Baucus Unveils Stimulus Tax Mark

Senate Finance Committee Chairman Max Baucus, D-Mont., on January 23 unveiled an economic recovery tax package, the American Recovery and Reinvestment Act of 2009, which includes $275 billion in tax cuts for individuals and businesses, in addition to investments in renewable energy, infrastructure projects, and health care. The release came a day after the House Ways and Means approved a slightly different version of the economic stimulus legislation (HR 598) (TAXDAY, 2009/01/23, C.1), setting the stage for more negotiations before Congress can approve the measure and send it to President Obama before the President's Day recess beginning on February 13.

Most provisions in the competing bills are the same. Differences in ideology and costs explain the differing provisions. The total dollars in tax cuts are the same in the House and Senate versions, but Baucus lays out almost $11 billion more than his counterpart Charles B. Rangel, D-N.Y., does for green energy incentives. A tax break highly favored by the business community that allows companies to carry back net operating losses (NOLs) over two years, was increased to five years in the Baucus mark. Rangel made a last-minute change in his mark and offered companies the five-year option with a permanent 10-percent reduction in the value of their NOLs.

During the Ways and Means markup on January 22 House Democrats defeated a Republican amendment that would have temporarily cut taxes on jobless benefits for two years, but the Senate version includes an altered version of the proposal that would temporarily suspend federal income tax on the first $2,400 of unemployment benefits per recipient. The provision would be in effect only for 2009 and is estimated to cost $4.7 billion over ten years. In the Senate bill the income threshold for the refundable child tax credit would be lowered to $6,000, while the House bill would eliminate the threshold.

Notably missing from both bills is a fix for the alternative minimum tax (AMT). Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, said that he will be fighting during the markup on January 27 to include an AMT patch in the legislation. "Without it, at least 24 million middle-income families will face a tax increase, and that's the last thing anyone needs right now," he said.

Additional business tax cuts and investments include delayed recognition of certain cancellation of debt income, extension of bonus depreciation, elective expensing (Code Sec. 179), and monetization of accumulated AMT and R&D credits in lieu of bonus depreciation, an expansion of the work opportunity tax credit (WOTC), new markets tax credit and industrial development bonds, and an increase in the exclusion for small business capital gains.

Tax breaks for individuals include the making work pay credit which would provide an individual tax credit in the amount of 6.2 percent of earned income, expansion of the earned income tax credit and the refundable child tax credit, creation of a $2,500 higher education tax credit, inclusion of computers as qualified education expenses in Code Sec. 529 education plans, and a homeownership tax credit.

JCT Description of the American Recovery and Reinvestment Tax Act of 2009, JCX-10-09

JCX-11-09

SFC Release: Stimulus Legislation Memorandum

IRS Highlights Tax Law Changes Related to National Disaster Relief (FS-2009-8)

The IRS has released a fact sheet highlighting provisions of the National Disaster Relief Act of 2008, Subtitle B of Title VII of the Emergency Economic Stabilization Act of 2008 (P.L. 110-343), which provide tax relief for victims of federally declared disasters occurring after December 31, 2007, and before January 1, 2010. The National Disaster Relief Act, which provides numerous tax benefits that may be used by anyone who is affected by a federally declared disaster, effectively replaces the former strategy of providing targeted benefits for disaster victims in the weeks or months following the incident.

Major provisions of the National Disaster Relief Act include:

--an expansion of the availability of the casualty loss deduction to include not only individual taxpayers who itemize but, also, those who claim the standard deduction;

--an increase, for tax years beginning in 2009, in the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500 (the $100 floor returns for tax years beginning after 2009);

--a waiver of the requirement that the net casualty loss deduction be allowed only if the casualty loss exceeds 10 percent of the individual's adjusted gross income;

--the creation of a special five-year net operating loss carryback period for qualified disaster losses; and

--increases in the charitable mileage deduction and in the charitable use of a vehicle allowance.

Other important provisions in the National Disaster Relief Act for business taxpayers include:

--an election to deduct, rather than capitalize, certain qualified disaster cleanup expenses;

--a waiver of certain mortgage revenue bond requirements for affected business taxpayers and permission to use the bond proceeds for rebuilding;

--a new set of disaster private activity bonds for business reconstruction;

--a deduction for 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available; and

--an increase in the limits that can be expensed for qualifying Code Sec. 179 property.

