March 4, 2009 – The American Recovery and Reinvestment Act of 2009 (ARRA) is one of the most massive and far-reaching pieces of legislation in history. According to some economists, the nearly $800 billion bill is also one of the most important in a generation. Through direct spending on infrastructure in the public and private sectors, and nearly $300 billion in tax relief, ARRA is intended to boost the economy out of recession. In all, the new law makes more than 300 changes to the Internal Revenue Code.

Does the ARRA affect 2008 tax returns?

Generally not, but there are certain exceptions. The ARRA does not have any major impact on the vast majority of individuals who are currently preparing their 2008 tax returns that are due in April. The ARRA contains several provisions that will have a great impact on 2009 returns filed next year, in 2010. If they think their 2008 returns have been impacted by the new legislation, taxpayers should contact their local tax advisor before filing their returns.

There are small areas in the ARRA that could impact 2008 tax returns. As examples, for some small businesses, changes in the net operating loss provisions could impact their 2008 tax returns. For first-time homebuyers who have purchased a home since Jan. 1, 2009, there is an election to take the $8,000 credit on their 2008 returns.

What are the individual tax benefits?

• Expansion of the first-time homebuyer credit. Taxpayers who purchase a home in 2009 may be able to get a credit of $8,000 with no payback requirement.

• Decrease in federal withholding requirements. The “Making Work Pay Tax Credit” will mean an extra $400 to $800 in many people’s paychecks – the savings spread out between now and the end of the year.

• Rebate for Social Security recipients, veterans, and railroad retirees. A one time, $250 payment will be made by the SSA, VA, and the Railroad Retirement Board to their recipients. The payment will be an offset to the Making Work Pay Tax Credit.

• New deduction for new vehicle purchases. Taxpayers who buy qualifying new vehicles in 2009 can deduct the state and local sales taxes they paid on the purchase.

And the business tax benefits?

• Extension of bonus depreciation. Last year, Congress temporarily allowed businesses to depreciate capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow. The ARRA extended this benefit to 2009.

• Extension of §179 expensing limits. Small business taxpayers may elect to write off certain capital expenses in the year of acquisition under IRC §179. Last year, Congress temporarily increased the amount of write-offs allowed in 2008 to $250,000. The ARRA extended this benefit to 2009.

• Five-Year carryback of net operating losses. Under the previous law, any qualified business could carry back net operating losses (NOL) two tax years. Under the ARRA, any qualified “small business” with a 2008 net operating loss can carry back the NOL for a period of three, four or five years.

Strategic tax planning begins immediately

A great deal is riding on the ARRA, but only time will tell if this landmark legislation will provide the right amount of economic stimulus at the right time. Rather than wait for the outcome, individuals and businesses are being urged to plan strategies that maximize these and other benefits in the coming year.

Online resources

• An update regarding the ARRA of 2009 written by the Internal Revenue Service

• A summary of the key provisions from the Senate Finance and House Ways and Means committees

Atty. Jamey Rappis is a senior tax manager in Clifton Gunderson’s Firmwide Tax Group and is one of the firm's tax niche leaders. He has extensive experience in the areas of estate & gift tax, estate & business succession planning, and retirement planning. Look for more in-depth analysis of the ARRA in the April Wisconsin Lawyer magazine.