The American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act

March 12, 2009

Presenters:

Wayne Schiferl, CPA, Tax Partner

Minneapolis Construction Real Estate Group

Jonathan Olson, CPA, Tax Senior Manager

Minneapolis Construction Real Estate Group

• American Recovery & Reinvestment Act Highlights
• Provisions Targeted to Large Businesses
• Provisions Targeted to Small Businesses
• Provisions Targeted to Individuals
• Construction Industry Impact
• State of Minnesota Impact
• Energy & Utilities Industry Impact

Total Stimulus Plan cost:

$787 Billion

Increase to the National Debt:

$330 Billion (over ten years)

On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009, a nearly $790 billion stimulus package that seeks to address the current economic challenges of the U.S. through a combination of direct federal spending, aid to the states and localities, and $326 billion in tax relief. Specifically, the measure contains an array of temporary business tax reductions, energy production and investment tax credits and infrastructure and economic development bonds.

Stimulate Consumer Spending

• $14 Billion - direct cash payment
• $115 Billion - individual tax credits
• $2.5 Billion – sales tax deduction on new cars

Highlights and Goals

• Create or save 3 to 4 million jobs over the next two years
• Spend at least 75% of the package in the first 18 months after passage
• Doubles renewable energy capacity over three-years
• Enacts the largest investment increase in our nation's roads, bridges and mass transit systems since the creation of the national highway system in the 1950's
• Lowering healthcare costs and ensuring broader healthcare coverage
• Supporting America's working families through tax cuts and aid programs

Primary Provisions

Science and Technology

Provision	Description	Spending (bln)
Tax Cuts	Tax cuts to individuals, businesses, and state and local governments	$358.2
Aid to States	State fiscal relief, Medicaid, law enforcement	$134.8
Aid to Low-Income Families	Health insurance, Medicaid, Job training, hunger programs, unemployment	$97.2
Transportation and Infrastructure	Highways and Bridges, environmental cleanup, transit, water resources, competitive grants	$85.1
Education	Education programs, K-12 education	$42.9
Energy	Efficiency for federal buildings, fossil energy research, energy efficiency projects, Electricity Grid, Renewable Energy research	$39.0
Broadband, Biomedical research (to National Institutes of Health), CDC, etc	$22.4
Health Care	Health Care Information Technology (primarily Electronic Health Records)	$19.2

Bonus Depreciation

50% bonus depreciation and AMT depreciation relief are extended one year through Dec. 31, 2009 (Dec. 31, 2010 for certain aircraft and long-production-period property)

"Qualified property" is allowed 50% depreciation in the year that the property is placed in service. (after Dec. 31, 2007 and before Jan. 1, 2009)

"Qualified property" is exempt from the AMT depreciation adjustment (200DB method v. 1 50DB method)

"Qualified property" eligible for bonus first-year depreciation includes most tangible personal property, "qualified leasehold improvement property" (i.e. certain interior improvements to nonresidential buildings), and most computer software.

In addition to being of a qualifying type, the property must meet original use, timely acquisition, and timely placed-in-service requirements.

New Markets Tax Credit

• Community Development Entity (CDE)

   

  • Primary mission - serving or providing investment capital for low income communities

   

• 39% credit for investment in CDE

   

2009 Recovery Act changes

• $1.5 billion increase in credit alloc. to $5 billion for 2008 & 2009

   

  • 2008 Allocated to CDEs that submitted 2008 application and didn't receive an allocation or received less than requested

   

Low-Income Housing Tax Credit (LIHTC)

• 9% credit for investment in affordable housing

2009 Recovery Act Changes

• Grants instead of Credits at states election

   

  • 85% of credit allocation

     

    • Unused 2008 allocation
    • Credits returned in 2009
    • 40% of 2009 allocation

     

  • Good faith effort to obtain investment commitments

   

Temporary Extension of NOL Carryback for Small Businesses

• An NOL is the excess of business deductions over gross income in the tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions.

   

  • In general, NOLs may be carried back two years and forward 20 years.
  • The NOL is first carried back to the earliest tax year for which it s allowable as a carryback or carryover, and is then carried to the next earliest year.

