March 2009
David C. Morganelli, Esq.


The American Reinvestment and Recovery Tax Act (“ARRA”) includes many tax provisions designed to stimulate the economy and create jobs. These provisions expand existing business tax incentives and create several new ones. Your business may benefit from some of the new incentives included in the Act.

Business Investment in Tangible Property
ARRA extended the current 2008 expensing limitation under Internal Revenue Code (“IRC”) Section 179 (commonly referred to as the "179 Deduction") for business investment in certain tangible property and computer software in amounts up to $250,000. The 179 Deduction allows for the cost of tangible property that is otherwise depreciated for tax purposes over several or more years, to instead be fully deducted for tax purposes in the year the property is placed in service. Therefore the deduction creates a tax benefit for investment in tangible property which is expected to result in economic growth. The deduction begins to phase out for investment in excess of $800,000 through 2009. Prior to the enactment of ARRA, the amount eligible for deduction was scheduled to be $133,000 for tangible property placed in service in 2009.

Net Operating Loss Extension
Another key provision in ARRA extends the net operating loss (“NOL”) carryback effective for NOLs arising in taxable years ending after December 31, 2007. If made before April 18, 2009, the election to increase the carryback period under the new provision will be treated as timely made. Under ARRA, taxpayers with gross receipts not exceeding $15,000,000 may elect a three-, four-, or five-year carryback of 2008 NOLs, instead of the usual two-year carryback period. The carryback provisions differ depending on the circumstances. For example, there is a three-year carryback for NOLs arising from casualty or theft losses of individuals, or for federally declared disasters for taxpayers engaged in a farming business or a small business, but a five-year carryback for NOLs arising from an ordinary farming loss. Special rules also apply to real estate investment trusts which will have no carryback and for electric utility companies which receive unique treatment under ARRA.

Discharge of Debt
With respect to income from the discharge of indebtedness, ARRA allows taxpayers to elect to treat 2009 and 2010 business income from a discharge of indebtedness as includable in income pro-rated over a five-year tax period. For a 2009 discharge, the inclusion in income begins in the fifth tax year following the tax year in which the debt forgiveness occurs. For a 2010 discharge, the inclusion begins in the fourth tax year following the tax year in which the debt forgiveness occurs.

Tax Imposed on Certain Built-In Gains of an S Corporation
S Corporations historically paid a corporate level tax, at the highest marginal rate applicable to corporations (currently 35%), on the gain from the subsequent sale or exchange of assets as held by it when it existed as a C Corporation. Prior to ARRA, the S Corporation would recognize built-in gain if such assets were sold within 10 years after converting from C status to S status. Now, for any taxable year beginning in 2009 and 2010, ARRA provides for a seven-year recognition period, versus a 10-year one. As a practical matter, the definition of “asset” for purposes of the built-in gain tax is extremely broad: in addition to items such as furniture and equipment or appreciated investments such as securities, other valuable rights such as goodwill or unrecognized income items are potentially subject to the built-in gains tax. An asset may be subject to the built-in gains tax even if it does not appear on the balance sheet. Therefore, proper valuation of assets upon conversion to S Corporation status is recommended.