Objectives

• Highlights of “The American Recovery and Reinvestment Tax Act” – signed February 17, 2009 and effective for year

ending 2009.

• Review President Obama’s tax proposals.

• Other topics.

General Relief - IndividualsMaking Work Pay Credit – Refundable credit equal to lesser of 6.2% of income or

$400 for individual $800 for joint.– Congress accelerated through adjustments to

withholdings.– Phase out AGI

• Individual: begins at $75,000 phased out by $95,000• Joint: begins at $150,000 phased out by $170,000.

Suspension of Tax on Unemployment Compensation– Excludes $2,400 from taxable income.

General Relief - Individuals

First-Time Homebuyer Credit– Increased refundable credit from $7,500 to $8,000– Eliminated repayment requirement– Recapture only if sold in first 36 months– Must be purchased by November 30, 2009– Can allocate the credit amount to any buyer who qualifies

as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter.

– Phase out AGI• Individual >$95,000• Joint > $260,000

General Relief - Individual

Deduction for Sales Tax on Purchase of Vehicle– “Qualified” motor vehicle purchased between February 17, 2009

through December 31, 2009.– Qualified new vehicle includes passenger automobile or motorcycle

with GVW < 8,500 pounds or motor home.– Limited to first $49,500 on each vehicle’s purchase price (can be

multiple purchases).– Deductible either as itemized deduction or additional standard

deduction– Phase out AGI

• Individual > $135,000• Joint > $260,000

Education Relief - Individuals

American Opportunity Tax Credit– Replaces Hope Credit.– Includes tuition, fees, books, and supplies.– Increases max. from $1,800 to $2,500.– Increased from first 2 years to first 4 years.– Phase out AGI

• Individuals > $90,000• Joint > $180,000

Education ReliefSection 529 Education Plans

– Only for year 2009 may make investment changes twice in a calendar year – as well as if/when there is a change in beneficiary.

– Allows purchase of computer technology or equipment or Internet access and services while beneficiary is enrolled at educational institution.

– Statutory language of this legislative change is quite broad:• Covers both the beneficiary and the beneficiary’s family during any of the

years that the beneficiary is enrolled at an eligible educational institution.• Qualified higher education expenses appear to include not only a college

students laptop but also the family’s home computer and related equipment, software, and internet access.

• The language also appears broad enough to cover Apple’s iPhone, Sprint’s Pre, Blackberry’s Storm, and other smart phones.

AMT Relief

• Higher exemptions for Alternative Minimum Tax (AMT) has been extended

– Allows individuals to offset non-refundable personal credits against the AMT through 2009. (dependent care, child, elderly and disabled, higher education credits)

Joint Returns Singles MFS

2008 $69,950 $46,200 $34,975

2009 $70,950 $46,700 $22,500

2010 $45,000 $33,750 $22,500

Energy ReliefResidential Energy Property Credit

Prior to 2008 2009 & 2010

Max. lifetime credit of $500 Max. $1,500 per year

Qualifying insulation, windows, doors, & roofs – 10% of cost with $200 max

30% of costs

100% cost on energy efficient fans (max $50), furnaces & boilers (max $150), heat pumps, water heaters, & biomass fuel stoves (max $300)

30% of cost not 100% with no $50, $150, $300 maximums

Expenditures from energy subsidized financing do NOT count

Expenditures from energy subsidized financing DO count

Must meet energy-efficient guidelines to quality

Guidelines modified for property placed in service after 2/17/09. In IR 2009-44, IRS says taxpayers may rely on Mfgs certifications and energy star labels

Business Relief

• Depreciation (Section 179):– Allows up to $250,000 expensing of capital expenditures.– Phase-out begins at $800,000 and runs to $1,050,000.– Both new and used equipment is eligible– Cannot create a taxable loss (NOL)

* Singh v. Commissioner, TC Memo. 2009-36 a taxpayer claimed Section 179 deduction for a sport utility vehicle was disallowed because the taxpayer did not maintain a mileage log or otherwise substantiate business use of the vehicle.

Business Relief• Depreciation - Section 168(k) – bonus depreciation– 50% of cost– Must first be reduced by section 179– New property – original use of which begins with taxpayer– Life < 20 years– Can create NOL

• Bonus depreciation for passenger automobilies – Additional $8,000 in addition to regular depreciation of:• $2,960 for a car• $3,060 for a truck or van

DepreciationMay swap 50% bonus depreciation for “Refundable” AMT & R&D Credits.• Corporations incurring losses may want to choose option• Treat up to 6% of unused AMT and R&D credits attributable to tax years

beginning before 2006 as refundable credits.– If elected, bonus depreciation does not apply to qualifying property acquired

and placed in service after March 31, 2008.– Corporation must use the straight line method for all assets otherwise

qualifying for bonus depreciation– “bonus depreciation amount” is 20% of the difference between

• Aggregate bonus depreciation and regular depreciation that would be allowed if bonus was claimed

• Aggregate straight-line depreciation that would be allowed on the eligible qualified property placed in service during the year if no bonus was claimed.

