American Recovery and Reinvestment
Tax
Act of 2009
On February 17, 2009, President Obama is expected to sign into law the American Recovery and Reinvestment Tax Act of 2009 (the “Act”). The Act contains a number of amendments to the Internal Revenue Code that may be applicable to your business.
1. Business Incentives
a. Election to Defer COD Income Arising in 2009 or 2010
The Act permits businesses to defer cancellation of debt income (“COD income”) realized in 2009 or 2010 for a period of 4 to 5 years (the “deferral period”), then to amortize the income ratably over a 5-year period. For example, if a corporation with a calendar tax year retires a $1000 debt for $700 in 2009 or 2010, it can elect not to take the resulting $300 of COD income into account in the year of retirement. Instead, the electing corporation would report $60 of COD income (1/5th of the $300 total) in each year from 2014 through 2018.
The Act applies to COD income arising upon a repurchase of debt for cash, a debt-for-debt exchange (including a deemed exchange resulting from a modification of the terms of debt), an exchange of debt for corporate stock or a partnership interest, a contribution of debt to capital, or a complete forgiveness of debt.
If debt is retired in exchange for new debt or the proceeds of new debt, the Act defers any deductions for original issue discount (“OID”) that accrue on the new debt during the deferral period, up to the amount of any deferred COD income on the retirement. The deferred OID deductions are allowed ratably over the same 5-year period as the deferred COD income.
All deferred COD income will be accelerated upon certain extraordinary transactions, including the liquidation or sale of substantially all of a taxpayer’s assets, the cessation of business by the taxpayer or similar circumstances.
b. 5-Year Carryback of 2008 Net Operating Losses For Small Businesses
The Act extends the maximum carryback period from 2 years to 5 years for any net operating loss generated by a qualifying small business in taxable years ending in 2008 or, alternatively (if the taxpayer so elects), in taxable years beginning in 2008. A corporation, partnership, or sole proprietorship qualifies for this extended carryback only if its average annual gross receipts for the prior 3 taxable years (or for its entire period of existence, if less than 3 years) do not exceed $15,000,000.
c. Bonus Depreciation Extended
The Act extends for 1 year the bonus deprecation provisions that were included in the Economic Stimulus Act of 2008. As a result of this extension, businesses are permitted to claim 50% bonus depreciation for capital expenditures on most types of tangible personal property and on certain other types of property that are acquired in 2009 (or pursuant to a binding contract entered into in 2009), if such expenditures are incurred in 2009 and the property is placed in service in 2009 (or, for certain types of property, in 2009 or 2010).
The Act also extends the provision contained in the Housing Assistance Tax Act of 2008 allowing certain taxpayers to elect to accelerate the use of their available alternative minimum tax (“AMT”) or research and development (“R&D”) credits in lieu of claiming bonus depreciation. As a result of this extension, businesses may, in lieu of claming the bonus depreciation described in the preceding paragraph, elect to increase the amount of available AMT and R&D Credits that may be utilized in the taxable year by 20% of the bonus deprecation that would otherwise be allowable, subject to certain specified caps.
d. AHYDO Rules Inapplicable to Certain Debt Issued in Debt-for-Debt Exchanges in Late 2008 or 2009
The Act provides that the “AHYDO” rules, which defer or disallow OID deductions on certain debt issued with a yield to maturity at least 500 basis points higher than the “applicable Federal rate,” do not apply to certain debt issued from September 1, 2008 through December 31, 2009 in exchange for other non-AHYDO debt of the issuer. This relief (i) extends to certain debt deemed issued as a result of the modification of the terms of outstanding non-AHYDO debt but (ii) does not apply to certain contingent debt or to debt held by related parties.
e. Temporary Elimination of Built-In Gain Tax on Sales of S Corporation Assets with Three or Fewer Years Remaining in 10-Year Recognition Period
The Act temporarily eliminates the built-in gain tax under Section 1374 of the Internal Revenue Code on sales of S corporation assets with three or fewer years remaining in the applicable 10-year “recognition period.” For example, in the case of calendar year S corporations, this provision generally eliminates the built-in gain tax (i) on asset sales occurring in 2009 for S corporations whose S elections were effective on January 1, 2000, 2001 or 2002 and (ii) on asset sales occurring in 2010 for S corporations whose S elections were effective on January 1, 2001, 2002 or 2003, as to assets held by the S corporation at the time of its S election.
