Senate Finance Committee Passes Economic Stimulus Legislation

On January 27, 2009, the Senate Finance Committee approved the tax portion of the Senate version of economic stimulus legislation.  The Committee approved the markup of the tax title to the bill, titled the American Recovery and Reinvestment Act of 2009, by a vote of 14 to 9.  The tax portion of the legislation includes more than $300 billion in tax breaks over ten years, heavily loaded toward the 2009 and 2010 period.  The principal individual tax break would be the Making Work Pay Credit -- 6.2 percent of earned income up to a maximum of $500 ($1,000 for joint filers), with the Senate version adding a $300 payment to individuals on fixed incomes.  The credit could be claimed as a refundable credit on the tax return or as a reduction in withheld payroll taxes.  The repayment obligation on the first-time homebuyer credit would be eliminated for qualifying home purchases in 2009, and the Senate version would extend the purchase deadline from June 30, 2009 to August 31, 2009.  The Hope Credit would be replaced in 2009 and 2010 with an enhanced American Opportunity Tax Credit of up to $2,500 per year for each of the first four years of college.  Tuition, fee and textbook costs would need to total $4,000 for the year to qualify for the maximum credit.  The income phase-out range would also increase.  In the Senate version the American Opportunity Tax Credit would be 30 percent refundable, rather than the 40 percent in the House version. The earned income floor on the refundable child tax credit would be reduced to $6,000, as compared to zero in the House version.  The Earned Income Tax Credit would also be expanded. 

The Senate version adds several individual tax breaks not in the House version, including an additional year of AMT relief, an exclusion of up to $2,400 in unemployment compensation for 2009, use of tax-free distributions from 529 plans for computers and computer technology, and expansion of the Plug-In Electric Vehicle Credit.

Business tax breaks included in the legislation include a five-year carryback of net operating losses, with differences between the House and Senate versions on the amount and flexibility of the carryback; extension of 50 percent first-year bonus depreciation and Code Sec. 179 expensing, with motion picture film and video tape added to the property qualifying for bonus depreciation in the Senate version; and an expanded Work Opportunity Tax Credit.  Notice 2008-83, permitting domestic banks to avoid the usual restrictions on utilizing net operating losses under Code Sec. 382, would, under this bill, have no further force and effect after January 16, 2009.

The Senate version of the legislation would also include some additional business tax breaks not in the House version, including an expanded carryback of the General Business Credit, extension of the use of refundable credits in lieu of bonus depreciation, deferral of cancellation of indebtedness income, an increase to 75 percent in the exclusion for Qualified Small Business Stock, a temporary reduction to seven years for the S Corporation built-in gain holding period, an investment credit for broadband investments in rural and underserved areas, additional allocations for the New Markets Tax Credit, and increases in the transportation fringe benefit for transit passes and van pooling.

The legislation also makes a number of enhancements to tax breaks designed to promote alternative energy and energy conservation, including the Residential Energy Property Tax Credit under Code Sec. 25C, the Residential Energy Efficient Property Credit under Code Sec. 25D, the alternative fuel vehicle refueling property credit, the Renewable Electricity Production Credit under Code Sec. 45, the Alternative Energy Investment Credit under Code Sec. 48, a new energy research and development credit, and new energy bonds.  Again, there are a number of differences in the House and Senate approach to these energy provisions. 

The legislation also provides a variety of bond assistance to state and local governments, also with several differences between the House and Senate versions.  The Senate would defer for one year the withholding requirement for government contractors.

The Senate is expected to take up the legislation within a week.  Republican support for the legislation in its present form appears to be minimal, with most Republicans pushing for greater tax cuts and smaller spending increases in the larger, non-tax, portion of the legislation.  The new Administration supports the legislation, and President Obama is encouraging its passage as soon as possible, while also leaving the door open to additional changes to attract more bipartisan support.  Many of the effective dates on the tax breaks relate back to January 1, 2009, to encourage individuals and businesses to act assuming that the tax breaks are already in effect.