Below are some of the highlights of the Worker, Homeownership and Business Assistance Act of 2009 signed into law by President Obama on November 6th, 2009.
Especially as the close of the current tax year approaches, you may want to take certain steps to maximize your tax savings under the new law. We are here to assist you and answer your questions.
Two popular tax breaks – the first-time homebuyer credit and the expanded net operating loss (NOL) carryback – are extended in the new law. Some non first-time homebuyers may be eligible for a reduced credit. Additionally, the expanded NOL carryback is now available to all businesses, not just for small businesses. Along with these incentives, the new law also extends the FUTA (unemployment) surtax, increases corporate estimated tax payments for part of 2014, delays application of worldwide allocation of interest, increases penalties for failure to file partnership or S corporation returns, expands electronic return filing by paid preparers, and excludes some special payments to military personnel from income.
First-time homebuyer credit. The first-time homebuyer credit is one of the most popular tax incentives in recent years. However, it is not a permanent tax break. It is temporary. Its originally scheduled expiration date of November 30, 2009 prompted Congress to extend and expand it.
Originally, the credit was limited to $7,500 ($3,750 for a married taxpayer filing separately) and the credit acted like a loan. Taxpayers had to repay it in equal installments over 15 years. The repayment requirement appeared to discourage taxpayers from taking the credit and Congress removed it last year in most cases. Congress also raised the maximum credit to $8,000 ($4,000 for a married taxpayer filing separately).
The new law extends the credit for principal residences purchased on or before April 30, 2010. If a taxpayer enters into a binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the new law treats the credit as not expiring until July 1, 2010. Members of the U.S. armed forces, foreign service and intelligence community may have additional time to claim the credit if they are serving on qualified official extended duty outside of the U.S.
The new law also extends a special rule that could boost your expected tax refund. Eligible taxpayers can elect to treat a qualified purchase of a principal residence after December 31, 2008 as made on December 31 of the calendar year preceding the purchase. For example, if you purchase a qualified principal residence on March 2, 2010 and you are eligible for the credit, you can elect to treat the purchase as made on December 31, 2009 and claim the credit on your 2009 return. This treatment could result in a larger refund in 2010 depending on your personal tax situation. Otherwise, you could wait and claim the credit when you file your 2010 return in 2011. This election needs to be reviewed carefully. Our office can help you decide when to claim the credit to maximize your tax savings.
Until now, the credit was limited to first-time homebuyers. The full credit (the $8,000 credit) is still limited to first-time homebuyers. However, some long-time residents of the same principal residence may be eligible for a reduced credit of $6,500. Generally, you must have owned and used the same residence as your principal residence for any five consecutive year period during the eight year period ending on the date of the purchase of a subsequent principal residence. This provision is intended to help younger homeowners who are trading up and seniors who may be looking to downsize.
Another notable change in the new law enables many more taxpayers to take advantage of the credit. Congress raised the income phase-outs for the credit. Previously, the credit phased out for single individuals with modified adjusted gross income (MAGI) between $75,000 and $95,000 and for married couples filing joint returns with MAGI between $150,000 and $170,000. Under the new law, phase out starts for single individuals with MAGI at $125,000 and for married couples filing joint returns with MAGI at $225,000.
While the homebuyer credit can be very valuable, it is also very complex. In addition to the provisions we have described, there are special rules for repayment, new documentation requirements, a purchase price cap, and more. Please contact our office for more details about the credit.
NOL carryback. In what is very welcomed news for many businesses buffeted by the recession, the new law not only extends special NOL carryback rules, it makes all businesses eligible for the expanded carryback first made available under the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act). NOL carrybacks are valuable when taxpayers are operating at a loss. A taxpayer can use an NOL to obtain a refund for taxes paid in prior or future years when they have an operating gain. Under normal circumstances, the carryback period is two years. The new law more than doubles that period, allowing up to a five-year carryback of NOLs.
