The votes are in and the President has signed the American Recovery and Reinvestment Act of 2009 (ARRA). In this month’s Tax and Accounting article we discussed the impact ARRA will have on individuals and families. In this article, we will take a closer look at the impact on businesses.
The total estimated revenue effect prepared by the Joint Committee on Taxation of the United States Congress pegs overall tax savings at $326 billion. Depending on how you parse the numbers, the effect to individuals ranges from $246 billion to as much as $276 billion. This leaves between $80 billion and $50 billion in tax savings to businesses and other interests. That sounds great, but ‘the devil is in the details’, so here is the rest of the story.
The real tax savings to businesses weighs in at only $6.15 billion. This comes from:
- A one year extension of the 50% bonus depreciation to purchases of certain assets in 2009 ($5 billion),
- A one year extension of more generous expensing provisions for purchase of business equipment ($41 million),
- A one year extension of the election to use AMT and Research credits as refundable credits in lieu of taking bonus depreciation ($805 million),
- A five year carry back of 2008 net operating losses for businesses with $15 million or less in gross receipts ($947 million),
- A change in the treatment of certain ownership changes of manufacturing firms for purposes of limiting net operating loss carryforwards and built-in losses ($3.2 billion), and
- Miscellaneous other provisions, including adding unemployed veterans and disconnected youths to people eligible for the work opportunity tax credit ($3.134 billion).
You may notice that the foregoing list adds up to a little more than $6.15 billion. That’s because ARRA also will tighten other rules that limit the ability to utilize built-in losses following an ownership change, raising $6.977 billion.
So what else does ARRA give the taxpayer to make up the total $50 billion to $80 billion in savings?
To begin with, the subsidization of COBRA health premiums discussed in this month’s Tax and Accounting article accounts for $24.7 billion of the difference. Energy incentives will reduce taxes for individuals and businesses by an estimated $22 billion. Economic recovery tools, such as issuance of certain private activity bonds, Indian tribe economic development bonds, and extension of the new markets tax credit are expected to reduce tax receipts by approximately $6.5 billion.
Much was made of improvements to the nation’s infrastructure in the debate over the bill. To finance some of them, state and local governments will need to raise funds from the issuance of debt. Through a combination of changes in rules relating to how financial institutions recognize tax exempt interest, issuance of new tax credit bonds, and other types of bonds, Congress expects to give up $19.6 billion in revenue over the next ten years.
If we have done our math right, the total so far comes to around $79 billion. Take out the COBRA premium support and $4.55 billion in energy tax credits to individuals and you get back to about $50 billion.
An S Corporation that converted from a C Corporation within the last six to seven years is a winner under ARRA. Prior law imposed a tax on any built-in gain on corporate assets at the date of the election to become an S Corporation if those assets were sold within ten years of the conversion. Thus, the excess of the fair market value of a company’s assets (including goodwill, etc.) over the book value was subject to a 35% tax. For 2009 and 2010, if you sell assets with a built-in gain after the 7th taxable year from the time of the S Corporation election, no built-in gain tax will be levied. For those looking to dispose of excess assets or sell the business, 2009 and 2010 could be ideal years to do so.
Whether ARRA will achieve its goals or not remains to be seen, but one thing is certain – it presents opportunities for businesses that may well not come around again. Let’s get together and discuss how you might be able to take advantage of the American Recovery and Reinvestment Act of 2009.
Have a terrific March!