—   Embracing the Past while Building for the Future   —

The American Recovery and Reinvestment Act of 2009  

- Passed by the House and Senate February 13, 2009

The Children's Health Insurance Program Reauthorization Act of 2009  

- Signed into Law February 17, 2009

The recently enacted “American Recovery and Reinvestment Act of 2009” and the “Children’s Health Insurance Program Reauthorization Act of 2009” contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers, and charges affecting business.

Individuals and Families

Making Work Pay Credit

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers.  The centerpiece of the tax package – and at $115 billion its single largest component – is a “Making Work Pay” tax credit of up to $400 per year for individuals, or $800 per year for couples.  Here are the details of this new credit:

n Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010).  The new credit, like other tax credits, will reduce a person’s tax liability on a dollar-for-dollar basis.  Wage earners who do not earn enough to pay income taxes will be able to claim the difference as a tax refund.

n The new credit is the lesser of (1) 6.2% of an individual’s earned income or (2) $400 ($800 in the case of a joint return).  In other words, for individuals with earned income above roughly $6,451 ($12,902 for couples), the credit maxes out at $400 ($800 for couples).  For the last half of 2009, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June.  That reduction goes down to about $9 per week next year.

n Nonresident aliens do not qualify for this credit.  Neither do estates, trusts, or individuals who can be claimed as a dependent on someone else’s return.

n The credit is available in full only if AGI (adjusted gross income, with some modifications for highly specialized income) does not exceed $75,000 for an individual ($150,000 if you file a joint return).  The credit is phased out at a rate of two percent of the eligible individual’s AGI above $75,000 ($150,000 in the case of a joint return).  So no credit is allowed for individuals with AGI of $100,000 or more, or for joint filers with AGI of $200,000 or more.

n Unlike the $600 per worker lump-sum rebates issued last year, the credit can be received as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return.

n Since the credit is based on taxable wages and thus unavailable to many retired people and other whose income does not come from wages, the new law includes a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Socials Security Administration, and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans’ Affairs.  The one-time payment is a reduction to any allowable Making Work Pay credit.  Similarly, a one-time refundable tax credit of $250 is provided in 2009 to certain government retirees who are not eligible for Social Security benefits.  This one-time credit is a reduction to any allowable making Work Pay credit.

Enhanced First-Time Home Buyer Credit

You may remember that last year’s Housing Act included a tax credit giving first-time homebuyers up to a $7,500 (actually, 10% of the purchase price or $7,500, whichever is less) credit for buying a home between April 8, 2008, and July 1, 2009, with single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualifying for the full tax credit.  However, despite high hopes that the credit would be effective in getting people to buy homes and thereby reduce the excessive inventory on the market, the credit is widely acknowledged to have failed in its objective.  The problem, according to realtors and industry officials, was that buyers were turned off by the odd way the credit worked.  While the credit functioned initially like other tax credits, reducing a person’s tax liability on a dollar-for-dollar basis, it was unusual in that, unlike other federal tax credits (for example, the child credit), the credit for first-time homebuyers had to be paid back to the government ratably over a period of 15 years (or earlier if the house is sold).  So, as a practical matter, the credit was the equivalent of an interest-free loan from the government.  It was the payback requirement that many in the industry felt kept potential buyers on the sidelines.  Now, Congress has beefed up the credit in renewed optimism of enticing more first-time homebuyers to take the plunge.  First and foremost, the new legislation scuttles the repayment requirement for homes purchased on or after January 1, 2009.  The new law also extends the credit through the end of November 2009, and bumps up the maximum credit amount form $7,500 to $8,000.  However, the new law retains the recapture provisions if the house is sold within three years of purchase.

Expanded College Credit

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) includes a measure aimed at making college more affordable for low and moderate-income students.  The new provision temporarily enlarges the Hope tax credit (renamed the American Opportunity tax credit) for students from middle-income families and partially extends this tax credit for the first time to students from lower-income families.  Here are the details:

n The new law creates a new American Opportunity tax credit for 2009 and 2010, replacing and expanding the Hope tax credit for those years.

n The maximum amount of the American Opportunity tax credit is $2,500 (up from a maximum credit of $1,800 under the Hope credit).  The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, so the maximum credit of $2,500 is reached when a student has qualifying expenses of $4,000 or more.

n While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity tax credit is available for up to four years.

n Under the Hope credit, qualifying expenses were narrowly defined to include just tuition and fees required for the student’s enrollment.  Textbooks were excluded, despite their escalating cost in recent years.  The American Opportunity tax credit expands the list of qualifying expenses to include textbooks.

n The Hope credit was nonrefundable, i.e., it could reduce your regular tax bill to zero but could not result in a refund.  This meant that if a family did not owe any taxes it could not benefit from the credit, which prompted critics to argue that the credit was thus denied to the very families most in need of help affording college.  The American Opportunity tax credit addresses this criticism to a degree by providing that 40% of the credit is refundable.  This means that someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.

n The Hope credit was not available to someone with higher than moderate income.  Under the credit’s “phaseout” provision, taxpayers with adjusted gross income (AGI) over $50,000 (for 2009) saw their credits reduced, and the credit was completely eliminated for AGIs over $60,000 (twice those amounts for joint filers).  Under the American Opportunity tax credit, taxpayers with somewhat higher incomes can qualify, as the phaseout of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).