Certain provisions of the National Disaster Relief Act do not apply to the Midwestern disaster area, i.e., disasters affecting the Midwest that were declared from May 20, 2008 through July 31, 2008. That is because the Heartland and Hurricane Ike Disaster Relief Act, part of the same legislation that resulted in the National Disaster Relief Act, provides other tax benefits.

IRS Fact Sheet FS-2009-8, 2009FED ¶46,254

Other References:

Code Sec. 63

CCH Reference - 2009FED ¶6023.033

Code Sec. 143

CCH Reference - 2009FED ¶7786.025

CCH Reference - 2009FED ¶7786.073

Code Sec. 165

CCH Reference - 2009FED ¶10,005.01

CCH Reference - 2009FED ¶10,005.041

Code Sec. 168

CCH Reference - 2009FED ¶11,279.001

Code Sec. 172

CCH Reference - 2009FED ¶12,014.061

Code Sec. 179

CCH Reference - 2009FED ¶12,126.01

CCH Reference - 2009FED ¶12,126.03

CCH Reference - 2009FED ¶12,126.0325

Code Sec. 198A

CCH Reference - 2009FED ¶12,467.01

Tax Research Consultant

CCH Reference - TRC INDIV: 54,200

CCH Reference - TRC INDIV: 54,300

CCH Reference - TRC BUSEXP: 45,154.05

CCH Reference - TRC BUSEXP: 57,300

CCH Reference - TRC BUSEXP: 57,304.45

TRC DEPR: 3,600

Additional Guidance Provided on Election Not to Claim 50-Percent Additional First-Year Depreciation (Rev. Proc. 2009-16)

The IRS has provided additional guidance to clarify the rules regarding the effects of making the Code Sec. 168(k)(4) election not to claim bonus depreciation, the time and manner for making the election, the allocation of the credit limitation increases among the members of a controlled group, the effect of the election on partnerships with corporate partners that make the election, the applicability of this election for S corporations, and the election under Act §3081(b) of the Housing and Economic Recovery Act of 2008 (P.L. 110-289) by certain automotive partnerships. Except for these certain automotive partnerships, only a corporation may elect to apply Code Sec. 168(k)(4). This guidance supplements earlier guidance contained in Rev. Proc. 2008-65, I.R.B. 2008-44, 1082.

The election is made by the taxpayer for its first tax year ending after March 31, 2008, and applies to all eligible qualified property placed in service by the taxpayer in the taxpayer's first tax year ending after March 31, 2008, and in any subsequent tax year. When the election is made, the corporation forgoes the 50 percent additional first year depreciation deduction and instead increases the limitations under both the general business credit (Code Sec. 38(c)) and the alternative minimum tax (Code Sec. 53(c)). This will enable a corporation to claim unused credits from tax years beginning prior to 2006 that are allocable to research expenditures or AMT liabilities. The guidance clarifies that --to the extent that a corporation is allowed the business or AMT credit in an amount allocable to the aggregate increases in the credit limitation as a result of the Code Sec. 168(k)(4) election --any such amounts will be treated as overpayment (within the meaning of Code Sec. 6401(b)) and refundable to the taxpayer.

The guidance clarifies that generally a corporate taxpayer must make the election by the due date, including extensions, of its federal income tax return for its first tax year ending after March 31, 2008, even if the taxpayer does not place in service any eligible qualified property during the first tax year ending after that date. Special rules are included for taxpayers whose first tax year ending after March 31, 2008, ends before December 31, 2008.

The guidance also describes the necessity for an electing taxpayer to allocate the bonus depreciation amount between the business credit limitation under Code Sec. 38(c) and the AMT credit limitation under Code Sec. 53(c). Different allocations may be used for different tax years.

In addition, the guidance clarifies that an S corporation is allowed to make this election, but any increases in the business or AMT credit limitations that result from the election must be applied at the corporate level, and not at the shareholder level.

Rev. Proc. 2009-16, 2009FED ¶46,255

Other References:

Code Sec. 168

CCH Reference - 2009FED ¶11,279.058

CCH Reference - 2009FED ¶11,279.19

Tax Research Consultant

CCH Reference - TRC DEPR: 3,600

TRC DEPR: 3,606