In addition to extending unemployment insurance for jobless workers, the Worker, Homeownership, and Business Assistance Act of 2009 contains a number of tax provisions aimed at further stimulating the economy.
Tax highlights include:
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.
The definition of a first-time home buyer 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).
Several limitations were also 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 NOL
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 percent 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 funds.
The 90-percent limitation normally applicable to Alternative Minimum Tax NOLs has been suspended for the use of any AMT NOL deduction attributable to carrybacks for which an extended carryback period is elected.
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 Nov. 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.
Provisions Create 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.
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 a 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 percent of their AMT NOL to capture any remaining AMT.
Steve Holden is a tax partner with BKD, LLP.