   

• The 2009 Recovery Act provides that an "eligible small business" may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period.
• Example: Taxpayer, an eligible small business, incurs an NOL for its tax year ending Dec. 31, 2008. Taxpayer may elect to carry the loss back f ive years to its tax year that ended Dec. 31, 2003.
• "Eligible Small Business" is any trade or business whose average annual gross receipts for the three-tax-year period ending with the year in which the loss arose are $15 million or less. (generally 2006-2008 gross receipts)
• Receipts of all related entities must be aggregated for purposes of applying the average annual gross receipts test.
• Taxpayers should use the tentative ("quick") carryback procedures to expedite the recovery of the refund. (IRS Form 1045 for individuals, Form 1139 for corporations)
• Taxpayers must affirmatively elect the increased carryback on E s the tax return. Election must be made by the due date (including extensions) for filing the taxpayer's return for the tax year of the NOL.

Extension of Enhanced Small Business Expensing (Section 179)

• An expense deduction is allowed taxpayers who elect to treat the cost of qualifying property, called Section 179 property, as an expense rather than as a capital expenditure.
• Qualifying property- property must be tangible section 1245 property (new or used), depreciable under MACRS, and acquired by purchase for use in the active conduct of a trade or business.
• The Recovery Act extends the deduction limit of $250,000 and beginning phase-out amount of $800,000 to tax years beginning in 2009.

Temporary Reduction of S Corporation Built-In Gains Holding Period

• Unrecognized built in gain from conversion of C Corporation to S Corporation

Recovery Act Changes

• Reduction from 10 year period to 7 year period for 2009 and 2010

Estimated Tax Payments for Certain Small Business Owners

• Required individual estimated tax lesser of:

   

  • 90% of current year, or
  • 100% of prior year (110% if AGI prior year > 150K)
  • 2009 Recovery Act changes

   

• Required qualified individual estimate tax lesser of:

   

  • 90% of current year 2009, or
  • 90% of prior year

   

• Qualified individual:

   

  • 50% of AGI from small business <500employees
  • 2008 AGI less than $500,000

   

Individual Tax Provisions

Totals close to $185 billion

• ”Making Work Pay”

   

  • $400 (single) and $800 point) in the form of lower withholding
  • Tax years 2009 and 2010
  • Phase out individuals $75k to 95K, joint $150k to 190k

   

• Economic recovery payment (2009 only)

   

  • $250 one-time payment to those on Social Security
  • Eligible Nov 2008, Dec 2008, or Jan 2009
  • 55 million recipients - $13.75 Billion

   

AMT patch from 2008 to 2009

• Extends AMT patch from 2008 to 2009
• Pre-2009 Recovery Act law exemptions

   

  • $33,750 for unmarried individuals
  • $45,000 for married filing joint
  • $22,000 for married individuals filing separately

   

• 2009 Recovery Act exemptions

   

  • $70,950 for unmarried individuals
  • $46,700 for married filing joint
  • $35,475 for married individuals filing separately

   

Unemployment Compensation

• Up to $2,400 of unemployment compensation is deductible from recipient's gross income for 2009.

College Education Tax Credit

• The 2009 Recovery Act increases the maximum credit (formerly Hope) for 2009 by $700 (from $1,800 to $2,500)
• Expands the definition of qualified tuition and related expenses
• Allows credit for the first 4 years of higher education (formerly 2 years)
• Increases the AGI income range at which phase-out occurs
• Permits credit to be claimed against AMT liability
• Allows 40% of the credit to be refundable
• Lifetime Learning Credit still exists

First-Time Homebuyer Tax Credit

• Up to $8,000 credits for first-time homebuyers, would not need to repay of in the house for 36 months - purchased before 12/1/09

New Car Deduction

• Sales tax deduction for new car purchases up to $49,500 of purchase price
• Itemized deduction or addition to standard deduction
• Phase out Single 5125k - 135k, Joint $250k- 260k

Residential Energy Efficient Property (REEP) Credit

• 30% credit for qualified solar water heating property & qualified a geothermal heat pump. 52,000 cap.
• 2009 Recovery Act changes:

   

  • Elimination of cap on qualified solar water heating, geothermal heat pump, and small wind energy property

   

Non Business Energy Property Credit

• 10% of amount paid for qualified energy efficiency improvements installed during year. Lifetime cap $500.
• 2009 Recovery Act changes:

   

  • 10% increased to 30%
  • Lifetime cap eliminated with an aggregate $1,500 cap for 2009 + 2010
  • Extended through 2010

   

529 Plan Distributions May Be Used for Additional Expenses

• Under the 2009 Recovery Act, expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment, or internet access and related services, are qualified higher education expenses for purposes of the 529 plan rules.
• Expenses for computer software designed for sports, games, or hobbies are excluded unless the software is predominantly educational in nature.

