The American Recovery and Reinvestment Act of 2009, which was signed by President Obama on February 17th, includes many provisions applicable to businesses.  The following is a summary of those that will affect many of our clients.  Note that we do not expect the states to adopt these provisions.

Section 179 Expense Limit Increased to $250,000 for 2009
Section 179 allows a business to write-off the cost of otherwise capitalizable new personal property (equipment, machinery, furniture & fixtures) instead of depreciating the cost over its expected useful life.  This limit was increased to $250,000 in 2008 (from $35,000) and the increased limit is renewed for tax years beginning in 2009.  The limit is reduced dollar-for-dollar if qualifying purchases exceed $800,000 (i.e. there is no Section 179 deduction allowed if purchases exceed $1,050,000).  A Section 179 expense cannot create or add to a loss from the business.  Also, the Section 179 expense is claimed before the bonus depreciation discussed below is calculated.

50% Bonus Depreciation for Most New Personal Property Purchased in 2009
The bonus depreciation that was reenacted for 2008 has been extended for calendar year 2009 purchases.  This allows the business to write-off half of the cost of new equipment, furniture and fixtures, qualifying leasehold improvements and most other property that is not a building in the year of acquisition.  There is no dollar limitation and the extra depreciation can create a tax loss for the business.  A taxpayer may elect out of claiming the bonus depreciation.

Luxury Auto Depreciation Limit Raised by $8,000 in 2008 and 2009
Business cars that are purchased are subject to limits on the amount of annual depreciation that may be claimed if the cost exceeds $15,800.  Thus, the bonus depreciation discussed above would also apply to new car purchases and an additional deduction of $8,000 is allowed for 2008 and 2009.  Note that this is a retroactive change for 2008, in case a return has already been filed that did not claim the deduction.

5-Year Carryback Allowed for 2008 Net Operating Losses (NOL) Incurred by Small Businesses
If a qualifying small business had a net operating loss in its tax year beginning or ending in 2008, it can carry that loss back five years instead of two.  This rule also applies to owners of flow-thru businesses (partnerships and S corporations) who have an NOL due to the loss from their qualifying small business.  A qualifying small business is one that has average annual gross receipts for the prior three years of $15,000,000 or less.  Certain businesses owned primarily by the same person or persons may have to aggregate their gross receipts for the $15,000,000 test.

Deferred Payment of Taxes on Cancellation of Indebtedness Income (COD)
If a business or flow-thru business owner recognizes COD on business debt repurchases (broadly defined) in 2009 or 2010, the taxation of the COD income can be deferred until 2014 and then is included 20% per year for five years (thru 2018).

S Corporation Built-In Gain Recognition Period Shortened
If an S corporation recognizes built-in gains (from its previous life as a C corporation) during its first ten years as an S corporation, it must pay a corporate-level tax on that gain as if it were still a C corporation. The Act changes that recognition period to seven years for gains recognized in 2009 and 2010.  Accordingly, if a C corporation elected S as of January 1, 2002 and recognizes a built-in gain in 2009 or 2010, it pays no federal corporate tax on the gain.  The same applies to corporations electing S as of January 1, 2003 and recognizing built-in gains in 2010.

Exclusion from Gain on Sale of Qualified Small Business Stock Increased
Original shareholders of qualifying small business stock can exclude 50% of the taxable gain if they hold the stock for at least five years.  The Act increases that exclusion to 60% for stock acquired after February 17, 2009 and before December 31, 2010. 

Withholding by Federal Government on Payments to Contractors
The government was to begin withholding 3% of all contract payments as a tax withholding beginning on payments after December 31, 2020.  That withholding has been delayed for a year under the Act.