February 06, 2009
The House has voted 244 to 188 to approve a stimulus bill (H.R. 1) with a $275 billion tax package, and the Senate Finance Committee has passed its own slightly larger tax title that will soon move to the Senate floor.
The House did not modify the tax title passed by the House Ways and Means Committee before its vote. Senate tax writers, however, made several changes to their original tax package during markup, including the addition of alternative minimum tax relief for 2009. More changes are likely before the full Senate votes on final passage.
The House and Senate versions are similar, but several significant differences will have to be ironed out before enactment. Both bills include temporary tax credits for individuals, a five-year net operating loss carryback period, extension of bonus depreciation to 2009, enhancements to existing energy tax incentives and loosened tax-exempt bond rules. The Senate legislation also would allow general business credits to be carried back five years instead of one, allow individuals to exclude more income from gains on small business stock, allow income from the repurchase of a taxpayer’s own debt at a discount to be spread over eight years and patch the AMT for 2009.
Congressional leaders are still pledging to have the finished package to President Obama before President’s Day on February 16.
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Following is a summary of the details of the major tax provisions in the two versions.
Individuals
Alternative minimum tax — The Senate Finance Committee accepted an amendment to its tax title that patches the AMT for 2009. It would increase the AMT exemption to $46,700 for individuals (up from $46,200 in 2008) and $70,950 for married couples (up from $69,950). The House Ways and Means Committee rejected a similar amendment offered by Republican lawmakers, and the White House does not support an AMT patch as part of a stimulus bill.
“Making work pay” credit — Taxpayers under both bills would receive a refundable tax credit of 6.2 percent of their income up to a maximum of $500 for individuals and $1,000 for couples filing jointly. The credit would be in effect for 2009 and 2010 and would phase out for adjusted gross incomes of $75,000 to $100,000 for single individuals and $150,000 to $200,000 for married couples. The credit would not be available for taxpayers that can be claimed as dependents on another taxpayer’s return.
As structured, the credit would be made available as a reduction of liability or increase in refund through the 2009 and 2010 returns. House Ways and Means Chair Charlie Rangel, D-N.Y., has indicated his expectation that delivery of the benefit will be accelerated throughout the year through reduced withholding. However, the Joint Committee on Taxation has reported that Treasury will not be able to adjust the withholding tables for employers until at least June. Individuals, of course, have the option of changing their own withholding or estimated tax payments at any time.
Earned income tax credit — Both bills would increase the EITC in 2009 and 2010 for credit recipients with three or more children and increase the beginning point of the phaseout range for married couples regardless of the number of children. For those with three or more children, the credit would be increased from 40 percent to 45 percent. For married couples, the beginning of the phaseout range for their credit would be increased by $1,880.
Child credit — Each of the two bills would increase the refundability of the child credit. In the House, the $1,000 child credit would be made fully refundable in 2009 and 2010. The Senate bill would reduce the current phaseout of refundability from $8,500 of income to $6,000.
Education credit — The Hope Credit would be enhanced under both bills for 2009 and 2010. Taxpayers would receive a credit equal to 100 percent of the $2,000 on tuition and expenses (including textbooks for the first time) and 25 percent of the next $2,000 — for a total credit of $2,500. The credit would be 40 percent refundable and would phaseout beginning at an adjusted gross income level of $80,000 for individuals and $160,000 for married couples.
Homebuyer credit — Both bills would eliminate the payback requirement for taxpayers using the temporary first-time homebuyer credit for purchases between January 1 and June 30, 2009, provided the home is not sold within 36 months of purchase. The Senate bill would also extend the provision’s sunset date.
The original credit was enacted last year and is equal to 10 percent of the purchase price of a principal residence up to $7,500. It is available for property purchased on or after April 9, 2008, and before July 1, 2009, by taxpayers who have not had ownership in a principal residence within three years of the purchase. The Senate bill would extend the provision through August 30, 2009. Under both bills, taxpayers who bought property between April 9, 2008, and January 1, 2009, still will have to pay back the credit over the next 15 years in equal installments, as originally required. The credit phases out for single taxpayers with adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for married couples filing a joint return).
Payments to seniors, disabled veterans and SSI recipients — The Senate bill would give a one-time $300 payment that would be made to Social Security, SSI and railroad retirement beneficiaries, as well as veterans receiving disability compensation and pension benefits.
Suspension of tax on unemployment benefits — The Senate bill would exempt the first $2,400 of unemployment benefits received in 2009 from income tax. The House bill has no such provision.
Business
NOL carrybacks — Both bills would extend the carryback period from two to five years for net operating losses in 2008 and 2009, but the House version includes a key limitation. Under both bills, the taxpayer could elect to extend the carryback period to three, four or five years for losses incurred in taxable years either beginning or ending in 2008 and 2009. However, in the House bill, this election would permanently reduce the applicable NOL by 10 percent.
In both bills, neither Fannie Mae and Freddie Mac, nor any company that received help through the financial bailout, could use the extended NOL carryback period. NOLs that are carried from or to 2008 or 2009 would also be able to offset up to 100 percent of AMT income.