The Break for Car Buyers

In hopes of spurring the overall economy in general, and the automobile industry in particular, the recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) includes a new tax break for purchasers of new cars:  a deduction for state and local sales and excise taxes paid on new vehicle purchases.

Sales tax is generally not a deductible item for individuals.  A limited exception allows taxpayers who itemize their deductions to claim either state and local income taxes or state and local general sales taxes, which mainly benefits taxpayers with a state or local sales tax but no income tax.  Under the new law, buyers can claim an income tax deduction for the sales or excise tax they pay on a vehicle purchase.  Key details of this new tax incentive include:

n The tax break applies to purchases of passenger cars, minivans, light trucks, motorcycles, and motor homes, but it only applies on $49,500 of the vehicle’s price and it only applies to new vehicles.

n The tax break covers new vehicles purchased between the date of enactment of the 2009 economic stimulus legislation and the end of 2009.

n You do not have to itemize your deductions to be able to claim the deduction.  However, the deduction cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes.

n Only couples making less than $250,000 a year, or individuals making less than $125,000 annually, qualify for the full deduction.

Unemployment Compensation Exclusion

A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded Earned Income Tax Credit

The new law provides tax relief to families with three or more children and increases marriage penalty relief.  The changes apply for 2009 and 2010.

Expanded Child Tax Credit

A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).

Computers as an Education Expense

A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.

Alternative Minimum Tax

To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

Tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference for AMT purposes.

Nonrefundable personal credits can offset AMT through 2009 (instead of 2008).

COBRA Premium Subsidy Provided for 9 Months to Workers Involuntarily Terminated between September 10, 2008 through December 31, 2009

Under the so-called COBRA continuation rules added by the Consolidated Omnibus Budget Reconciliation Act of 1985, employees and their dependents who are covered under group health insurance plans maintained by employers that have at least 20 employees, must be allowed to elect to continue their coverage at their own expense, plus a 2% administrative fee.  This coverage can continue for at least 18 months after the date that their health plan coverage is lost due to an employee’s termination of employment, i.e., due to a “qualifying event.”

All “qualified beneficiaries” must be allowed to continue the same coverage that they had immediately before the occurrence of the qualifying event that caused the loss of coverage.

Following the occurrence of a qualifying event that causes the loss of coverage under a group health plan, the plan administrator must, within 14 days of being provided notice of the qualifying event, provide each qualified beneficiary with a notice that explains the beneficiaries’ right to elect COBRA continuation coverage, the coverage that may be elected, the duration of the coverage, and how much the coverage will cost and how and when it must be paid.

Nothing in the law requires the plan to charge qualified beneficiaries for their continuation coverage.  The COBRA rules merely set the upper limit for the premiums a plan is allowed to charge, i.e., 102% of the employee’s cost.

The 2009 Recovery Act provides that, for a period not more than nine months, an “assistance eligible individual” (AEI) is treated as having paid any premium required for COBRA continuation coverage under a group health plan is the individual pays 35% of the premium.  Thus, if the assistance eligible individual pays 35% of the premium, the group health plan must treat that individual as having paid the full premium required for COBRA continuation coverage, and the individual is effectively entitled to a “subsidy” for 65% of the premium.

Illustration:  John is laid off from work and is eligible to elect COBRA continuation coverage.  The cost to his employer for the coverage is $100 per month.  Under pre-Act law, John’s COBRA premium for that coverage was $102 per month (i.e., 102% of the regular premium).  Under the Act, John has to pay only 35% of the $102 premium, i.e. $35.70.  The $66.30 balance is the “subsidy” that the Act provides.

Who is an Assistance Eligible Individual

For purposes of the Act, an “assistance eligible individual” (AEI) is any qualified beneficiary if:

(1) at any time from September 1, 2008 through December 31, 2009 the qualified beneficiary is eligible for COBRA continuation coverage;

(2) elects COBRA continuation coverage; and

(3) the qualifying event giving rise to the beneficiary’s COBRA eligibility consists of the involuntary termination of the covered employee’s employment during this period.

