News & Insights

March 31, 2009
By Phillip L. Jelsma

Federal and State First Time Homebuyers Credits.

The American Recovery and Reinvestment Act of 2009 (“Act”) modifies the first-time homebuyers credit. A first-time homebuyer who, in 2008, purchased a home that he or she uses for principal residence, may claim a credit up to $7,500. An individual who is married filing a separate return may claim a $3,750 tax credit. If the married person files a joint return, and has adjusted gross income of $150,000 or more, the credit is gradually reduced. For single taxpayers and married filing separately, the reduction begins at $75,000. In addition, anyone claiming this credit must pay it back over a 15-year period beginning on the second taxable year after which the credit is claimed. For example, for 2008, that would be 2010. Finally, a taxpayer claims the credit and then sells the home before the end of the 15-year recapture period, has an accelerated recapture provision in effect causing a repayment of the credit.

For 2009, the credit amount increases to $8,000 and the repayment provision no longer applies. Unfortunately, the accelerated recapture provisions apply for the 3-year period following the date of purchase. The increased credit only applies to homes purchased before December 1, 2009. A taxpayer may elect to accelerate the benefit of the credit by treating a purchase made before December 1, 2009 as if the purchase occurred in 2008.

Filing Options for First Time Homebuyer.

File an extension. Taxpayers who haven’t yet filed their 2008 returns but are buying a borne soon can request a six-month extension to October 15. This step would be faster than waiting until next year to claim it on the 2009 tax return. Even with an extension, taxpayers could still file electronically, receiving their refund in as few as 10 days with direct deposit.

File now, amend later. Taxpayers due a sizable refund for their 2008 tax return but who also are considering buying a house in the next few months can file their return now and claim the credit later. Taxpayers would file their 2008 tax forms as usual, then follow up with an amended return later this year to claim the homebuyer credit.

Amend the 2008 tax return. Taxpayers buying a home in the near future who have already filed their 2008 tax return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on the 2009 return.

Claim the credit in 2009 rather than 2008. For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return. This could include people who have less income in 2009 than 2008 because of factors such as a job loss or drop in investment income.
In addition, California has its own first-time homebuyer credit. Whereas under the federal rules, the taxpayer could not have owned a home within the 3-year period ending on the date of the purchase of the home, the California credit only applies for the purchase of a newly built home that has never been occupied. The California state tax credit is $10,000 or 5% of the purchase price of the home, whichever is less. The sale must close between March 1, 2009 and March 2010. The California credit will be provided in 3 equal amounts (up to $3,333 per year) over three consecutive tax periods, beginning in the year of purchase. It can be combined with the federal tax credit, in essence, creating up to a $18,000 tax benefit.

Extension of Bonus Depreciation.

The 50% bonus depreciation deductions for property placed in service prior to January 1, 2009 has now been extended through January 1, 2010. The placed in service deadline for non-commercial aircraft is one year longer, to January 1, 2011. Bonus depreciation is available for new property that is depreciable with a recovery period of 20 years or less, off the shelf computer software depreciable over 3 years or qualified leasehold improvement property. Listed property such as passenger automobiles, which is used 50% or less for business, does not qualify for bonus depreciation, nor does most intangible property.

• The bonus first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes. The taxpayer may elect out of bonus first-year depreciation.
• “Qualified property” for purposes of this section includes (1) depreciable property to which § 16 applies and has a recovery period of 20 years or less (most machinery, equipment or other tangible personal property), (2) computer software, and (3) certain leasehold improvements. The original use of the property must begin with the taxpayer.

Election to Accelerate Recognition of Historic AMT/R&D Credits.

In 2008, in lieu of the above-described bonus depreciation, businesses can elect to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits. The amount that taxpayers may accelerate is calculated based on the amount that the taxpayer invests in property that would otherwise qualify for bonus depreciation. The Act extends this acceleration rule through 2009.

Election to Expense the Purchase of Assets.

Code Section 179, which allows a tax credit to expense the cost of an asset purchased for a trade or business is increased in 2009 from $250,000 to $800,000.

5-Year Carryback for 2008 and 2009 Net Operating Losses.

The Act extends the period that a small business can carryback net operating losses. Instead of the normal 2 years, a taxpayer may elect to carryback 2008 losses 3, 4, or 5 years. Generally, the 5-year loss period will only apply if the taxpayer has less than $15 million in gross receipts, including any entities in which the taxpayer has a 50% or greater common ownership. Taxpayers must make an affirmative election to use a longer carryback.

