“Stimulus Bill” Business Tax Impact
On February 13, the House of Representatives, by a vote of
246-183, and the Senate, by a vote of 60–38, passed H.R. 1, the
American Recovery and Reinvestment Act of 2009 (the Recovery Act).
The Recovery Act contains $787 billion in spending, investment and
tax cuts; approximately 60% is allocated to spending and investment
provisions, with the remaining 40% allocated to tax cuts. President
Obama is expected to sign the Recovery Act on Tuesday, February
17th, which will impact closely-held businesses as follows:
Increased Expensing Provisions
The Recovery Act extends the current bonus depreciation provision
to cover assets placed in service during 2009. This provision
allows a business to immediately deduct 50% of the cost of assets acquired
and placed in service in 2009 with depreciable lives of 20 years
The Recovery Act also extends, for property placed in service
during 2009, the provision allowing a business to monetize its AMT
credits and research and development (“R&D”) credits in lieu of the
aforementioned bonus depreciation. This provision is geared to businesses
with AMT exposure, or, who have current year losses and cannot
benefit from bonus depreciation. The provision allows such businesses
to elect to receive 20% of the value of unused AMT or R&D
credits to the extent they invest in assets that would qualify for bonus
depreciation. The amount is capped at the lesser of 6% of the outstanding
unused AMT credits and R&D credits, or $30 million.
Additionally, the Recovery Act would allow businesses to immediately
expense acquired capital assets. An existing provision
in the Internal Revenue Code permits businesses to expense up to
$125,000 (subject to a phase-out) of applicable capital acquisitions
through 2010; however, in 2008, Congress temporarily increased the
deductible amount to $250,000 only for 2008. This $250,000 deduction
amount is now extended through 2009 (with retroactive effect to
January 1, 2009). This expensing amount will be reduced to $25,000
beginning in 2010.
Increased Net Operating Loss Carryback Provision
The Recovery Act extends the carryback period for net operating losses (“NOLs”) generated in
2008 (years beginning or ending in 2008) to the previous fi ve years, but only for businesses with annual
gross receipts of not more than $15 million per year. This “gross receipts test” would be met if the
average annual gross receipts for the previous three years are $15 million or less. Under pre-Act law,
a corporation could carryback a current year NOL to generate a refund of income taxes only where the
corporation had income in the prior two years. The fi ve-year carryback period will allow the recovery
of tax payments made in prior years, which could be applied by corporate taxpayers to operate businesses
struggling in the current economic climate.
Cancellation of Indebtedness
The Recovery Act will encourage business restructurings by allowing the delayed recognition of
cancellation of debt income (“CODI”). Businesses would be allowed to recognize CODI over ten years
(defer tax on CODI for the fi rst four or fi ve 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.
Qualified small business stock
“Qualified small business stock” is any stock in a qualifi ed small business issued to a taxpayer
after August 10, 1993, in exchange for money or other property (not including stock), or as compensation
for services. A “qualifi ed small business” is a domestic C Corporation with aggregate gross assets
not in excess of $50,000,000.
Under pre-Act law, a taxpayer (other than a corporation) that recognized gain from the sale or
exchange of “qualifi ed small business stock” held for more than fi ve years could exclude 50% of such
gain from gross income for regular income tax purposes. The new law increases the exclusion from
50% to 75% for stock issued after the enactment date and prior to 2011, which effectively reduces the
tax on gains from such stock to 7%.
S Corporation Holding Period
An “S” corporation allows certain corporations to be taxed as a conduit so that income, gains,
and losses pass through to the shareholder’s tax return without tax consequences to the corporation.
In the absence of restrictions, an S corporation election would provide substantial tax avoidance opportunities for a C corporation holding appreciated assets that would yield taxable gains if sold.
For example, a corporation holding assets worth $500,000 in market value and having total
adjusted bases of $150,000 has $350,000 of “built-in gain” on its balance sheet. Prior to making an
S election, the disposal of these assets would generate a $350,000 gain that would be taxed to the C
corporation. When the after-tax proceeds from this sale are distributed, they are subject to tax again at
the shareholder level. If the corporation delays disposition of the assets until an S election is made, the typical tax treatment under Subchapter S would be to pass through $350,000 of income to the shareholders and thus avoid double taxation on gain which had actually accrued during the C corporation
years. The Internal Revenue Code enacted a law in 1986 to close this loophole by assessing a tax on
any “built-in gains from C corporation years when they are realized within the first ten years of the S
The Recovery Act temporarily shortens the holding period
of assets subject to the built-in gains tax from ten years to seven
years for sales occurring in 2009 and 2010.
If you have questions whether your business qualifies for
any of these corporate tax benefits, or how you can structure your
business affairs to maximize these benefits, please contact our
closely held business members Randall L. Duncan or Jonathan D.
Mishkin at (503) 242-0000, and we will be glad to assist you.
Randall L. Duncan
Direct Line: 541-417-6010
Jonathan D. Mishkin, LL.M.
Direct Line: 503-417-6007
1001 SW Fifth Avenue
Portland, OR 97204-1116
Phone: (503) 242-0000
Fax: (503) 241-1458
360 E. 10th Avenue, Suite 300
Eugene, OR 97401-3273
Phone: (541) 485-0220
Fax: (541) 686-6564
333 High Street, N.E.
Salem, OR 97301-3632
Phone: (503) 371-3330
Fax: (503) 371-5336
Nothing in this communication creates or is intended to create an
attorney-client relationship with you, constitutes the provision of legal advice,
or creates any legal duty to you. If you are seeking legal advice, you
should first contact a member of the Closely Held Business Team with the
understanding that any attorney-client relationship would be subsequently
established by a specific written agreement with Harrang Long Gary Rudnick
P.C. To maintain confidentiality, you should not forward any unsolicited
information you deem to be confidential until after an attorney-client relationship
has been established.