When AEI’s Eligibility for COBRA Premium Subsidy Ends

The Act provides that an AEI’s eligibility for a COBRA premium assistance subsidy will end for months of coverage beginning on or after the earlier of:

n The first date that the AEI is eligible for coverage under:  any other group health plan (other than coverage consisting of only dental, vision, counseling, or referral services, or a combination thereof), coverage under a health reimbursement arrangement or a health flexible spending arrangement, or coverage of treatment that is furnished in an on-site medical facility maintained by the employer and that consists primarily of first-aid services, prevention and wellness care, or similar care (or a combination thereof); or the first date that the AEI is eligible for benefits under title XVIII of the Social Security Act; or

n The earliest of –

(1) the date that is nine months after the first day of the first month that the subsidy becomes available to the individual,

(2) the date following the expiration of the maximum period of continuation coverage required under the applicable COBRA continuation coverage provision, or

(3) the date following the expiration of the period of the continuation coverage allowed under the rules at 302.

Thus, the maximum period for which the subsidy can be provided is nine months.

Additional Rules

Workers who were involuntarily terminated between September 1, 2008 and date of enactment, but initially failed to elect COBRA because it was unaffordable, are given an additional 60 days to elect COBRA and receive the subsidy.

COBRA-subsidized individuals may elect to change COBRA continuation coverage to a different plan where the employer so permits.

COBRA premium assistance provided to high income taxpayers can be recaptured.

The COBRA subsidy is excluded from income.

COBRA-subsidized individuals are not eligible for the refundable federal health coverage tax credit.

Terminated workers must be notified of their right to COBRA continuation benefits subsidy.

There is a reimbursement mechanism provided to plans for COBRA premiums that are not paid by COBRA-subsidized individuals.

As part of its overhaul of the COBRA rules, the 2009 Recovery Act provides that an “assistance eligible individual” (AEI) who elects COBRA coverage under the employer’s group health plan, is required to pay no more than 35% of the applicable premium for COBRA coverage, and that IRS will provide a “subsidy” for the remaining 65%.

The 2009 Recovery Act provides a recapture provision for premium assistance provided to high-income taxpayers.  Under this provision, if:  (a) premium assistance is provided for any COBRA continuation coverage which covers the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer (as defined below) during any portion of the tax year, and (b) the taxpayer’s modified adjusted gross income (MAGI; as defined below) for the tax year exceeds $125,000 ($250,000 in the case of a joint return), the taxpayer’s income tax for the tax year is increased by the amount of the premium assistance.

Phase-In of Recapture

For taxpayers whose MAGI for the tax year does not exceed $145,000 ($290,000 for joint returns), the increase in the tax imposed by the premium assistance recapture rules must not exceed the phase-in percentage of such increase (determined without regard to this phase-in rule).  “Phase-in percentage” means the ratio (expressed as a percentage) obtained by dividing:

(1) the excess of [the taxpayer’s MAGI over $125,000 ($250,00 for joint returns)], by

(2) $20,000 ($40,000 for joint returns).

Despite the definition of “assistance eligible individual,” an individual will not be treated as an AEI for purposes of the COBRA premium assistance rules of the Act if the individual:

(1) makes a permanent election (in the manner to be set out by IRS) to waive the right to premium assistance, and

(2) notifies the entity to whom premiums are reimbursed – typically, the employer maintaining the group health plan, or the insurer providing coverage for the plan-of the waiver election.

The 2009 Recovery Act establishes that any premium reduction provided is excluded from the gross income of assistance eligible individuals of the “Health Insurance Assistance for the Unemployed Act of 2009.”

Thus, a taxpayer’s receipt of the subsidy for COBRA continuation coverage is not subject to federal income tax.

The Act provides a mechanism for reimbursing the person to which premiums are payable for the difference between the full premium and the amount paid by an AEI.  Specifically, the person to which premiums are payable under COBRA continuation coverage must be reimbursed for the amount of the premiums that are not paid by AEIs on account of the 65% premium reduction.

The person to whom premiums are payable will be, except as IRS provides otherwise, either the plan, the employer, or the insurer.  Specifically, the person entitled to reimbursement is:

(1) in the case of a group health plan which is a multiemployer plan;

(2) in the case of a group health plan which is not a multiemployer plan and which is subject to the COBRA continuation provisions contained in the Code, ERISA, Public Health Service Act, or civil service provisions of the U.S. Code, and under which some or all of the coverage is not provided by insurance, the employer; and

(3) in the case of any group health plan not described in (1) or (2) above, the insurer providing the coverage under the plan.

A person entitled to reimbursement and who files a claim for reimbursement at such time and in such manner as IRS may require will be treated as having paid to IRS, on the date that the AEI’s premium payment is received, payroll taxes in an amount equal to the portion of the reimbursement relating to that premium.  To the extent that the amount treated as paid exceeds the amount of the person’s liability for payroll taxes, IRS will credit or refund the excess in the same manner as if it were an overpayment of payroll taxes.

