Tax

The Worker, Homeownership, and Business Assistance Act of 2009 was signed into law on November 6.  In addition to extending unemployment insurance for jobless workers, this legislation contains a number of tax provisions aimed at further stimulating the economy.  Tax highlights include:

Extension and Expansion of the First-time Homebuyer Credit  

The extended credit applies to principal residence purchases closing before July 1, 2010, if a binding written contract is entered into before May 1, 2010.  At a taxpayer’s election, 2009 purchases may be claimed on the taxpayer’s 2008 return.  Likewise, qualifying purchases made in 2010 may be claimed on a 2009 return.

The definition of a first-time homebuyer was expanded to include an individual (and, if married, the individual’s spouse) who has maintained the same principal residence for five consecutive years during the eight-year period ending on the date of the subsequent residence’s purchase.  For such individuals, the maximum $8,000 credit amount is reduced to $6,500 ($3,250 for a married individual filing separately).  Income phase-out limitations are liberalized.  The credit phases out at modified adjusted gross income between $125,000 and $145,000 for individual filers and between $225,000 and $245,000 for joint filers.

Several limitations also were added.  No credit is allowed if the home’s purchase price exceeds $800,000, the taxpayer is less than 18 years old as of the date of purchase, the purchaser may be claimed as a dependent by another taxpayer or a copy of a properly executed settlement statement is not attached to the taxpayer’s tax return.

Five-year Carryback of Net Operating Losses  

At the taxpayer’s option, net operating losses (NOL) generated in a taxable year beginning or ending in either 2008 or 2009 may be carried back as many as five years instead of the usual two years.  Losses carried back to the fifth preceding year are limited; such a carryback may offset up to 50% of the taxpayer’s taxable income in that year.  Eligible small businesses that timely elected to carry back an NOL between three and five years before the enactment of this bill have a second opportunity to carry back an NOL three to five years.  The expanded NOL carryback does not apply to entities receiving Troubled Asset Relief Program (TARP) funds.

Alternative Minimum Tax (AMT) NOL Limitation Removed

The 90% limitation normally applicable to AMT NOLs has been suspended for the use of any AMT NOL deduction attributable to carrybacks for which an extended carryback period is elected. 

Additional provisions include:

• Penalty for failure to file partnership or S corporation returns increased from $89 to $195 multiplied by the number of shareholders or partners for each month the failure continues, up to a maximum of 12 months
• Expansion of the exclusion from gross income of qualified military base realignment and closure fringe housing assistance payments
• Worldwide allocation of interest rules deferred until taxable years beginning after December 31, 2017
• Expansion of electronic filing requirements by tax return preparers effective for tax returns filed after December 31, 2010
• Estimated tax payments for corporations with assets of at least $1 billion are increased by 33% for payments otherwise due in July, August or September 2014

Accounting Tips for Tax Law Changes

Under U.S. generally accepted accounting principles (GAAP), tax law changes must be accounted for in the period the law is enacted.  Revised tax laws cannot be applied to periods ending prior to their enactment, even if the financial statements for those periods have not been issued.  So for any period ending after November 6, 2009, the effects of the new law must be included in the deferred tax calculation, but financial statements for periods ending prior to that date cannot show any impact.  If quarterly or other interim reports are prepared in accordance with U.S. GAAP, be careful to include the impact in the proper reporting period.  For a company with a calendar year, the effect of tax law changes will be reflected in fourth-quarter financial statements.  The same is true for bank call reports.

Net Operating Loss Provisions Create Planning Opportunities

The expanded NOL carryback provisions described above create an opportunity for businesses to improve their cash flow by recouping taxes paid in more prosperous years.  The American Recovery and Reinvestment Act of 2009 signed into law in February of this year allowed eligible small businesses to take advantage of a three-, four- or five-year NOL carryback period for NOLs arising in any tax year ending in 2008 or, at the taxpayer’s election, any tax year beginning in 2008.  All taxpayers may now take advantage of a three-, four- or five-year carryback period for tax years beginning or ending in either 2008 or 2009.

Taxpayers may generally elect an extended carryback period for only one taxable year.  Therefore, taxpayers should analyze which carryback period results in the largest refund.  Generally, carrying back the loss to years in which the taxpayer faced the highest marginal tax rates will create the largest refund.  Fiscal-year entities have even more flexibility as they can analyze three years versus two years for calendar-year taxpayers.  For example, an entity with a January 31 year-end may utilize the carryback provisions for its years ended January 31, 2008, January 31, 2009, or January 31, 2010.

NOL carrybacks may create other tax-planning opportunities.  As an example, NOLs can potentially free up tax credits previously used to offset income tax.  These credits can be carried back one year or forward 20 years.  If the credit originated in the fifth year of carryback, there may be an opportunity to carry that credit back to the sixth previous taxable year.

Eligible small businesses that timely made an election to carry back their NOLs between three and five years before the enactment of the Worker, Homeownership, and Business Assistance Act of 2009 have a second opportunity to carry back an NOL three to five years.  In addition, eligible small businesses that could not recover all of their alternative minimum tax with their extended three- to five-year carryback can now go back and utilize 100% of their AMT NOL to capture any remaining AMT. 

Taxpayers also may gain greater benefit from an NOL carryback by taking advantage of provisions to increase the size of their operating loss.  Bonus depreciation, a cost segregation study for a newly constructed or purchased building and favorable accounting method changes can all enhance an operating loss.  Your BKD advisor can evaluate your business’ cash flow by examining your NOL carryback and other year-end planning opportunities.

For more information on this topic, please contact your BKD advisor.