Section 179 expensing — Both bills would extend through 2009 the $250,000 limit for small business expensing under Section 179 that applied in 2008. The increased phaseout threshold starting at $800,000 would also be extended through 2009.
Bonus depreciation — Both bills would extend through 2009 the bonus depreciation provision enacted for 2008. This provision allows one-half of the cost of eligible property to be recovered in the year it is placed in service, while the remaining half is depreciated using the normal rules.
As currently structured, the provision would allow for bonus depreciation on qualified property that is placed in service in 2008 or 2009, so long as it was not the subject of a binding contract before 2008. A binding contract for the acquisition of property entered into in 2008 will not prevent otherwise qualified property placed in service in 2009 from qualifying for bonus depreciation.
Under present law, certain types of (mostly long lived or long production period) property are allowed to qualify for bonus depreciation if they are placed in service in 2008 or 2009, but only as to costs incurred by the end of 2008. As currently structured, the bills would allow such property to be placed in service in 2008, 2009 or 2010, and bonus depreciation would be allowed with respect to costs incurred in 2008 and 2009.
Acceleration of AMT and R&D credits — The Senate bill would extend a provision allowing taxpayers to elect to cash out some of their older AMT and research and development credit carryovers in lieu of claiming bonus depreciation. The House bill does not include this provision.
Carryback of business credits — Under the Senate bill, general business credits could be carried back five years instead of one year as under present law. There is no equivalent provision in the House bill.
Small business capital gains — Under the Senate bill, individuals would be allowed to exclude 75 percent (increased from 50 percent) of the gain on small business stock issued after the date of enactment and before 2011 if the stock is held at least five years. There is no equivalent provision in the House bill.
Cancellation of debt income — In the Senate bill, some businesses would be able to recognize cancellation of indebtedness income over eight years for repurchases of debt in 2009 and 2010, with income inclusion generally delayed until 2011.
Work opportunity tax credit — The work opportunity credit would be expanded under both bills in 2009 and 2010 to apply to the hiring of unemployed veterans or unemployed youths between 16 and 24 years of age who are not attending any school and lack a sufficient number of basic skills.
Section 382 notice — Both bills would rescind Notice 2008-83, which made a Section 382 exception for built-in losses after bank changes in ownership. Under the provision, the notice would have no force or effect of law after January 16 unless a binding written contract on the ownership change is in place before that date. An earlier version of the provision also allowed for the notice to apply if a public announcement of an ownership change was made by January 16.
Government contractor withholding — The House bill would repeal the 3 percent withholding rate on payments made by federal, state and local governments that is scheduled to take effect in 2011. The Senate bill would delay the implementation of the provision for just one year.
S corporation built-in gains — The Senate bill would reduce temporarily the S corporation built-in gains holding period from the current 10-year period to a seven-year period for taxable years that begin in 2009 and 2010. The House version does not include the provision.
Energy
Renewable energy tax incentives — Both bills would make a number of enhancements to renewable energy tax incentives. There are several differences in the energy packages of the two bills that need to be resolved, but some of the major provisions proposed in one or both bills include:
• a three-year extension of the placed-in-service date for most facilities under the Section 45 production tax credit;
• an election in 2009 and 2010 to claim the Section 48 investment tax credit in lieu of the Section 45 production tax credit;
• a repeal of caps on the Section 48 credit and removal of a restriction on government financing;
• authorization of an additional $1.6 billion in clean renewable energy bonds;
• authorization of an additional $2.4 billion in qualified energy conservation bonds;
• an extension and increase in the Section 25C energy-efficient home improvement tax credit;
• an increase for 2009 and 2010 of the credit percentage and caps for the Section 30C alternative fuel pump credit;
• an additional 20 percent research credit in 2009 and 2010 for research on certain energy technologies;
• a new 30 percent investment tax credit would be established for designated advanced energy projects;
• an increase in the 250,000 vehicle limitation for the plug-in electric drive motor vehicle credit to 500,000; and
• a new 10-percent plug-in electric drive motor vehicle credit for low-speed vehicles, motorcycles and three-wheeled vehicles.
Bonds
State and local government bonds — Both bills would make a number of changes in the area of tax-exempt state and local government bonds. There are significant differences in the bond packages of both bills that need to be resolved, but some of the major changes proposed in one or both bills would:
• allow small financial institutions to take a deduction in 2009 and 2010 for the interest expense of tax-exempt municipal bonds if the investments are less than 2 percent of the bases of the institutions’ assets;
• increase the threshold from $10 million to $30 million in 2009 and 2010 when determining whether a tax-exempt obligation qualifies for the small-issuer exemption;
• exempt private activity bonds from the AMT for bonds issued in 2009 and 2010;
• create a new category of tax credit bonds in 2009 and 2010 for construction, repair or land acquisition for public schools;
• authorize an additional $1.4 billion in qualified zone academy bonds;
• provide state and local governments the option of issuing a tax credit bond instead of a tax-exempt bond in 2009 and 2010;
• create a new category of tax credit bonds for investment in economic recovery zones for 2009 and 2010;
• allow tribal governments to issue $2 billion in tax-exempt bonds without restricting them to the essential government function requirement; and
• apply the prevailing wage requirement to contracts using certain tax favored bonds.
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