Any overstatement of the reimbursement to which the person is entitled and any amount paid by IRS as a result of an overstatement will be treated as an underpayment of payroll taxes by the person and may be assessed and collected by IRS in the same manner as payroll taxes.

Thus, IRS can assert appropriate penalties for failing to truthfully account for the reimbursement.

However, it is not intended that any portion of the reimbursement is taken into account when determining the amount of any penalty to be imposed against any person, required to collect, truthfully account for, and pay over any tax (dealing with penalties for failure to collect and pay over tax).

No person is eligible for this reimbursement, however, until the person has received the reduced premium payment from the AEI.

For purposes of determining a person’s payroll tax liability, “payroll taxes” includes amounts deducted and withheld for a payroll period for federal income tax and for amounts deducted for employees’ FICA taxes and amounts imposed for the person’s share of FICA taxes.

A “person” includes any governmental entity.

Any person entitled to reimbursement for any period must submit reports, at such time and in such manner as IRS may require, including (1) an attestation of the involuntary termination of employment of each covered employee on the basis of whose termination entitlement to reimbursement of premiums is claimed, (2) a report of the amount of payroll taxes offset for reporting period and the estimated offsets of such taxes for the subsequent reporting period, and (3) a report containing the TINs of all covered employees, the amount of subsidy reimbursed with respect to each covered employee and qualified beneficiaries, and a designation with respect to each covered employee as to whether the subsidy reimbursement is for coverage of one individual or of two or more individuals.

IRS is authorized to issue regulations or other guidance as may be necessary or appropriate to carry out the reimbursement provisions, including the reporting requirement or the establishment of other methods for verifying the correct payments and credits.  In addition, IRS must issue regulations or guidance with respect to applying the reimbursement provisions to group health plans that are multiemployer plans.

In the case of an AEI who pays the full premium amount required for COBRA for the first period to which the subsidy applies or the immediately subsequent period, the person to whom the payment is made must:

(1)  make a reimbursement payment to the AEI for the amount of the premium paid in excess of the amount required to be paid; or

(2) provide credit to the AEI for that amount in a manner that reduces one or more subsequent premium payments that the AEI is required to pay for the coverage involved.

The person reimbursing or crediting the individual will in turn be reimbursed as provided for above.

Unless it is reasonable to believe that the credit for excess payment described in (2) above will be used by the AEI within 180 days of the date on which the person paid received the full premium payment, that person must make the payment required to the AEI within 60 days of that full payment.  However, if as of any day within the 180-day period, it is no longer reasonable to believe that the credit will be used during that period, payment equal to the remainder of the credit outstanding must be made to the AEI within 60 days of that day.

Decreased Required Estimated Tax Payments in 2009 for Certain Small Businesses

Generally, the required annual payment for individual estimated income tax is the lesser of (1) 90% of the tax shown on the return for the tax year (or, if no return is filed, 90% of the tax for that year), or (2) under pre-2009 Recovery Act law, 100% of the tax shown on the return of the individual for the preceding tax year.  However, if the adjusted gross income (AGI) shown on the return of the individual for the preceding tax year exceeds $150,000 ($75,000 for a married individual who files a separate return), higher percentages than 100% of the tax shown on the return of the individual for the preceding tax year (option (2), above) apply.

Thus, in the case of individuals whose AGI exceeded the above mentioned amounts in the preceding year, the option to base the estimated tax payments on the previous year’s tax return required them to pay a higher percentage of the previous year’s tax as estimated tax.

NEW LAW:  The 2009 Recovery Act provides that, for any tax year beginning in 2009, in computing the amount of the required annual installments of estimated income tax of any “qualified individual” (defined below), the term “required annual payment” means the lesser of (1) 90% of the tax shown on the return for the tax year, or (2) 90% of the tax shown on the return of the individual for the preceding tax year.

Thus, for tax years beginning in 2009, 100% of the tax shown on the individual’s return for the preceding tax year in the computation is reduced to 90% of the tax so shown.

Thus, the 2009 Recovery Act provides that the required annual estimated tax payments of a qualified individual for tax years beginning in 2009 is not greater than 90% of the tax liability shown on the tax return for the preceding tax year.

For purposes of this special rule for 2009 tax years, “qualified individual” means any individual if:

(1) the adjusted gross income shown on the return of that individual for the preceding tax year is less than $500,000, and

(2) that individual certifies that more than 50% of the gross income shown on the return of that individual for the preceding tax year was income from a small business.

A certification under (2), above, must be in the form and manner, and filed at a time, as IRS may prescribe by regulations.

Thus, the 2009 Recovery Act provides that a qualified individual means any individual if the adjusted gross income shown on the tax return for the preceding tax year is less than $500,000 ($250,000 if married filing separately) and the individual certifies that at least 50% of the gross income shown on the return for the preceding tax year was income from a small trade or business.

