Recent Tax Legislation

On November 6, 2009, President Obama signed into law H.R. 3548, the “Worker, Homeownership, and Business Assistance Act of 2009” (the Act) in law. Specific provisions that our clients should pay close attention to include changes to net operating loss carry backs, the homebuyer credit, and penalties associated with failure to file.

Five-Year NOL Carry back

The Act expands the Net Operating Loss (NOL) carry back provision from the American Recovery and Reinvestment Act (ARRA) passed in February 2009. Businesses may now carry back NOLs to offset 50 percent of taxable income in the fifth preceding year and 100 percent of taxable income in the remaining four preceding years.

The NOL carry back provisions from the Act do NOT include any gross receipts test limitations and are available to all taxpayers with losses in either 2008 or 2009. The Act provides an election for taxpayers to either carry back 2008 losses five years or 2009 losses five years to recapture taxes that have been paid in years when the taxpayer was profitable. The Act does not allow, however, taxpayers to carry back losses five years for both the 2008 and 2009 tax years, unless the taxpayer elected the five year carry back for 2008 as an eligible small business.

This provision will likely provide considerable relief to many financial institutions with recoverable taxes in the extended five year period. The increase in recoverable taxes will reduce the amount of Deferred Tax Asset that is required to be disallowed for regulatory capital purposes on a financial institution’s CALL Report. The resulting impact will be an increase to Tier 1 Capital and will improve Capital Ratios.

Homebuyer Credit

The homebuyer credit has been extended for first-time homebuyers and has also been expanded to include current long-term homeowners and taxpayers in higher-income tax brackets. The credit has been extended to include all contracts initiated on or before April 30, 2010 and that close no later than June 30, 2010.

A tax credit of up to $6,500 is available for existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight year period. The purchase price must be less than $800,000 for both current and first-time homebuyers. Congress has also increased the adjusted gross income limitations for qualifying taxpayers. Single tax filers who earn up to $125,000 are eligible for the full credit amount. Single tax filers earning between $125,000 and $145,000 will receive a partial credit and a complete phase-out of the credit occurs with an adjusted gross income in excess of $145,000. Joint tax filers with an adjusted gross income of $225,000 or less are eligible for the total credit amount. Joint tax filers will face a partial phase-out of the credit as earned income climbs towards $245,000 with a full phase-out of the credit occurring if adjusted gross income exceeds $245,000.

Failure to File Penalties Increasing

The penalty for failure to timely file partnership and S corporation returns is increasing for returns required to be filed after December 31, 2009 from $89 per each partner/shareholder for each month that the return is not filed to $195 per partner/shareholder per month. These penalties stop accruing after 12 months. This large increase in penalties (almost a 120% increase) has been implemented to promote higher filing compliance from S corporations, partnerships, and LLCs.

Please contact Robert E. Schwarzmann, Principal at PKM at 404-420-5795, or your PKM tax advisor, with questions regarding how this legislation will impact your business.

PKM is a full-service accounting and consulting firm based in Atlanta, Georgia. A nationally recognized CPA firm with 10 partners and more than 85 total staff, PKM offers audit, tax and systems services to clients throughout the country. The firm was founded in 1977 and focuses its efforts on serving companies registered with the Securities and Exchange Commission (SEC) and specializes in banking, insurance, real estate and construction, as well as technology and bio sciences.
For more information, visit www.pkm.com or call 404-588-4200.