 2019. If deferral is elected, deductions for original issue discount ("OID") on direct or indirect replacement debt are similarly deferred. COD so deferred is accelerated into income upon cessation of business, liquidation, or sale of all or substantially all the assets of the business (or the day before it files a bankruptcy petition) or, in the case of an S corporation or partnership, upon sale, exchange or redemption of an interest or death of a shareholder or member.
- Temporary Allowance of Deductions for OID on Modification or Exchanges Into High-Yield Discount Obligations. Corporations cannot deduct unpaid OID representing a yield higher than six percentage points over the applicable federal rate on debt with a term of 5 years or more. ARRTA temporarily suspends this disallowance for exchanges or modifications after September 1, 2008 and before December 31, 2008, provided the old debt itself was not a high-yield discount obligation, does not have contingent interest, and is not held by a person related to the issuer. Thus, such publicly traded debt can be exchanged without COD arising as a result of trading at a discount in the secondary market, and privately held debt can be modified debt so it has substantial OID without COD (such as due to deferring payments of interest). IRS can temporarily use higher rates to determine high-yield discount status.
- Extension of Bonus Depreciation and Increase in Small Business Expensing. Businesses can deduct for regular and alternative minimum tax ("AMT") purposes 50% of the cost of most depreciable tangible personal property, computer software, qualified leasehold improvements and certain other property acquired and placed in service during 2009 as well as during 2008. Also, taxpayers can write-off immediately up to $250,000 of tangible personal property and computer software purchased during 2009, subject to phase out if such purchases exceed $800,000.
- Extension of Election to Accelerate Pre-2006 AMT and Research Credits In Lieu of Bonus Depreciation. As under prior law, instead of bonus depreciation a corporation may elect to increase its limits on use of pre-2006 AMT and research credits up to the lesser of 6% thereof or $30 million. Different elections for 2008 and 2009 are allowed.
- Preservation of NOLs Following Ownership Changes Pursuant to Loans Under EESA. The limitation on using net operating losses ("NOLs") of a corporation after a more than 50% ownership change does not apply to a change required under a loan agreement or commitment with Treasury under the Emergency Economic Stabilization Act of 2008 to rationalize costs, capitalization and capacity with respect to manufacturing workforce of, and supplies to, the corporation, or to certain later ownership changes, provided the corporation is not more than 50% held by one or related persons (other than a voluntary employees benefit association). IRS Notice 2008-83 is overturned for post‑January 16, 2009 deals not previously committed (Notice 2008-83 granted similar relief to banking institutions).
- 5-Year Carryback of NOLs for Smaller Business. A business with average gross receipts up to $15,000,000 for its prior three years may elect to carry back five years any NOL for its taxable year beginning or ending in 2008.
- Temporary Suspension of S Corporation 10-Year Built-In Gain Rule. S corporations that have not been C corporations for more than seven years can sell built-in gain assets during 2009 or 2010 without incurring corporate-level tax, rather than having to wait until more than 10 years after electing S corporation status.
- Expansion of Qualified Small Business Stock Rule for Investments Before 2012. For qualified small business stock acquired after enactment and before 2012 and held five years, 75% rather than 50% of gain will be excluded.
- Numerous Other Business Incentives. ARRTA includes numerous other incentives for business investment and activity, including credits for hiring veterans and disconnected youth, expansion of industrial development and other tax-exempt bond provisions, credits for renewable energy products and projects, and many other new tax benefits.
Pursuant to applicable Treasury Regulations, we notify you that the information in the foregoing flyer does not constitute legal or tax advice, cannot be used for the purpose of avoiding any tax penalties that may be imposed on any person, and may not be used or referred to in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any person. No limitation is hereby imposed on disclosure of tax treatment or structure of any transaction.