For purposes of the definition of “qualified individual,” income from a small business means, with respect to any individual, income from a trade or business the average number of employees of which was less than 500 employees for the calendar year ending with or within the preceding tax year of the individual.

Business Tax Changes

Scope of $500,000 Compensation Deduction Limit on TARP Recipients is Broadened; Other Executive Compensation Restrictions are Imposed

A publicly held corporation cannot deduct more than $1 million per year of applicable employee remuneration (defined below) paid to a covered employee.  “Covered employee” means the principal executive officer (PEO) or someone acting in that capacity and the three highest paid officers other than the PEO or principal financial officer (PFO).

“Applicable employee remuneration” means a covered employee’s aggregate remuneration for services performed (during the deduction year or another tax year) that would be deductible entirely for the tax year if the $1 million limit did not apply.  But it does not include commissions generated directly by the executive’s performance, certain other performance-based compensation, certain grandfathered contracts, qualified plan contributions, and certain excludable employee fringe benefits.

The $1 million deduction limit is reduced to $500,000 for remuneration paid to covered executives – generally, the chief executive officer (CEO), chief financial officer (CFO), and the three highest paid other officers of an “applicable employer.”  The $500,000 limit applies to the covered executive’s applicable employee remuneration, but without the exclusions for commissions, performance-based compensation, and grandfathered contracts.

Under pre-2009 Recovery Act law, the $500,000 limit applied to financial institutions (even if not publicly held or not incorporated) from whom troubled assets were acquired under the Troubled Assets Relief Program (TARP) established by the 2008 Emergency Economic Stabilization Act, if the aggregate amount of acquired assets exceeded $300 million.  However, if all the acquisitions were direct purchases, the $500,000 limit did not apply.

The $500,000 limit applied for the first employer tax year that includes any part of the “TARP authorities period” (October 3, 2008 to December 31, 2009, or to the extended period, which cannot be later than October 3, 2010) in which the $300 million amount was cumulatively exceeded, and any later employer tax year that included any part of that period.

NEW LAW:  The 2009 Recovery Act provides that each TARP recipient is subject to the $500,000 compensation deduction limit during the period in which any obligation arising from financial assistance provided under TARP remains outstanding.

For this purpose, “TARP recipient” means any entity that has received or will receive financial assistance under TARP.

The period in which any obligation arising from financial assistance provided under TARP remains outstanding does not include any period during which the federal government only holds warrants to purchase the TARP recipient’s common stock.

The 2009 Recovery Act expands the scope of the $500,000 compensation deduction limit in the following ways:

(1) The $500,000 limit applies to “any entity,” not just to financial institutions.

(2) The $500,000 limit applies to all entities that have received or will receive TARP financial assistance of any type or amount.  It is not restricted to institutions from which more than $300 million of troubled assets were acquired, and there is no exception for institutions from which assets were acquired only through direct purchase.

(3) The $500,000 limit will remain in effect as long as any obligation arising from TARP financial assistance remains outstanding (with the exception for warrants to purchase common stock).  It is not restricted to employer tax years that include any part of the “TARP authorities period,” which would have ended by October 3, 2010.

Other Executive Compensation Rules for TARP Recipients

2009 Recovery Act also modifies and expands the non-tax TARP executive compensation rules.  These modifications include:

(1) The requirement to recover any bonus, retention award, or incentive compensation paid to a senior executive officer based on statements of earnings, revenues, gains, or other criteria that are found to be materially inaccurate, which applied to the five “senior executive officers,” is expanded to apply to the next 20 most highly compensated employees of a TARP recipient.

(2) The prohibition on golden parachute payments, which applied to the five “senior executive officers,” is expanded to apply to the next five most highly compensated employees of the TARP recipient.  The term “golden parachute payment” is defined as any payment for departure from a company for any reason, except for payments for services performed or benefits accrued.

(3) A TARP recipient is prohibited from paying or accruing any bonus, retention award, or incentive compensation to at least the 25 most highly compensated employees.  The restriction is phased in by the amount of financial assistance received by the entity receiving TARP assistance.  Compensation may be paid in the form of restricted stock.

(4) Any compensation plan that would encourage manipulation of the reported earnings of a TARP recipient to enhance the compensation of any of its employees is prohibited.

2009 Recovery Act also provides corporate governance rules relating to the compensation committees of TARP recipients, nonbinding shareholder votes on executive compensation payable by a TARP recipient, and the adoption by TARP recipients of policies regarding luxury expenditures such as entertainment, aviation, and office renovation expenses.

The Treasury Secretary is directed to review compensation paid to senior executive officers and the next 20 most highly compensated employees of an entity receiving TARP assistance before date of enactment to determine whether the payments were inconsistent with the provision, the TARP, or public interest.

