Washington Tax Alert February 17, 2009 – Stimulus Bill

Washington Tax Alert from Don Barnes, [email protected]

February 17, 2009

The American Recovery and Reinvestment Act of 2009, which is expected to be signed by the President later today, contains the following provisions, in addition to a one-year extension of bonus depreciation and a one-year extension of the IRC § 179 expensing limits —

1. Corporations, partnerships and sole proprietorships may elect to carry back NOLs incurred in the taxable year ending in 2008 (or the taxable year beginning in 2008) for three, four or five years instead of the two-year carryback period allowed under current law. This election is available only for businesses with average annual gross receipts of $15 million or less during the preceding three-year period.

2. Businesses that reacquire their debt instruments or other indebtedness at a discount in 2009 or 2010 may elect to defer the recognition of COD income until 2014, and then recognize the COD income ratably over five years beginning in 2014. A business can acquire its debt instruments or other indebtedness for cash, in exchange for new debt or equity, by contribution to capital, or by the lender forgiving the indebtedness. If a business elects to defer recognition of COD income under this provision, it is not allowed to exclude the income under any of the provisions of IRC § 108(a)(1). In the case of partnerships and S corporations, the election to defer COD income must be made at the entity level.

3. The 10-year built-in gains period applicable to C corporations that convert to S status (or S corporations that acquire assets from a C corporation in a carryover basis transaction) is temporarily reduced to seven years for 2009 and 2010. Accordingly, C corporations that elected S status for taxable years beginning in 2000, 2001 or 2002 will not be subject to the built-in gains tax on assets disposed of during 2009 and 2010.

4. For 2009, individuals will avoid estimated tax penalties if they make estimated tax payments based on 90% of their tax liability for the preceding taxable year. However, this provision is available only for individuals with adjusted gross income for the preceding taxable year of less than $500,000 ($250,000 for married filing separately) if the individual can certify that more than 50% of the gross income shown on the tax return of the individual for the preceding taxable year was from a trade or business that employed, on average, less than 500 persons.