Construction Impact Analysis

Construction Funding Drivers

• Create over 1,000,000 jobs
• Repair and enhance a 50 year old interstate system
• Begins to create meaningful alternative transportation systems to trucks and autos
• Reduce facility energy consumption and on going cost of operations
• Complete deferred maintenance projects

Construction Industry Sector Breakdown - $143.7 Billion

• Transportation - $49.3 Billion
• Water& Environmental infrastructure - $21.4 Billion
• Building infrastructure - $21.5 Billion
• Housing infrastructure - $8 Billion
• Energy& Technology - $29.8 Billion
• Workforce Development & Safety - $4.7 Billion
• School Construction - $8.8 Billion (State Discretionary)

Construction Resources on the Stimulus Bill

• Associated General Contractors:

  www.aqc.orq/cs/rebuild_americas_future

• American Road & Transportation Builders Association:

  www.artba.org

• Engineering News and Records:

  www.enr.com

• Associated Builders &Contractors:

  www.abc.org

• U S General Services Administration:

  www.gsa.gov

State of Minnesota Impact Analysis

• Total Minnesota Benefits: $9 billion
• Funding Breakdown:

   

  • Medicaid Spending - $2 billion
  • Schools and Training Programs - $1 billion

     

    • Public Schools and Colleges - $668 million
    • Special Needs - $190 million
    • Child Care - $26 million
    • Head Start Programs - $8 million

     

  • Highways & Bridges - $448 million
  • Transit- $111 million
  • Clean Water - $1 OB million
  • Weatherization Programs - $170 million
  • Renewable Power - 567 million

   

• Estimated Construction Jobs Created: 66,000

Energy & Utilities Impact Analysis

Energy Tax Policy Changes

Totals close to $20 billion

• Extension and modification of Renewable Energy Tax Credit
• Allowance to claim investment Tax Credit in lieu of Production Tax Credit
• Repeal subsidized energy financing limitation
• Remove dollar limits on certain energy credits
• Clean Renewable Energy Bonds (CREBs), Qualified Energy Conservation Bonds
• Tax Credits for energy-efficient improvements to existing homes and alternative fuel pumps
• Enhanced R&D Credit

Production/Investment Tax Credits (Wind and Solar industries)

• Extension of placed-in-service production tax credit (PTC) sunset date to December 31, 2013
• Option to claim an investment tax credit (ITC) in lieu of the PTC. The amount of the ITC generally would be 30% of qualifying costs of the facility
• Option to receive a grant in lieu of claiming tax credits with respect to certain property placed in service in 2009 and 2010 that otherwise would qualify for the ITC or the PTC.
• For Grant Option, Construction would need to start in 2009 or 2010
• The amount of a grant generally would be equal to 30% of the qualified cost of the project
• 10% of the qualified cost of geothermal, qualified microturbine, combined heat and power system, and geothermal heat pump property).
• Receipt of the grant would not be includible in the gross income of a the taxpayer.
• If grant option taken, the tax basis for depreciation generally would equal 85% of the qualifying costs of the property.
• The U.S. Treasury would be required to pay a grant to a project a owner within 60 days of the project in service date
• Extend first-year 50% bonus depreciation to property placed in service in 2009.

Other Provisions

• Modifications to ITC ("Double Dip")
• Clean Renewable Energy Bonds (CREBs) $1.6 billion
• Qualified Energy Conservation Bonds S2.4 billion
• Non-business Energy Property Credit
• Residential Energy Credit
• Advanced Energy Property Credit

Wayne Schiferl, Partner

Construction and Real Estate Group

612.876.4800

wschderl@virchowkrause.com

 

Jonathan Olson, Senior Manager

Construction and Real Estate Group

ldolson@virchowkrause.com