– The “bonus depreciation amount” may not exceed the “maximum increase amount” which is the lesser of • 6% of the Corporations unused credits• $30 million

Businesses ReliefCOBRA: Health Insurance Continuation Subsidy

– Applies to employers > 20 employee’s– Government subsidizes 65% of COBRA premiums– Subsidy for up to nine months beginning on February 17, 2009– Employee must be involuntarily terminated after 9/1/08 and before

2010 (Notice 2009-27).– Employer pays 65% of premium and takes credit on Form 941 (Notice

2009-15)– Subsidy recaptured

• Individual – AGI $125,000-$145,000• Joint – AGI $250,000-$290,000

Work Opportunity Credit – Expanded to include unemployed veterans and disconnected youth.– Begin work in 2009 or 2010– 40% of first $6,000 of wages – max $2,400

Tax Proposals

New Simplified Tax Forms

1. How much did you make last year._________2. How much do you have left. _________3. Send in amount on Line 2.

“Green Book”The Treasury Department’s General Explanations of the

Administration’s Fiscal Year 2010 Revenue Proposals (Green Book) describes the Obama administration’s tax agenda.

– Reinstate marginal income tax rates for individuals of 36% and 39.6%• Individuals > $200,000• MFJ > $250,000• Extend the 10%, 15%, 25% and 28% for another 10 years

– Impose a 20% tax rate on qualified capital gains and dividends for individuals in the 36% and 39.6% brackets.• Currently max is 15%• 0% and 15% for lower brackets made permanent

Tax Proposals

Limitations on itemized deductions– Excludes medical expenses, investment interest,

theft and casualty losses, and gambling losses.– Deductions reduced by 3% amount of AGI that

exceeds inflationary indexed statutory floors– Individuals > $200,000– MFJ > $250,000– Itemized deductions for 36% and 39.6% tax brackets

limited to 28%.

Tax Proposals

Reinstate the personal exemption phase-out – Individuals > $200,000– MFJ > $250,000

AMT – The administration’s FY 2010 budget assumes that Congress will continue to “patch” the alternative minimum tax as it did in 2009.

American Opportunity Tax Credit– Make permanent– Index phase out and expense amounts for inflation.

Tax ProposalsState and Local Sales Tax Deduction– Extend through December 31, 2010

Net Operating Loss Carryback– Proposing extension (extent still not known)– Extended from 2 years to 3, 4, and 5 years in 2008– For companies that averaged $15 million in sales over

three years

Estate Tax– Make permanent and index for inflation(was set to expire

for one year in 2010).– Exemption is $3.5 million and top rate is 45%.

Tax Proposals

Research Tax Credit– Make permanent– Currently set to expire 12/31/2009. (Since 12/31/85 the

credit has expired eight times and been extended thirteen times.

– Reward to companies for incurring expenses in the development of new and improved products and processes.

– Tax Reform Act of 1986 established the original qualifying activities, but since then the definition has evolved to include a 4 part test that is refined by specific exclusion.

Four Part Test for R&D Credit

1. Technological in Nature – IRC Section 41 (d)(1)(B)(i) – must fundamentally rely on the principles of physics, biology, chemistry, mathematics, and computer science.

2. Level of Technological Uncertainty – IRC Section 41 (d)(1)(A) “Section 174 Test”: level of uncertainty exists if information available to taxpayer does not establish a method for determining the ultimate design

3. Process for Experimentation – IRC Section 41(d)(1)(C): results directly from uncertainty concept. Must show a process of theoretical and physical evaluation of one or more design alternatives.

4. Permitted Purpose – IRC Section 41(d)(1)(B)(ii) – The goal is to improve the fit, form, or function of a product or process for a business component. The IRS defines a “business component” as any product, process, computer software, technique, formula, or invention.

Specific Exclusions

• Research performed outside of the United States, Puerto Rico, or any possession of the United States.

• Research and development that is funded by a third party.

• Research performed after commercial production begins.

• Adaptation of a product or process for a particular customer.

• Duplication of an existing product or process.• Efficiency Surveys.• ISO certification.

Qualifying ExpensesWages

– Engaging in qualified research.• Direct conduct in R&D.

– Directly supervising qualified research.• First line supervisors – not higher level managers

– Supporting qualified research.• Time spent aiding the direct conduct of R&D (ie: data recording,

prototype building, and performing test/trials.Supplies

– Tangible property other than land or land improvements directly linked to research activities.

Contract Research– Included at 65% of the actual expense.

Basic Research Payments– Basic research that focuses on evaluating theories and hypotheses regardless of an

application.– Included at 75% of actual expense.

Credit Calcualtion

The R&D Tax Credit allows for 3 calculation methods based on the taxpayer’s date of incorporation, initiation of qualified research, and ability to collect contemporaneous documentation.– The Traditional Credit Calculation and Start-Up Credit Calculation

provide a credit of 20% of the taxpayers qualified research expenditure that exceed a calculated base amount.

– The Alternative Simplified Credit base is equal to 14% of the taxpayers qualified research expenditures that exceed a calculated base amount.

– Regardless of calculation method used, the base amount cannot be less than 50% of the taxpayer’s current year qualified expenditures.

Other IssuesEmployer – provided cell phone used for business

purposes.– Currently classified as listed property and requires very

detailed substantiation for business use.– Secretary Geithner and IRS Commissioner Shulman both

want to make it clear that there will be no tax consequences for either employee or employer for personal use of cell phones provided by employers.

– Senators John Kerry, John Ensign, Sam Johnson, and Earl Pomeroy have sponsored the MOBILE Act that will remove cell phones from listed property.

Conversion of IRA to Roth

Previously , taxpayers with modified adjusted gross income of $100,000 or more were not permitted to make Roth IRA conversions:

– Requirement is eliminated for 2010.– The IRA owner will report 50% of the conversion income in

2011 and 50% in 2012 unless they elect to report all in 2010.

– Potential for planning depending on income tax brackets taxpayer is in.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.