Under the 2009 Recovery Act, a qualified small business could elect to carry back 2008 NOLs for three, four or five years rather than the standard two years. The 2009 Recovery Act generally limited this special treatment to small businesses with average gross receipts of $15 million or less. Since Congress enacted the 2009 Recovery Act, many business groups have lobbied for expanding the enhanced carryback to all businesses. The new law does just that. All businesses may elect to carry back 2008 or 2009 NOLs for up to five prior years, but with a 50 percent income limit on NOL carrybacks in the fifth year. A taxpayer can take the new expanded election for NOLs incurred in either 2008 or 2009, but not for both years.
There is a special rule for a qualified small business that elected under the 2009 Recovery Act to carry back 2008 NOLs. The qualified small business may make the election for an additional year. Consequently, an eligible small business may be able to carry back NOLs from both 2008 and 2009 for up to five years. More favorably, the 50 percent limitation does not apply to a qualified small business that elected to carry back its 2008 NOLs under the 2009 Recovery Act. However, the 50 percent limitation does apply to the qualified small business’s 2009 NOLs.
The election under the new law must be made by the due date (including extensions) for the tax return filed for the taxpayer’s last taxable year beginning in 2009. Keep in mind that the election is irrevocable. Fiscal year taxpayers can make the election for tax years beginning or ending in 2008 or 2009.
The new law also includes special NOL provisions for insurance companies and businesses that received funds under the federal government’s Troubled Asset Relief Program. Additionally, the new law suspends the 90 percent income limitation on the use of NOLs for determining the AMT of an extended carryback year.
Our office encourages small businesses to contact us about expanded NOL carrybacks. Moreover, because of the new law, all businesses need to review their NOL carrybacks. Please contact our office for more information.
FUTA. In 1976, Congress imposed a temporary 0.20 percent surtax on top of the regular 6.0 percent federal unemployment tax (FUTA). The surtax was most recently renewed in 2008. The new law extends the surtax through June 30, 2011.
Penalties. The IRS imposes penalties on taxpayers that fail to file returns. The new law increases two of those penalties. Effective for tax years beginning after December 31, 2009, the penalty for failure to file a partnership return increases from $89 to $195. The penalty for failure to file an S corporation return also increases from $89 to $195, effective for tax years beginning after December 31, 2009.
Military exclusion. The Department of Defense Homeowners Assistance Program (HAP) compensates eligible military personnel and civilian employees for adverse effects on housing values. These payments are generally excluded from income. The 2009 Recovery Act expanded HAP to assist military personnel who are wounded, injured or become ill when deployed; surviving spouses of service members or DOD employees killed or who died of wounds while deployed; military personnel member and civilian employees assigned to base realignment organizations; and military personnel required to permanently relocate during the home mortgage crisis. The new law clarifies that the 2009 Recovery Act HAP provisions are excluded from income.
Corporate estimated tax. In July 2009, Congress passed the Corporate Estimated Tax Shift Act. The Corporate Estimated Tax Shift Act increased estimated tax payments for large corporations to 100.25 percent for estimated taxes due in July, August and September 2014. The new law increases the required corporate estimated tax payments factor for these large corporations for payments due in July, August, and September 2014 by 33 percentage points.
Return preparation. The new law requires any individual income tax return prepared by a tax return preparer to be filed electronically unless the preparer reasonably expects to file fewer than 10 individual income tax returns during the calendar year. Under the new law, the term individual income tax return means any return imposed by subtitle A on individuals, estates or trusts.
Worldwide allocation of interest. In 2004, Congress authorized a worldwide affiliated group to make a one-time election to determine the foreign source taxable income of the group by allocating and apportioning the domestic members’ interest expense on a worldwide basis, as if all members of the group were a single corporation. The new law delays the effective date of this provision until tax years beginning after December 31, 2017.
As you may have gathered from what has been only a summary of the new tax law, there is a considerable degree of complexity involved both in taking full advantage of the tax benefits and in avoiding pitfalls. Please do not hesitate to contact our office if you have any questions about the Worker, Homeownership and Business Assistance Act of 2009.
