This report summarizes the primary tax and related components of the over 1,400 pages of American Recovery and Reinvestment Act of 2009 (ARRA). AARA contains $787 billion in tax cuts and spending; approximately 60% of the total cost is allocated toward spending and investment provisions with the remaining 40% allocated to tax cuts. The nonpartisan Congressional Budget Office said that the stimulus legislation will inject $185 billion into the U.S. economy in 2009 and $399 billion in 2010.

1. Individual Income Tax Rates and Alternative Minimum Tax Modifications

Individual Rate Modifications

The bill does not include any income tax rate cuts or tax rate changes for net long term capital gains or qualified dividends. Thus the present rates under the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 will remain in effect through December 31, 2010 (unless modified in future legislation). After 2010 and if not changed by future legislation, the higher income tax rates and net capital gain and qualified dividend tax rates in effect prior to 2001 will apply.

Alternative Minimum Tax

The bill includes a one year “patch” for 2009 to reduce the application of the Alternative Minimum Tax (AMT) to middle-class taxpayers. The bill would increase the AMT exemption amount for a joint return filer (or a surviving spouse) from $69,950 for 2008 to $70,950 for 2009; and for a single person from $46,200 for 2008 to $46,700 for 2009. These exemption amounts would phase out at certain levels of income: for a joint return filer the range for 2009 would be $150,000 to $433,800 and for a single filer for 2009 the range would be $112,500 to $299,300. The bill also would extend for one more year the AMT relief for personal tax credits (if not refundable to a taxpayer who is not able to use the credits) through 2009.

Unemployment Benefits

The bill suspends federal income tax on the first $2,400 of unemployment benefits in 2009.

Small Business Stock

The bill would increase the exclusion for individuals on gain from the sale of certain small business stock acquired in 2009 or 2010 and held for more than five years, effectively reducing the tax on gains from such stock to 7%.

2. Enhanced Tax Credits and Deductions for Individuals

Earned Income Tax Credit

The bill provides for an increase in the earned income tax credit for 2009 and 2010 for a family with three or more children, to 45% from 40% of the family’s first $12,570 of earned income, with a phase-out of the credit beginning at an increased amount of $21,420 in income for couples filing a joint return.

“Making Work Pay” Tax Credit

The goal of the Making Work Pay tax credit is to provide a refund to each individual equal to part of his or her Social Security tax payments for 2009 and 2010. The bill would provide a maximum credit of $400 for single persons and $800 for couples. The credit would phase out as income exceeds $75,000 for single filers and $150,000 for couples.

Work Opportunity Tax Credit

The bill includes an expanded work opportunity tax credit to employers that hire in 2009 or 2010 disconnected youth, or unemployed veterans discharged during the five years prior to being hired.

Child Care Tax Credit

The existing child and dependent care tax credit, allowing low-income families to receive up to a 50% credit on the first $6,000 of child care expenses, is partly refundable for taxpayers not able to use it as a tax credit. The bill would increase the eligibility for the refundable tax credit in 2009 and 2010; for 2008 the credit is refundable to the extent of 15% of the taxpayer's earned income in excess of $8,500, but the bill would lower the threshold for 2009 and 2010 to $3,000.

American Opportunity Tax Credit

The bill provides, for any taxable year beginning in 2009 or 2010, an increase in the Hope scholarship credit to equal the sum of 100% of qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in 2009 and 2010) not to exceed $2,000, plus 25% of such expenses so paid in excess of $2,000 but not to exceed $4,000. The credit would be allowed for the first four years of post-secondary education for qualified tuition and related expenses, including required course materials. The credit would be reduced by the amount which bears the same ratio to such credit as the excess of the taxpayer’s modified adjusted gross income for such taxable year over $80,000 ($160,000 for a joint return) bears to $10,000 ($20,000 for a joint return). The credit would be allowed against the AMT as well. If the taxpayer cannot use all of the credit as a tax credit, up to 40% of the credit would be refundable. However, the credit would not be refundable in the case of a child who is subject to the so-called kiddie tax.

First-Time Home Buyer Tax Credit

Legislation enacted in 2008 provided a $7,500 tax credit for first-time home buyers purchasing a home between April 2008 and June 2009, and is designed to be repaid by taxpayers without interest to the Internal Revenue Service over a 15-year period. The credit phases out for taxpayers with adjusted gross income in excess of $75,000/$150,000 (single/joint filers). In addition, a standard deduction (for those who do not itemize) of up to $500 ($1,000 for joint filers) is available for the 2008 tax year for property taxes paid.

