Date: 2009-12-21

COBRA Changes

The Recovery Act outlines changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. The provision affects former employees and other potential COBRA payers such as insurance carriers.

ARRA provides a 65 percent subsidy for up to nine months of the cost of COBRA coverage for an employee who was involuntarily terminated from his or her job from Sept. 1, 2008, through Dec. 31, 2009. The former employee must have been enrolled in an employer-provided health plan at the time of involuntary termination to qualify for the credit. The eligible former employee must pay 35 percent of the total premium and the former employer claims the remaining 65 percent of the total premium as a credit on Line 12a of Form 941, Employer's Quarterly Federal Tax Return. The credit is first available with the first quarter Form 941 due by April 30, 2009. The credit is subject to verification requirements, so the former employer must keep adequate documentation to support the credit claimed.

Energy Efficient Incentives

The American Recovery and Reinvestment Act (ARRA) provides numerous tax incentives for individuals and businesses to invest in energy-efficient products.

Here are two of the key energy provisions in ARRA that may impact business taxpayers:

Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses who place in service facilities that produce electricity from wind and some other renewable resources after Dec 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources. A business may not claim both credits for the same facility.

Coordination with Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010. In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities). Special Depreciation Allowance.

Net Operating Loss Carryback

Small businesses with deductions exceeding their income in 2008 can use a new net operating loss tax provision in the American Recovery and Reinvestment Act (ARRA) to get a refund of taxes paid over the past five years instead of the usual two. To accommodate the change in tax law, the IRS has updated Publication 536, as well as the instructions for Form 1045 and Form 1139, which small businesses will use to take advantage of the carryback provision.

Section 179 Deduction

A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property. Under ARRA, qualifying businesses can continue to expense up to $250,000 of section 179 property for tax years beginning in 2009. Without ARRA, the 2009 expensing limit for section 179 property would have been $133,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000. The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.

More Help for Small Business

The Recovery Act also includes the following business-related provisions:

Reduction of Estimated Tax Payments: Normally, small businesses have to pay 110 percent of their previous year's taxes in estimated taxes. The Recovery Act permits small businesses to reduce their estimated payments to 90 percent of the previous year's taxes.

Extension of Bonus Depreciation Deductions Through 2009: Bonus depreciation is extended through 2009, allowing businesses to take a larger tax deduction within the first year of a property's purchase.

Capital Gains Tax Break for Investment in Small Business: Investors in small business who hold their investments for five years can exclude from taxation 75 percent of their capital gains