On February 17, 2009, President Obama signed The American Recovery Reinvestment Act of 2009 (the Act) into law, following passage of the Act in the House and Senate on February 13, 2009. While the Act contains certain tax incentives for businesses, many of the incentives proposed in the House and Senate versions of the Act were not adopted as a result of a compromise reached by lawmakers from each chamber.
The Act extends the first-year bonus depreciation under section 168(k) of the Internal Revenue Code for property placed in service through 2010 and the increased limitations on expensing of certain depreciable business assets under section 179 of the Code through 2009.
The Act temporarily reduces the S corporation built-in gains holding period under section 1374 from 10 to seven years for taxable years that begin in 2009 or 2010.
The Act permits deferral of cancellation of indebtedness (COD) income recognized by the taxpayer as a result of the taxpayer’s (or a related person’s) purchase of certain applicable debt instruments in 2009 or 2010. COD income realized in 2009 is deferred and included ratably in income in each of the five taxable years beginning five years after the year of realization. COD income realized in 2010 is deferred and included ratably in income in each of the five taxable years beginning four years after the year of realization.
The Act suspends the applicable high yield debt obligation (AHYDO) rules under section 163(e)(5) for issuances of AHYDO obligations issued between September 1, 2008, and ending on December 31, 2009, in exchange for an obligation (of the issuer of the AHYDO obligation) which is not an AHYDO obligation.
The Act prospectively revokes the effect of Notice 2008-83, which essentially suspended the limitation of section 382 with respect to built-in losses of banks following an ownership change. While taxpayers may not be able to rely on Notice 2008-83 for ownership changes occurring after January 16, 2009, the Act does clarify that taxpayers can rely on Notice 2008-83 for ownership changes occurring on or prior to that date. The provision also provides that taxpayers can rely on Notice 2008-83, for ownership changes occurring after January 16, 2009, to the extent a binding commitment exists on or before such date.
The Act also suspends the limits on the use of net operating losses (NOLs) and built-in losses imposed by section 382 following an ownership change, when such ownership change is pursuant to a restructuring plan of the taxpayer which is required under a loan agreement or line of credit commitment from the U.S. Treasury Department under the Emergency Economic Stabilization Act of 2008 (EESA), and is intended to result in a rationalization of the costs, capitalization and capacity with respect to the workforce of, and suppliers to, the taxpayer and its subsidiaries. This provision is consistent with actions taken by the Treasury to eliminate the limits imposed under section 382 for ownership changes resulting from actions taken by Treasury under the EESA. For more on Treasury’s actions in this area, see McDermott Will & Emery On the Subject "IRS Issues Guidance that Treasury's Purchase of Stocks Will Not Result in Ownership Change Under Section 382," and McDermott Will & Emery On the Subject "IRS Expands Guidance on Application of Section 382 to Treasury’s Purchase of Financial Instruments ."
Notably, the Act did not include previous proposals in both the House and Senate to increase the general NOL carryback period from two years to five years in the case of any NOL for any taxable year ending in 2008 or 2009. The Act also did not include a proposals by the Senate to increase the carryback period for general business credits for 2008 and 2009 from one taxable year to five years, and to remove present law limitations to permit general business credits for the taxable years ending in 2008 or 2009 to offset 100 percent of a taxpayer’s net income tax.