2. Incentives for Electricity Production
a. Production Tax Credit for Electricity Produced from Renewable Resources
The Act extends the “placed in service” dates for purposes of the production tax credit for facilities producing electricity from certain domestic renewable resources. The placed in service dates for wind facilities have been extended for three years to December 31, 2012, and for closed-loop and open-loop biomass, geothermal, landfill gas, waste-to-energy (trash), hydropower, and marine energy renewable facilities to December 31, 2013.
b. Expansion of Energy Investment Tax Credit to Renewable Resource Facilities
The Act permits taxpayers to elect to claim a 30% energy investment tax credit for the production of electricity from qualifying costs of certain renewable resource facilities, in lieu of claiming production tax credits. The credit is available for wind facilities placed in service during 2009 through 2012 and for closed-loop and open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine energy renewable facilities placed in service during 2009 through 2013. The election to take the credit is irrevocable and is unavailable if the production tax credit is claimed for such facility.
In addition, the Act eliminates as of January 1, 2009, the subsidized energy financing limitation on claiming the energy investment tax credit. As a result of this change, the basis of the energy property upon which the credit may be claimed no longer has to be reduced by financing provided by federal, state, or local governmental subsidies or by proceeds from private activity bonds.
c. Renewable Energy Grants
The Act adds a federal grant program in lieu of the energy investment tax credit and the production tax credit described above. The amount of the grant is equal to 30% of the taxpayer’s basis for qualifying wind, closed-loop and open-loop biomass, certain geothermal, landfill gas, waste-to-energy, hydropower, and marine energy renewable facilities, qualified fuel cell property, solar property, and small wind energy property. For equipment used to produce, distribute, or use energy derived from a geothermal deposit up to the electrical transmission stage, qualified microturbine property, combined heat and power system property, and geothermal heat pump property, the amount of the grant equals 10% of the taxpayer’s basis in such property. The Act imposes certain limits on the grants that generally match the dollar limitations on the energy investment tax credit with respect to such property.
To qualify for the grants, property must be placed in service in 2009 or 2010 (or, if construction began on the qualifying facility during 2009 or 2010, before January 1, 2013 (for wind facilities), before January 1, 2014 (for closed-loop and open-loop biomass, certain geothermal, solar, landfill gas, waste-to-energy, hydropower, and marine energy renewable facilities), or before January 1, 2017 (for other qualified facilities)). In any case, application for the grant must be made before October 1, 2011. The Act indicates that the grant will be paid within 60 days after the later of the date of the application for the grant or the date the property is placed in service.
The grant will not constitute taxable income to recipients, but 50% of the grant will reduce the recipient’s tax basis in the qualifying property. If a taxpayer previously claimed an energy investment tax credit with respect to progress expenditures for a taxable year ending before a renewable energy grant was made, the Act requires such credit to be recaptured. The grant is not available for tax-exempt taxpayers, or for partnerships or pass-through entities any of whose partners or members consists of tax exempt entities or governmental bodies.
d. New Advanced Energy Projects Credit
The Act adds a new “advanced energy project credit” equal to 30% of a taxpayer’s capital expenditures with respect to qualifying projects. The national limitation on the advanced energy project credit is $2,300,000,000, and within 6 months of the Act’s enactment, Treasury is to establish certain criteria for awarding the advanced energy project credit.
The advanced energy project credit is available for projects that re-equip, expand, or establish a manufacturing facility for the production of (i) property which is designed to produce energy from the sun, wind, geothermal deposits, or other renewable resources, (ii) fuel cells, microturbines, or an energy storage system for use with electric or hybrid vehicles, (iii) electric grids to support the transmission of intermittent sources of renewable energy, (iv) property designed to capture and sequester carbon dioxide emissions, (v) property designed to refine or blend renewable fuels or to produce energy conservation technologies; (vi) new qualified plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components which are designed specifically for use with such vehicles, including green motors, generators, and power control units, or (vii) other advanced energy property designed to reduce greenhouse emissions.
e. National Limitations on CREBs Increased
The Act increases the national limitation by $1.6 billion for clean renewable energy bonds authorized by the Emergency Economic Stabilization Act. These bonds may be issued by public power providers, cooperative electric companies, governmental bodies, certain lenders to cooperative electric companies and nonprofit electric utilities. 100% of the proceeds from the issuance of these bonds must be used by the governmental body, public power provider or cooperative electric company for capital costs of a wind, closed-loop or open-loop biomass, geothermal, small irrigation, landfill gas, waste-to-energy, hydropower, or marine energy renewables facility.
3. Carbon Dioxide Sequestration Credit Amended
The Act amends the carbon dioxide sequestration credit, which was added to the Code in the Emergency Economic Stabilization Act of 2008. The $10 credit for carbon dioxide that is used as an injectant in certain enhanced oil or natural gas recovery projects is now available only if the carbon dioxide is disposed of in secure geological storage.
This Tax Update is intended only to provide a general summary of certain tax provisions. If you would like to discuss how any of these or other tax provisions may impact your operations, please contact any Baker Botts Tax lawyer, including the authors of this update listed above.
IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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