Monthly Exclusion for Employer-Provided Transit Passes and Vanpooling Benefits Increased to Same Level as Employer-Provided Parking, for the Rest of 2009 and 2010

An employer may exclude from an employee’s income an inflation adjusted amount of up to $120 a month (for 2009) for qualified transportation fringe benefits that the employer provides through transit passes and vanpooling.

An employer may also exclude from an employee’s income up to $230 a month (for 2009) for qualified transportation fringe benefits that the employer provides through employer-provided parking.

NEW LAW:  The 2009 Recovery Act increases the monthly exclusion for employer-provided transit passes and vanpooling to the same level as the exclusion for employer-provided parking.  Specifically, the Act provides that, for any month beginning on or after the date of enactment and before January 1, 2011, the monthly exclusion limitation for employer-provided transit and vanpooling benefits is the same as for employer-provided parking.

Thus, for months in 2009 beginning on or after date of enactment, an employer may exclude from an employee’s income up to $230 a month for the aggregate of transit passes and vanpooling benefits provided to an employee.  From January 2009 through the month before the first month that the change becomes effective, the employer may only exclude transit passes and vanpooling benefits at the rate of up to $120 a month.  For 2010, an employer will be able to exclude up to whatever the inflation-adjusted amount for employer-provided parking for 2010 turns out to be.

Special Enrollment and Notification Requirements for Group Health Plans for Medicaid or CHIP Eligible Employees or Dependents

Under the Children’s Health Insurance Program (“CHIP”) as reauthorized by the Children’s Health Insurance Program Reauthorization Act of 2009, the federal Centers for Medicare and Medicaid Services (CMS) administers a program under which federal matching funds help states expand health care coverage to uninsured children.  In addition, CMS oversees the Medicaid program under Title XIX of the Social Security Act, which subsidizes state provision of health care benefits to certain low-income individuals and families who fit into an eligibility group that is recognized by federal and state law.

NEW LAW:  The Children’s Health Insurance Program Reauthorization Act of 2009 (“2009 CHIP”) provides that group health plans must permit special enrollment arrangements for employees related to eligibility under either Medicaid or CHIP.  Specifically, a group health plan must permit an employee, or his dependent, who is eligible, but not enrolled, for coverage under the plan to enroll for coverage if either:

(1) (i) the employee or dependent is covered under a Medicaid plan or state CHIP, (ii) coverage of the employee or dependent is terminated as a result of loss of eligibility, and (iii) the employee requests coverage under the group health plan no later than 60 days after the date coverage terminates; or

(2) (i) the employee or dependent becomes eligible for assistance under a Medicaid plan or state CHIP (including under any waiver or demonstration project conducted under or in relation to those plans), and (ii) the employee requests coverage under the group health plan no later than 60 days after the date the employee or dependent is determined to be eligible for assistance.

In order to facilitate reaching out to employees and communicating the relationship between Medicaid and CHIP coverage and group health plan coverage, the 2009 CHIP also provides that each employer that maintains a group health plan in a state in which the Medicaid or Chip plan provides benefits in the form of premium assistance for the purchase of coverage under a group health plan must provide each employee a written notice informing the employee of those potential opportunities for the employee or the employee’s dependents then currently available in the state in which the employee resides.  For purposes of complying with this provision, an employer may use a state-specific model notice.

An employer may provide the applicable model notice with the materials it furnishes employees of health plan eligibility, concurrent with the material provided employees in connection an open season or election process conducted under the plan, or concurrent with the furnishing of the summary plan description.  ERISA is amended to permit the inclusion of the model notice in the summary plan description.

In addition to these notice requirements, the plan administrator of any group health plan which has a participant or beneficiary who is covered under Medicaid or CHIP must disclose to the state, upon request, information about the benefits available under the plan in “sufficient specificity” to make a determination concerning the cost-effectiveness of the state providing assistance through purchasing coverage and in order for the state to provide supplemental benefits required in the Social Security Act.  What constitutes “sufficient specificity” for these purposes will be determined under regulations issued by the Department of Health and Human Services (HHS), in consultation with IRS and DOL, that require use of the model coverage coordination disclosure form.

Carryback Period for 2008 NOLs is Increased to Three, Four, or Five Years (From Two Years) for Electing Small Businesses

A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular 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 is allowable as a carryback or a carryover, and is then carried to the next earliest tax year.  A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward.

Different rules apply for certain types of losses.  For example, a three-year carryback is allowed for “eligible losses” – i.e., (a) individual losses from casualty or theft and (b) farm or small business (average annual gross receipts of $5 million or less) losses attributable to designated disasters.  Certain NOLs cannot be carried back at all – i.e., so-called “excess interest losses,” which are NOLs attributable to interest allocable to a corporate equity reduction transaction (CERT).

