The Worker, Home Ownership and the Business Assistance Act of 2009

President Obama recently signed into law The Worker, Home Ownership and Business Assistance Act of 2009. This article addresses two significant provisions contained in the legislation ' the extension and expansion of the Net Operating Loss (NOL) Carryback rules, and the Homebuyer Credit ' which have broad implications that can benefit law firms and their clients, as well as individual attorneys and staff members and their families. This article also highlights some additional provisions affecting attorneys that relates to electronic filing requirements, S corporation and partnership penalties.

Net Operating Loss Carryback

Prior to the new legislation, the general rule was that a business or individual may carry back a loss two years and carry it forward 20 years. For 2008, Electing Small Businesses (ESBs) with average gross receipts of $15 million or less over the last three years were allowed to elect to carry back NOLs three, four or five years in lieu of the regular two years (as discussed in our April 2009 article). The new legislation expands this election to all businesses regardless of their size. The new law applies to losses arising in any tax year ending after Dec. 31, 2007 and beginning before Jan. 1, 2010. For calendar-year taxpayers, this means that the new NOL provisions apply to 2008 and 2009 losses, and for fiscal-year filers it applies to losses for fiscal years beginning in 2007, 2008 and 2009. The election generally may be made for only one tax year's losses (either 2008 or 2009, but not both). However, an ESB that elected the extended carryback for 2008 under the old law is still eligible for an extended carryback for 2009.

Planning point: A law firm or client that has a 2008 NOL and is projecting an NOL for 2009 should elect the extended carryback for the year that will maximize its tax refunds. In making this calculation, you need to consider that the year that is not elected gets a two-year carryback. You also need to be aware of the effective tax rates in the possible carryback years. Generally, you would want to carry back losses to years with the highest effective tax rates. All of these considerations must be made for both regular tax and for Alternative Minimum Tax (“AMT”) purposes.

The new law imposes a limitation on losses carried back to the fifth preceding tax year limiting the NOL carryback to 50% of the taxable income for that year. The 50% does not apply to 2008 ESB losses with respect to which an election was made under the old law.

Example

ABC Corp., which is not an ESB, has a $7 million NOL for 2008. In 2003, it had $10 million of taxable income. If ABC elects a five-year carryback, it would be allowed to carry back $5 million to 2003 (50% of $10 million). The $2 million remaining loss would be carried to 2004, 2005, etc. until it is fully absorbed (without further limitation).

The new legislation also suspends the 90% limitation on use of any AMT NOL deduction for which an extended carryback period is elected. This allows individuals and businesses to get back up to 100% of the tax in the carryback year.

This expanded NOL election is irrevocable and must be made by the extended due date of the taxpayer's 2009 tax return, generally Oct. 15, 2010 for individuals. The new law also allows taxpayers to revoke a previous election to waive the carryback period for tax years ending before Nov. 6, 2009. The revocation must be made by the extended due date of the tax return for the last tax year beginning in 2009 (for calendar year taxpayers ' Oct. 15, 2010). Additionally, any carryback claim relating to such a loss will be considered as timely filed if filed by the extended due date of the tax return for the last tax year beginning in 2009. This provision is designed to address the situation of taxpayers that elected to forego the carryback period based on a two year carryback period and now wish to take advantage of the extended carryback period. Since an election to waive the carryback period is normally irrevocable, Congress solved this problem by giving taxpayers a generous window of opportunity to revoke the election.

Homebuyer Credit

In our February and April 2009 articles, we discussed how attorneys or their staffs could benefit from this essentially interest-free loan in the form of a refundable credit. If you hope to sell your home or rebuild lost equity, there's new hope. One plus is that Congress has recently extended the first-time homebuyer credit, and even expanded it to include those with higher incomes and current homeowners. The main provisions of the new law which are effective for purchases after Nov. 6, 2009 are as follows:

