Economic Stimulus: What does the American Recovery and Reinvestment Act do for businesses?
The American Recovery and Reinvestment Act contains a variety of provisions that help businesses by reducing tax liability in the tax years 2009 and 2010. Some provisions reduce taxable income and others create or expand credits that promote certain activities while reducing tax liability. The Joint Committee on Taxation (JCT) estimates that the business provisions discussed below will reduce federal revenue by $34.2 billion between 2009 and 2019 (JCT-19-09).
- Extend Temporary Increase in Limitations on Expensing of Depreciable Business Assets.
Businesses may expense (that is, deduct the full cost of) qualifying investment undertaken in 2009, subject to limitations. The 2008 stimulus increased the maximum amount of investment that firms may expense and the 2009 act extends the higher amounts through 2009. “Qualifying investment” is generally defined as “depreciable tangible personal property that is purchased for use in the active conduct of a trade or business.”
- Firms may expense up to $250,000, but this limit is reduced by the amount by which qualifying investment exceeds $800,000. Thus, for example, a firm that invests $750,000 may expense $250,000. But a firm that invests $900,000 may expense only $150,000, because the $250,000 limit is reduced by the $100,000 of investment over the $800,000 limit. Firms that invest $1,050,000 or more may not expense any of their investment.
- After 2009, the limit on expensing reverts to $125,000 (indexed from 1997), with the reduction beginning when investment exceeds $500,000 (also indexed from 1997).
- JCT estimates that the provision will reduce federal revenue by $1.1 billion in fiscal 2009 and 2010. That cost will be offset, however, by additional revenue in subsequent years, because firms will be unable to claim as much depreciation in those years on investments made in 2009. The net revenue cost from 2009 through 2019 will be about $41 million (JCT-19-09
- Extend Special Depreciation Allowance for Certain Property
The stimulus act also extends the additional first-year depreciation provided in the 2008 stimulus. Businesses may deduct 50 percent of the cost of qualifying investments contracted for and placed in service during 2009. JCT estimates that this provision will reduce federal revenue by about $38.8 billion in fiscal 2009 and 2010. That cost will be offset, however, by about $33.7 billion of additional revenue in subsequent years, because claiming the additional first year depreciation will reduce the amount firms may depreciate in the future. The net revenue cost from 2009 through 2019 will thus be about $5.1 billion (JCT-19-09).
- 5 Year Carryback of Net Operating Losses
Under current law, businesses may carry net operating losses back two years to offset taxable income. The stimulus act allows businesses with annual gross receipts of $15 million or less to carry back net operating losses for any taxable year beginning or ending in 2008 for five years. Eligible businesses may amend prior-year tax returns to claim refunds for taxes paid during years when they had positive income. JCT estimates that this provision will cost $4.7 billion in fiscal year 2009, but that cost will be offset by $3.8 billion when there will be a decrease in net operating losses carried forward. The resulting 10 year revenue cost from 2009 to 2019 will be about $0.9 billion (JCT-19-09).
- Incentives to Hire Unemployed Veterans and Disconnected Youth
The Work Opportunity Tax Credit offers a maximum credit of $2,400 to businesses that hire certain disadvantaged workers. The 2009 act expands the target groups for 2009 and 2010 to include “disconnected youth” and unemployed recently discharged veterans. Disconnected youth are individuals between 16 and 25 years of age who have not been regularly employed or in school during the previous 6 months and lack basic skills. Individuals qualify as unemployed recently discharged veterans if they have left active duty in the previous 5 years and received unemployment compensation for at least four weeks during the year before being hired. JCT estimates that this proposal will cost $231 million over the next 10 years (JCT-19-09).
- Deferral of Certain Income from Discharge of Indebtedness
The stimulus act allows businesses that buy back or exchange their own debt in 2009 or 2010 to defer the income received from the transaction until 2014. Any deferred income would be included ratably in income in each of the five taxable years beginning in 2014. JCT estimates that this provision will cost $1.6 billion over 10 years (JCT-19-09).
Under the stimulus act, the federal government will allocate $10 billion for recovery zone development bonds and $15 billion for recovery zone facility bonds that states and municipalities may issue in 2009 or 2010. The bonds must support economic development in areas “having significant poverty, unemployment, home foreclosures, or general distress”. This provision increases the amount of bonds that states and local governments may issue to finance qualified private activities in recovery zones. Lending authority will be distributed among jurisdictions based on 2008 job losses, with greater authority going to states that lost proportionately more jobs. Each state will receive at least 0.9 percent of the aggregate allocation. JCT estimates that this provision is estimated to cost $5.4 billion over the next 10 years (JCT-19-09).
- Increase Funding for New Markets Tax Credit
The New Markets Tax Credit (NMTC) provides a non-refundable tax credit to individuals and corporations who invest in qualified Community Development Entities (CDEs) equal to 5 percent of the investment amount in each of the first 3 years and 6 percent of the investment amount in each of the next 4 years. The stimulus raises the limit on investment funds eligible for the credit from $3.5 billion to $5 billion in 2008 and 2009, resulting in a total increase of $3.0 billion of tax advantaged investment. JCT estimates that this provision will cost $815 million over 10 years (JCT-19-09).
- Renewable Energy Incentives
The 2009 act extends and modifies existing tax incentives for energy conservation and renewable energy and creates some new ones. JCT estimates that the incentives will cost a total of $20.0 billion over the next 10 years (JCT-19-09).
Economic Stimulus: How does the American Recovery and Reinvestment Act change the tax code?
Economic Stimulus: What does the American Recovery and Reinvestment Act do for individuals?
Economic Stimulus: When is fiscal stimulus appropriate?
Economic Stimulus: What characteristics make fiscal stimulus most effective?
Economic Stimulus: What fiscal stimulus options would be most effective?
Urban-Brookings Tax Policy Center, “Tax Stimulus Report Card: Conference Bill” (Washington, February 13, 2009). http://www.taxpolicycenter.org/UploadedPDF/411839_conference_reportcard.pdf
Text of Tax Provisions in AARA, http://taxpolicycenter.org/legislation/upload/ARRA-tax-provisions-as-enacted-2.pdf
U.S. Congress, Joint Committee on Taxation, “Description of the American Recovery and Reinvestment Tax Act of 2009” (Washington, January 27, 2009). http://jct.gov/publications.html?func=startdown&id=1239
U.S. Congress, Joint Committee on Taxation, “Estimated Budget Effects of the Revenue Provisions Contained in the “American Recovery and Reinvestment Tax Act of 2009," (Washington, February 12, 2009). http://www.jct.gov/x-19-09.pdf
Tax Policy Center Distribution Tables for the Stimulus: http://www.taxpolicycenter.org/taxtopics/stimulus_distribution_tables.cfm
Katherine Lim and Roberton Williams
Last Updated May 5, 2009