A special five-year carryback was provided for 2001 and 2002 NOLs (in response to the economic downturn following the events of September 11, 2001), but taxpayers could elect to use the regular carryback instead.

NEW LAW:  The 2009 Recovery Act (the Act) provides that if an “eligible small business” elects to apply Code Sec. 172(b)(1)(H) to an “applicable 2008 NOL” (or applicable NOL”), then Code Sec. 172(b)(1)(A)(i) (which provides the general two-year NOL carryback) is applied by replacing “two” with any whole number the taxpayer elects that is more than two and less than six.

In other words, an eligible business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period.

The Act does not change the allowable carryforward period for 2008 NOLs.

The taxpayer must affirmatively elect the increased carryback.  Absent any election, the regular NOL carryback period rules apply.  Thus, even if a taxpayer qualifies as an “eligible small business” and the taxpayer’s NOL qualifies as an “applicable NOL,” the NOL cannot be carried back more than two years unless the taxpayer elects to apply Code Sec. 172(b)(1)(H) (or one of the other special carryback periods applies).  By contrast, the special five-year carryback for 2001 and 2002 NOLs applied automatically; a taxpayer that wanted to use the regular carryback had to make an election “out.”

The Act does not affect the taxpayer’s ability to make a Code Sec. 172(b)(3) election to forego the entire carryback for the NOL and instead carry it forward.

“Eligible Small Business” Defined

An “eligible small business” that may elect the increased carryback is any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (or the average annual gross receipts of any of its predecessors) for the three-tax-year period (or shorter period of existence) ending with the tax year in which the loss arose are $15 million or less.  Thus, a taxpayer cannot elect the increased carryback for a 2008 NOL if the taxpayer’s average annual gross receipts for 2006-2008 exceeded $15 million.  The taxpayer can carry the NOL back only two years (unless another special carryback rule applies).

Extension of Bonus Depreciation

Last year, Congress temporarily allowed business to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write off 50% of the cost of depreciable property acquired in 2008 for use in the United States.  The new law extends this temporary benefit for qualifying property purchased and placed into service in 2009.

Extension of Enhanced Small Business Expensing (Section 179)

In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation.  Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000.  The new law extends these temporary increases for capital expenditures incurred in 2009.

Qualified Small Business Stock

The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50% to 75% for stock issued after the enactment date and before 2011.

S Corp Holding Period

The new law temporarily shortens the holding period of assets subject to the built-in gains tax from ten years to seven years.

Delayed Recognition of Certain Cancellation of Debt Income

To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income (CODI) over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five tax years) for specified types of business debt repurchased by the business in 2009 or 2010.

Energy Tax Incentives

Vehicles

The new law provides a tax credit for purchases of plug-in electric drive vehicles ranging from $2,500 to $7,500 depending on battery capacity.  The new law also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits.

Business Energy Credit

The nonrefundable business energy credit for any tax year is the energy percentage of the basis of each energy property placed in service during the tax year.  The energy percentage is 30% for “qualified small wind energy property,” which is property that uses a qualifying small wind turbine (defined below) to generate electricity.

A “qualifying small wind turbine” is a wind turbine that has a nameplate capacity of no more than 100 kilowatts.

“Qualified small wind energy property” does not include any property for any period after December 31, 2016.

Under pre-2009 Recovery Act law, for qualified small wind energy property placed in service during the tax year, the credit otherwise determined under Code Sec. 48(a)(1) (the energy percentage of the basis of each energy property placed in service during that tax year, for all that property of the taxpayer for that tax year could not exceed $4,000.

NEW LAW:  The 2009 Recovery Act specifically repeals the per taxpayer $4,000 annual limitation on the energy credit for qualified small wind energy property.  Thus, the 2009 Recovery Act eliminates the credit cap applicable to qualified small wind energy property.

Thus, subject to the project expenditure rules discussed below, qualified small wind energy property is eligible for an uncapped 30% credit if placed in service after 2008.

In 2008, J Corp., a calendar year taxpayer, places into service $40,000 of qualified small wind energy property.  J’s energy credit for 2008 for that property is $4,000 ($40,000 x 30%, capped at $4,000).

The facts are the same as in Illustration 1, except that J places the property in service in 2009.  Thus, subject to the project expenditure rules discussed below, J’s credit for 2009 is $12,000 ($40,000 x 30%).

Nonbusiness Energy Property Credit is Increased from 10% to 30% and Extended for One Year

Individual taxpayers are allowed a personal tax credit, known as the nonbusiness energy property credit, for energy efficient improvements to a dwelling unit in the U.S. owned and used by the taxpayer as the taxpayer’s principal residence.  Under pre-2009 Recovery Act law, this credit was equal to the sum of:

(1) 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements (i.e., building envelope components meeting certain requirements) installed during the tax year, and

(2) the amount of residential energy property expenditures (i.e., $50 for each advanced main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and $300 for “qualified energy efficient property,” including heat pumps, water heaters, and central air conditioners) paid or incurred by the taxpayer during the tax year.