The bill would increase the credit to $8,000 and eliminate the repayment obligation for taxpayers who purchase homes between January and November 2009, subject to recapture if the property is sold or ceases to be the taxpayer’s principal residence within three years of purchase.

Education Expenses

The bill would expand the definition of qualified education expenses for Section 529 education savings plans, to include computer technology and equipment

Car Buyer and Commuter Deductions

The bill would provide “above the line” income tax deductions to car buyers for sales and excise taxes on auto purchases through 2009 (but not auto loan interest payments). This deduction would be phased-out for taxpayers with more than $125,000 of income. The bill also would equalize tax-free transit and parking benefits.

3. Retirement Savings and Estate Taxes

No proposals were introduced in the reconciled bill regarding retirement plan distributions or modifications to existing qualified retirement plans. The bill also does not include any provisions impacting current or expiring estate tax provisions.

4. Corporate Tax Rates, Estimated Tax Payments, and S Corporation Holding Periods

Tax Rates

The bill would not alter present corporate income tax rates.

Estimated Tax Payments

Independent of the ARRA Senate and House bills, on February 4, 2009 the President signed into law HR 2, the Children's Health Insurance Program Reauthorization Act of 2009. This legislation provides health insurance to children living in families not eligible for Medicaid but unable to afford private health insurance. Revenue generation offsets include provisions that increase the Federal excise tax on tobacco products and make changes to the timing of certain estimated tax payments by corporations with assets of at least $1 billion.

Subchapter S Corporations

The bill temporarily shortens the holding period of S corporation assets which can be sold without tax on built-in gains from ten years to seven years, for sales occurring in 2009 and 2010.

5. Expanded Business Expensing, Loss Carryback, Income Deferral and
Credit Provisions

Increased Expensing Provisions

The bill includes an extension of the current bonus depreciation provision to cover assets placed in service in 2009. This provision allows taxpayers to deduct immediately 50% of the cost of applicable assets acquired with depreciable lives of 20 years or less.

The bill would also extend, for property placed in service in 2009, the provision allowing a company to monetize AMT credits and research and development (R&D) credits, in lieu of the bonus depreciation described above. This provision helps taxpayers who are in AMT or who have current year losses and may not be able to benefit from bonus depreciation. This provision allows such companies to elect to receive 20% of the value of unused AMT or R&D credits to the extent they invest in assets that would qualify for bonus depreciation. The amount is capped at the lesser of 6% of the outstanding unused AMT and R&D credits or $30 million.

Another tax benefit in the bill would allow small businesses to immediately expense acquired capital assets. An existing provision allows businesses to expense up to $125,000 (subject to a phase-out) of applicable capital acquisitions through 2010; in 2008 Congress temporarily increased, only for 2008, the deductible amount to $250,000 (phased out beginning at $800,000 in capital asset acquisitions). The increased $250,000 deduction amount would be extended to 2009, retroactive to January 1, 2009.

Increased Net Operating Loss Carryback Provision

The bill would extend the carryback period for net operating losses (NOLs) generated in 2008 (years beginning or ending in 2008) to the previous five years, but only for small businesses with gross receipts of not more than $15 million per year. The gross receipts test would be met if the average annual gross receipts for the previous three years are $15 million or less. A corporation is presently allowed to carryback a current year NOL to generate a refund of income taxes if the corporation had income in the previous two years. Some major business trade associations had suggested that many companies will not have had income in 2007 and 2008 in an amount sufficient to absorb losses expected to be generated in 2009; this could also limit the impact of the proposed increased expensing provisions discussed above. The five-year carryback period would allow the recovery of tax payments made in prior years, which could be applied by corporate taxpayers to operate businesses that are struggling in the current climate.

All Companies Receiving TARP Benefits

For all companies receiving TARP benefits, the bill clarifies that compensation deduction and payment limits enacted in fall 2008 apply; the bill does not contain an excise tax on compensation paid.

Cancellation of Indebtedness

The bill would encourage business restructurings by allowing – even outside bankruptcy proceedings – delayed recognition of certain businesses’ cancellation of debt income (“CODI”). Certain businesses would be allowed to recognize CODI over ten years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business in 2009 or 2010.

