Tax Law and Business Organization Strategy

Large Number of Significant Tax Provisions Expire in 2009

A recent report by the Joint Committee on Taxation included a list of expired and expiring tax provisions from 2008 through 2020. The report serves as a reminder that numerous key provisions — many of them only recently extended by the Emergency Economic Stabilization Act and the American Recovery and Reinvestment Act of 2009 — are currently slated to be on the books only through 2009, while others last only through 2010. While these provisions may ultimately be extended (and some of them surely will be), one, where possible, should take action now to prevent losing out on tax breaks.

The EESA extended more than 30 tax breaks that either expired at the end of 2007 or had been scheduled to expire soon. The following individual tax breaks were retroactively revived to apply for the 2008 tax year and extended to apply to the 2009 tax year:

the election to deduct state and local general sales tax,

the above the line deduction for higher education expenses,

the above the line deduction for educator expenses, and

the ability of taxpayers age 70 1/2 or older to make nontaxable IRA transfers to eligible charities.

The extended business tax breaks include the research credit, the 15-year writeoff for qualified leasehold improvements and qualified restaurant property, and enhanced deductions for certain charitable contributions.

The EESA was shortly followed by the Recovery Act which extended boosted alternative minimum tax (AMT) exemption amounts for individuals for 2009 and allowed personal nonrefundable credits to offset AMT and regular tax. It also extended 50% bonus depreciation and increased expensing to 2009.

Some of the provisions expiring in 2009 (generally at the end of 2009, unless otherwise noted) include:

  • Increased AMT exemption amount under Code Sec. 55. The AMT exemption amounts for 2009 were increased to $46,700 for unmarrieds, to $70,950 for joint filers, and to $35,475 for marrieds filing separately. After 2009, the exemptions drop to $33,750 for unmarrieds, to $45,000 for joint filers, and to $22,500 for marrieds filing separately.
  • Personal tax credits allowed against regular tax and alternative minimum tax under Code Sec. 26(a)(2). After 2009, the nonrefundable personal credits — other than the adoption expense credit, the child tax credit, the saver's credit, the residential energy efficient property credit, and the nonbusiness portion of the qualified plug-in electric drive motor vehicle credit — will be subject to the limitation under Code Sec. 26(a)(1): the aggregate amount of those credits can't exceed the excess of:

(a) the individual's regular tax liability, over

(b) the individual's tentative minimum tax, determined without regard to the AMT foreign tax credit

  • Additional first-year 50% bonus depreciation for qualified property under Code Sec. 168(k)(2). Qualified property is allowed 50% depreciation (bonus depreciation) in the year that the property is placed in service (with corresponding reductions in basis and reductions of the regular depreciation deductions otherwise allowed in the placed-in-service year and in later years). In addition, an $8,000 increase in the first-year depreciation limit for passenger automobiles that are qualified property is also extended through 2009. (Certain aircraft and long-production-period property can continue to be placed in service through 2010.)
  • Increased expensing election to $250,000 (with a $800,000 investment ceiling limit) under Code Sec. 179. Taxpayers can elect to deduct the cost of any section 179 property placed in service during the tax year as an expense which is not chargeable to capital account. (For 2010, expensing is limited to $125,000 with a $500,000 investment ceiling limit (both figures indexed for inflation)).
  • Incremental research credit under Code Sec. 41. A taxpayer is generally allowed a research credit of 20% of the amount by which the taxpayer's qualified research expenses exceed a specific base amount (unless the taxpayer elects the alternative simplified credit computation).
  • Election to accelerate AMT and research credits in lieu of additional first-year depreciation under Code Sec. 168(k)(4).
  • Five-year depreciation for farming business machinery and equipment under Code Sec. 168(e)(3)(B)(vii).
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements under Code Sec. 168(e)(3)(E)(iv), (v), and (ix).
  • Deduction allowable for income attributable to domestic production activities in Puerto Rico under Code Sec. 199.
  • New markets tax credit under Code Sec. 45D. A new markets tax credit is allowed for qualified equity investments in a qualified community development entity.
  • Expensing of “brownfields” environmental remediation costs under Code Sec. 198(h).
  • Additional standard deduction for state and local real property taxes under Code Sec. 63(c)(1)(C). The real property tax deduction — the lesser of: (a) the amount allowable as a deduction under the itemized deduction rules for state and local real property taxes; or (b) $500 ($1,000 for a joint return) — is included as a component of the standard deduction.
  • Deduction of State and local general sales taxes under Code Sec. 164(b)(5). At the taxpayer's election, state and local general sales taxes can be deducted in lieu of a state and local income tax deduction.
  • First time homebuyer credit under Code Sec. 36 (expiring in 11/30/09). A credit of $8,000 ($4,000 for marrieds filing separately) is allowed for first-time homebuyer (as specially defined). The credit isn't recaptured unless residence is sold or ceases to be a principal residence within 36 months of purchase.
  • Deduction for State sales tax and excise tax on the purchase of motor vehicles under Code Sec. 164(b)(6)(G). A new provision in the Recovery Act allows a standard or itemized deduction for sales and excise taxes imposed on most new vehicles purchased on or after Feb. 17, 2009 and before 2010.
  • Above-the-line deduction for qualified tuition and related expenses under Code Sec. 222.
  • Deduction for certain expenses of elementary and secondary school teachers under Code Sec. 62.
  • Credit for construction of new energy efficient homes under Code Sec. 45L. A contractor can claim a credit of $2,000 (for a 50% energy reduction in energy usage) or $1,000 (for a 30% energy reduction in energy usage) for each new energy efficient home he build.
  • Exclusion of unemployment compensation benefits from gross income under Code Sec. 85(c).
  • Encouragement of contributions of capital gain real property made for conservation purposes under Code Sec. 170(b)(1)(E) and Code Sec. 170(b)(2)(B). Special higher charitable deduction limitations on qualified conservation contributions by qualified farmers or ranchers expanded to apply to contributions of apparently wholesome food inventory.
  • Enhanced charitable deduction for contributions of food inventory under Code Sec. 170(e)(3)(C). A deduction is allowed for contributions by a noncorporate taxpayer from its trade or business of apparently wholesome food inventory for the care of the ill, needy, or infants.
  • Enhanced charitable deduction for contributions of book inventories to public schools under Code Sec. 170(e)(3)(D).
  • Enhanced deduction for corporate contributions of computer equipment for educational purposes under Code Sec. 170(e)(6)(G).
  • Waiver of the minimum required distribution (RMD) rules for IRAs and defined contribution plans under Code Sec. 401(a)(9)(H). Under the RMD rules, participants in qualified plans and individual retirement accounts and annuities (IRAs) are generally required to begin taking distributions no later than Apr. 1 of the year after they attain age 70-1/2. (For an employer-provided qualified retirement plan, the required beginning date for an individual who is not a 5% owner of the employer maintaining the plan is delayed to Apr. 1 of the year following the year in which the individual retires.)
  • Tax-free distributions from individual retirement plans for charitable purposes under Code Sec. 408(d)(8). An up-to-$100,000 annual exclusion from gross income is allowed for taxpayers age 70 1/2 who make otherwise taxable IRA distributions that are qualified charitable distributions. The distributions aren't subject to the charitable contribution percentage limits and are neither included in gross income nor claimed as a deduction on the taxpayer's return.
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