• Eligible “small businesses” are corporations, sole proprietorships, or partnerships whose average annual gross receipts are $15 million or less for the three-tax-year period ending with the tax year in which the loss arose.
• A “2008 NOL” is a NOL either for a tax year beginning in 2008 or ending in 2008.
• The election must be made by the due date for the taxpayer’s return for the year in which the NOL arose, with extensions.
• This provision may be useful to taxpayers in obtaining cash refunds in a loss year. If for example, a taxpayer paid taxes in 2004, and incurs a NOL in 2008, the taxpayer can carry back this NOL to create a current tax refund.

Deferral of Cancellation of Indebtedness Income.

Income attributable to the discharge of indebtedness after December 31, 2008 and before January 1, 2010 may be included in income over a 5-year period beginning with the 5th taxable year following the year of reacquisition occurring during 2009 and the 4th taxable year in which the reacquisition occurs during 2010. This applies whether the debt is acquired for cash or is acquired for a new debt instrument. Further, this provision may apply even if a related party acquires the debt from an unrelated person. If the taxpayer elects to defer the discharge of indebtedness income, the other exclusions for Chapter 11, insolvency and qualified real property business indebtedness do not apply.

• For example, if a taxpayer repurchases debt issued for $10 million at a discounted price of $5 million in 2009, such taxpayer has $5 million of Cancellation of Indebtedness Income (“COD”). If the relief provided under the Act is elected, instead of recognizing $5 million in 2009, the taxpayer recognizes $1 million in each of 2014-2018.
• This election is voluntary. Therefore, if a taxpayer has, for example, NOLs (see definition below) expiring in 2009, the taxpayer would generally not elect this deferral.
• A repurchase for this purpose includes the retirement of debt for cash, forgiveness of debt, conversion of debt into corporate stock or a partnership interest of the issuer, contribution of the debt to the capital of the issuer, or exchange of the debt for newly issued debt. Further, certain modifications of a debt obligation may cause a deemed debt-for-debt exchange.
• Applicable debt for purposes of this relief is either (1) a debt instrument issued by a C corporation, or (2) a debt instrument issued by any other person or legal entity in connection with the person’s or legal entity’s trade or business.
• COD deferred under this rule is accelerated upon the taxpayer’s death, the liquidation or sale of substantially all the taxpayer’s assets, or cessation of business by the taxpayer (as applicable). It does not appear that the COD deferral is accelerated in the case of a tax-free reorganization.
• Certain additional rules apply if the repurchased debt is exchanged for debt which is subject to the original issue discount (“imputed interest”) rules.
• The election is made with the return for the taxable year in which the debt is repurchased.
• This rule allows taxpayers to restructure or buy back debt at a significant discount, which may be possible in current market conditions, and defer the related taxes on such buy-backs and restructurings.

Built-in Gains Period for S Corporations.

The Act reduces the built-in gains tax period for S corporations from 10 years to 7 years beginning in 2009 and 2010. Generally, when a taxpayer converts from C to S status, for a 10-year period following the date of conversion, there is a C corporation tax on the gain. The Act reduces this built-in gain tax period from 10 years to 7 years.

Small Business Estimated Tax Payment Relief for 2009.

The Act reduces the 2009 required estimated tax payments for individuals who received not less than 50% of their gross income in the prior year from a small trade or business and whose adjusted gross income from the prior year was less than $500,000 ($250,000 is married and filing separately). For purposes of this relief, a small trade or business means any trade or business that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding taxable year.

Small Business Capital Gains.

Prior to the Act, 50% of the gain from the sale of certain small business stock held for more than five years is excluded from income. A percentage of the excluded gain, however, is an alternative minimum tax preference. The remaining 50% is taxed at a maximum rate of 28%. Under the Act, the 50% gain exclusion is increased to 75% for stock issued after February 17, 2009 and before January 1, 2011. The remaining 25% is taxed at a maximum rate of 28% (i.e., an effective rate of 7% under the regular tax and 12.88% under the alternative minimum tax).

• To qualify, the stock must generally be purchased by a non-corporate taxpayer at original issue for cash, and, at the time the stock is issued, the corporation must be a domestic C corporation whose gross assets do not exceed $50 million and is not primarily engaged in the active conduct of certain professional services.
• The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or $10 million.

Work Opportunity Credit.

The work opportunity credit is expanded to apply to unemployed veterans and disconnected youth who begin work in 2009 or 2010.

New Markets Tax Credit.

The new markets tax credit provides tax benefits for investments in certain entities whose primary Mission is serving or providing investment capital for low-income communities or low-income persons. The Act increases the maximum amount of qualified investments by $1.5 billion to $5 billion per year for 2008 and 2009.