Low-Income Housing and New Markets Credits

Since taxpayers may not have sufficient taxable income to use the existing low-income housing tax credit, the bill would provide a HUD grant option for low-income housing investment. The bill would provide $3 billion in additional funding for the existing new markets tax credit, for investments in 2008 and 2009.

6. Pre-Acquisition Losses

Banks and Financial Institutions

Generally, under current law, if an acquired corporation has an unrealized built-in loss, the ability of the purchaser to utilize the loss against post-acquisition income is limited. However, in IRS Notice 2008-83, the U.S. Treasury announced that any deduction properly allowed after an ownership change to a bank with respect to losses on loans or bad debts would not be treated as a built-in loss. The bill includes a prospective repeal of this Notice except for ownership changes pursuant to written agreements entered into and publicly announced on or before January 16, 2009, which would thus limit the use of losses on pre-acquisition bank loans by the acquirer.

Other Pre-acquisition Losses

The bill would clarify that the restriction on use of pre-acquisition losses generally does not apply to restructurings required under loan agreements with the Treasury Department pursuant to the Emergency Economic Stabilization Act of 2008.

7. Energy Provisions

Renewable Energy Production Tax Credit (REPTC)

The current REPTC generally provides a tax credit of 1.9 cents per kilowatt hour of electricity generated by certain renewable energy facilities. The bill includes a multi-year extension beyond 2010 of the tax credit for wind, geothermal, hydro, and bioenergy electricity generation facilities, with a temporary election to claim the investment tax credit in lieu of the REPTC. Since taxpayers may not have sufficient tax liabilities to use the credit, the bill would permit projects eligible for the REPTC to elect to participate instead in a Department of Energy grant program.

Additional Energy Credits

The bill includes tax credits for energy conservation, energy efficiency, and renewable energy research expenditures. It would allow an individual up to $1,500 in credits for qualified nonbusiness energy efficiency improvements and residential energy property expenditures. The bill also expands existing credits for plug-in electric drive vehicles, alternative fuel refueling property, and other energy expenditures. The bill also contains an important new 30% investment tax credit for facilities engaged in the manufacture of advanced energy property. The existing reduction of the investment tax credit if property is financed with subsidized energy financing would be repealed.

Energy Bonds

The bill would create additional tax-advantaged Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds, to promote financing of renewable energy facilities and energy conservation expenditures.

8. Government Bonds and Projects

The bill would make it easier for financial institutions to invest in municipal bonds. The bill would also repeal the AMT income inclusion for tax-exempt income from new private activity bonds issued in 2009 or 2010.

In addition to the provisions for bonds and tax credits promoting renewable energy and conservation as noted above, various tax-exempt and tax-credit bonds would be authorized to spur development in recovery zones with high unemployment, tribal economic development, high speed rail and broadband. For example, the bill would provide for $15 billion in recovery zone facility bonds and $10 billion in recovery zone economic development bonds. The bill also would create a new category of tax credit bonds for public school facilities and land and expand existing authority for qualified zone academy bonds.

The bill includes a taxable bond option for local government bonds issued in 2009 and 2010 – so-called Build America Bonds – which would include a tax credit of 35% of interest payable to purchasers, instead of tax-exempt interest. (Since the private investment market for tax credits may be limited for a time, the bill would also allow the issuing authority of bonds issued in 2009 or 2010 to receive a direct payment from the federal government equal to the tax credit.)

The existing eligibility of manufacturing facilities for tax-exempt bond financing would be expanded to include intangible property manufacturing facilities.

The bill would delay through 2011 the 3% withholding requirement on government contractors.

9. Health Policies

The bill would provide for COBRA premium subsidies of 65% for up to 9 months following involuntary termination of employment between September 2008 and the end of 2009. It also gives employers more time to administer the subsidies and allows COBRA-eligible individuals to change coverage options.

10. Investment and Spending Provisions

Among the non-tax spending provisions and consistent with the President’s objectives, the bill provides major funding for energy, science, infrastructure, education and healthcare, re-employment and training, and relief for the states.

A controversial bill component is the Buy American provision which would require most projects to be built entirely with U.S. products. However, the bill would require the limitation to be applied in a manner consistent with U.S. agreements with its trading partners.