• The credit is extended to apply to a principal residence purchased by the taxpayer before May 1, 2010. Under the old law, the credit was set to expire by Nov. 30, 2009. Additionally, if a taxpayer enters into a binding written contact to purchase a principal residence prior to May 1, 2010, he/she has until June 30, 2010 to close on the purchase and still be eligible for the credit.
• A taxpayer may elect to treat a 2010 purchase (prior to May 1) as if it was purchased on Dec. 31, 2009 and thereby claim the credit on his or her 2009 tax return.
• The credit is not subject to recapture unless the taxpayer disposes of the home (or it ceases to be the taxpayer's principal residence) within 36 months of the date of purchase (same as old law).
• The amount of the credit remains at the lesser of $8,000 or 10% of the purchase price.
• A taxpayer who is not a first-time homebuyer may qualify for the credit. The individual is eligible for the credit if he/she maintained the same principal residence for any five year consecutive period during the eight years previous to the purchase of new principal residence. Under these circumstances the purchase of the new home qualifies for the credit to a maximum of $6,500 vs. $8,000 for first-time homebuyers.
• The new law increases the income limitation phase-out to modified gross income of $125,000 and $145,000 for single filers and $225,000 and $245,000 for joint filers for the year of purchase. Under the old rule the income limitations phase-outs were $75,000 and $95,000 for single filers and $150,000 and $170,000 for joint filers.
• No credit is allowed for the purchase of any residence if the purchase price exceeds $800,000.
• In order to be eligible for the credit, the taxpayer must be at least 18 years old and may not be the dependent of another taxpayer.
• Transactions between related parties do not qualify for the credit.
• The taxpayer must attach to his tax return a properly executed copy of the settlement statement used to complete the purchase.

Electronic Filing

The new law requires all paid tax preparers to electronically file individual, estate and trust returns. Since many law firms regularly file their clients' estate and trust tax returns, they will have to make sure their tax preparation software allows for electronically filing of the tax returns. Preparers who prepare 10 or fewer tax returns are excluded from the electronic filing requirement. The new provisions are effective for tax returns filed after Dec. 31, 2010.

Penalties

The new legislation increases the failure to file penalties for partnerships and S corporations. Under prior law, the amount of the penalty was $89 times the number of shareholders or partners for each month (or fraction of a month) that the failure continues up to a maximum of 12 months. The new law increases the base amount from $89 to $195. The new provision is effective for tax years beginning after Dec. 31, 2009.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Martin Arking, CPA, is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP, which specializes in providing accounting, tax, and consulting services to law firms. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected].

President Obama recently signed into law The Worker, Home Ownership and Business Assistance Act of 2009. This article addresses two significant provisions contained in the legislation ' the extension and expansion of the Net Operating Loss (NOL) Carryback rules, and the Homebuyer Credit ' which have broad implications that can benefit law firms and their clients, as well as individual attorneys and staff members and their families. This article also highlights some additional provisions affecting attorneys that relates to electronic filing requirements, S corporation and partnership penalties.

Net Operating Loss Carryback

Prior to the new legislation, the general rule was that a business or individual may carry back a loss two years and carry it forward 20 years. For 2008, Electing Small Businesses (ESBs) with average gross receipts of $15 million or less over the last three years were allowed to elect to carry back NOLs three, four or five years in lieu of the regular two years (as discussed in our April 2009 article). The new legislation expands this election to all businesses regardless of their size. The new law applies to losses arising in any tax year ending after Dec. 31, 2007 and beginning before Jan. 1, 2010. For calendar-year taxpayers, this means that the new NOL provisions apply to 2008 and 2009 losses, and for fiscal-year filers it applies to losses for fiscal years beginning in 2007, 2008 and 2009. The election generally may be made for only one tax year's losses (either 2008 or 2009, but not both). However, an ESB that elected the extended carryback for 2008 under the old law is still eligible for an extended carryback for 2009.

Planning point: A law firm or client that has a 2008 NOL and is projecting an NOL for 2009 should elect the extended carryback for the year that will maximize its tax refunds. In making this calculation, you need to consider that the year that is not elected gets a two-year carryback. You also need to be aware of the effective tax rates in the possible carryback years. Generally, you would want to carry back losses to years with the highest effective tax rates. All of these considerations must be made for both regular tax and for Alternative Minimum Tax (“AMT”) purposes.

The new law imposes a limitation on losses carried back to the fifth preceding tax year limiting the NOL carryback to 50% of the taxable income for that year. The 50% does not apply to 2008 ESB losses with respect to which an election was made under the old law.

