House Passes Economic Stimulus Legislation

On January 28, 2009, the House passed an economic stimulus bill, titled the American Recovery and Reinvestment Act of 2009 (H.R. 1), by a vote of 244 to 188.  The legislation has an overall ten-year projected cost of $825 billion.  The tax portion of the legislation includes $275 billion in tax breaks over ten years, heavily loaded toward the 2009 and 2010 period.  The principal individual tax break would be the Making Work Pay Credit — 6.2 percent of earned income up to a maximum of $500 ($1,000 for joint filers).  The credit could be claimed as a refundable credit on the tax return or as a reduction in withheld payroll taxes.  The repayment obligation on the first-time homebuyer credit would be eliminated for qualifying home purchases in 2009.  The Hope Credit would be replaced in 2009 and 2010 with an enhanced American Opportunity Tax Credit of up to $2,500 per year for each of the first four years of college.  The credit would be refundable up to 40 percent, as compared to 30 percent in the Senate version.  Tuition, fee and textbook costs would need to total $4,000 for the year to qualify for the maximum credit.  The income phase-out range would also increase.  The earned income floor on the refundable child tax credit would be reduced to zero, as compared to $6,000 in the Senate version, enabling additional taxpayers to receive a child tax credit.  The Earned Income Tax Credit would also be expanded.

Business tax breaks included in the legislation include a five-year carryback of net operating losses, extension of 50 percent first-year bonus depreciation and Code Sec. 179 expensing, and an expanded Work Opportunity Tax Credit.  Notice 2008-83, permitting domestic banks to avoid the usual restrictions on utilizing net operating losses under Code Sec. 382, would, under this bill, have no further force and effect after January 16, 2009. The House legislation would allow taxpayers to substitute federal government grants to states for low-income housing projects in lieu of the low-income housing credit allocation for 2009; the Senate version does not include this provision.

The legislation also makes a number of enhancements to tax breaks designed to promote alternative energy and energy conservation, including the Residential Energy Property Tax Credit under Code Sec. 25C, the Residential Energy Efficient Property Credit under Code Sec. 25D, the alternative fuel vehicle refueling property credit, the Renewable Electricity Production Credit under Code Sec. 45, the Alternative Energy Investment Credit under Code Sec. 48, a new energy research and development credit, and new energy bonds.  There are a number of differences between the House and Senate versions of these provisions.

The legislation also provides a variety of bond assistance to state and local governments, again with differences between the House and Senate versions.  The legislation would repeal the requirement for withholding on government contractors, while the Senate version would only defer the requirement.

The Senate Finance Committee passed out of committee its version of the tax legislation on January 27th.  There are a number of additional tax provisions in the Senate legislation, as well as a number of variations in the specifics on provisions that are common to both bills.  The full Senate is expected to take up the legislation within the next week.  Republican support for the legislation in its present form appears to still be minimal, with most Republicans pushing for greater tax cuts and smaller spending increases in the larger, non-tax, portion of the legislation.  The new Administration supports the legislation, and President Obama is encouraging its passage as soon as possible, while at the same time pushing to obtain more bipartisan support for the final version.  Many of the effective dates on the tax breaks relate back to January 1, 2009, to encourage individuals and businesses to act assuming that the tax breaks are already in effect.

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Wolters Kluwer Tax and Accounting

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