Under pre-2009 Recovery Act law, the credit was subject to a lifetime cap.  The total credit for all tax years could not exceed $500, no more than $200 of which could be for expenditures on windows.

Under pre-2009 Recovery Act law, expenditures made from subsidized energy financing were not taken into account for purposes of the credit.

The credit is allowed for property placed in service in calendar years 2006, 2007, and 2009.  Under pre-2009 Recovery Act law, the credit was not available for property placed in service after December 31, 2009.

NEW LAW:  The 2009 Recovery Act modifies and extends the nonbusiness energy property credit in the following ways:

(1) the 10% credit rate is increased to 30%;

(2) all energy property that was previously eligible for the $50, $100, and $150 credits is instead eligible for a 30% credit;

(3) the $500 lifetime cap ($200 for windows) is eliminated and replaced with an aggregate $1,500 cap for 2009 and 2010; and

(4) the credit is extended for one year, through December 31, 2010.

Amount of Credit

The 2009 Recovery Act provides that individuals are allowed a credit for the tax year equal to 30% of the sum of:

(1) the amount paid or incurred by the taxpayer during the tax year for qualified energy efficiency improvements, and

(2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the tax year.

The dollar limitations on residential energy property expenditures - $50 for each advanced main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, $300 for each item of qualified energy efficient property – have been eliminated.

Credit Cap

The aggregate amount of credits allowed to a taxpayer for tax years beginning in 2009 and 2010 may not exceed $1,500.

The lifetime limitation of $500 ($200 for windows) has been eliminated.

Termination

The credit will not be available for property placed in service after December 31, 2010.

Dollar Caps on Residential Energy Efficient Property (REEP) Credit are Eliminated for Solar Hot Water, Geothermal, and Wind Property Expenditures

Individual taxpayers are allowed a nonrefundable personal tax credit, known as the residential energy efficient property (REEP) credit, for 30% of expenditures made during the tax year for qualified solar water heating, geothermal heat pump, fuel cell, small wind energy, and solar electric property.

The REEP credit for a tax year was limited to:

(1) under pre-2009 Recovery Act law, $2,000 for qualified solar water heating property;

(2) under pre-2009 Recovery Act law, $2,000 for qualified geothermal heat pump property;

(3) $500 for each 0.5 kilowatt of capacity of qualified fuel cell property; and

(4) under pre-2009 Recovery Act law, $500 for each 0.5 kilowatt of capacity (not to exceed $4,000) of qualified small wind energy property.

There is no dollar limit for solar electric property after 2008.

Rules are provided for allocating the credit where two or more individuals jointly occupy a dwelling unit and use it as a residence.  The maximum amount of expenditures taken into account by all the individuals during the calendar year was:

(1) under pre-2009 Recovery Act law, $6,667 for qualified solar water heating property expenditures;

(2) under pre-2009 Recovery Act law, $6,667 for qualified geothermal heat pump property expenditures;

(3) $1,667 for each 0.5 kilowatt of capacity of qualified fuel cell property for which qualified fuel cell property expenditures are made; and

(4) under pre-2009 Recovery Act law, $1,667 for each 0.5 kilowatt of capacity (not to exceed $13,333) of wind turbines for which qualified small wind energy property expenditures are made.

Those amounts ($6,667, $1,667, and $13,333) were the maximum amounts of expenditures that qualified for the credit – 30% of $6,667 is $2,000; 30% of $1,667 is $500; and 30% of $13,333 is $4,000.

NEW LAW:  The 2009 Recovery Act eliminates the REEP credit caps for qualified solar water heating, geothermal heat pump, and small wind energy property, while retaining the credit cap for qualified fuel cell property.  Thus, for any qualified fuel cell property expenditure, the REEP credit for any tax year cannot exceed $500 for each 0.5 kilowatt of capacity of the qualified fuel cell property to which the expenditure relates.

Joint Occupancy

The rules for allocating the credit among joint occupants are revised to conform to this change.  Where two or more individuals jointly occupy a dwelling unit and use it as a residence, the maximum amount of qualified fuel cell property expenditures that may be taken into account by all of the individuals for the calendar year is $1,667 for each 0.5 kilowatt of capacity of qualified fuel cell property to which the expenditures relate.  The allocation rules for other types of qualified expenditures are eliminated.

Tax Credits for Alternative Fuel Pumps

The new law provides an increase for 2009 and 2010 in the 30% alternative refueling property credit for businesses (capped at $30,000) to 50% (capped at $50,000).

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