Example

ABC Corp., which is not an ESB, has a $7 million NOL for 2008. In 2003, it had $10 million of taxable income. If ABC elects a five-year carryback, it would be allowed to carry back $5 million to 2003 (50% of $10 million). The $2 million remaining loss would be carried to 2004, 2005, etc. until it is fully absorbed (without further limitation).

The new legislation also suspends the 90% limitation on use of any AMT NOL deduction for which an extended carryback period is elected. This allows individuals and businesses to get back up to 100% of the tax in the carryback year.

This expanded NOL election is irrevocable and must be made by the extended due date of the taxpayer's 2009 tax return, generally Oct. 15, 2010 for individuals. The new law also allows taxpayers to revoke a previous election to waive the carryback period for tax years ending before Nov. 6, 2009. The revocation must be made by the extended due date of the tax return for the last tax year beginning in 2009 (for calendar year taxpayers ' Oct. 15, 2010). Additionally, any carryback claim relating to such a loss will be considered as timely filed if filed by the extended due date of the tax return for the last tax year beginning in 2009. This provision is designed to address the situation of taxpayers that elected to forego the carryback period based on a two year carryback period and now wish to take advantage of the extended carryback period. Since an election to waive the carryback period is normally irrevocable, Congress solved this problem by giving taxpayers a generous window of opportunity to revoke the election.

Homebuyer Credit

In our February and April 2009 articles, we discussed how attorneys or their staffs could benefit from this essentially interest-free loan in the form of a refundable credit. If you hope to sell your home or rebuild lost equity, there's new hope. One plus is that Congress has recently extended the first-time homebuyer credit, and even expanded it to include those with higher incomes and current homeowners. The main provisions of the new law which are effective for purchases after Nov. 6, 2009 are as follows:

• The credit is extended to apply to a principal residence purchased by the taxpayer before May 1, 2010. Under the old law, the credit was set to expire by Nov. 30, 2009. Additionally, if a taxpayer enters into a binding written contact to purchase a principal residence prior to May 1, 2010, he/she has until June 30, 2010 to close on the purchase and still be eligible for the credit.
• A taxpayer may elect to treat a 2010 purchase (prior to May 1) as if it was purchased on Dec. 31, 2009 and thereby claim the credit on his or her 2009 tax return.
• The credit is not subject to recapture unless the taxpayer disposes of the home (or it ceases to be the taxpayer's principal residence) within 36 months of the date of purchase (same as old law).
• The amount of the credit remains at the lesser of $8,000 or 10% of the purchase price.
• A taxpayer who is not a first-time homebuyer may qualify for the credit. The individual is eligible for the credit if he/she maintained the same principal residence for any five year consecutive period during the eight years previous to the purchase of new principal residence. Under these circumstances the purchase of the new home qualifies for the credit to a maximum of $6,500 vs. $8,000 for first-time homebuyers.
• The new law increases the income limitation phase-out to modified gross income of $125,000 and $145,000 for single filers and $225,000 and $245,000 for joint filers for the year of purchase. Under the old rule the income limitations phase-outs were $75,000 and $95,000 for single filers and $150,000 and $170,000 for joint filers.
• No credit is allowed for the purchase of any residence if the purchase price exceeds $800,000.
• In order to be eligible for the credit, the taxpayer must be at least 18 years old and may not be the dependent of another taxpayer.
• Transactions between related parties do not qualify for the credit.
• The taxpayer must attach to his tax return a properly executed copy of the settlement statement used to complete the purchase.

Electronic Filing

The new law requires all paid tax preparers to electronically file individual, estate and trust returns. Since many law firms regularly file their clients' estate and trust tax returns, they will have to make sure their tax preparation software allows for electronically filing of the tax returns. Preparers who prepare 10 or fewer tax returns are excluded from the electronic filing requirement. The new provisions are effective for tax returns filed after Dec. 31, 2010.

Penalties

The new legislation increases the failure to file penalties for partnerships and S corporations. Under prior law, the amount of the penalty was $89 times the number of shareholders or partners for each month (or fraction of a month) that the failure continues up to a maximum of 12 months. The new law increases the base amount from $89 to $195. The new provision is effective for tax years beginning after Dec. 31, 2009.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Martin Arking, CPA, is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP, which specializes in providing accounting, tax, and consulting services to law firms. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected].