American Recovery and
 Reinvestment Act of 2009
Part I

The American Recovery and Reinvestment Act of 2009 (the Recovery Act), which was signed into law by the President on Feb. 17, 2009, includes many tax breaks for businesses and individuals as well as energy incentives. This article summarizes the most widely applicable changes for businesses and individuals other than AMT, COBRA and Health Coverage Tax Credit changes.

Tax Changes for Business

Additional 50% first-year depreciation OK'd for most types of new-depreciable property placed in service in 2009.

Under pre-Act law, for property placed in service after Dec. 31, 2007 and before Jan. 1, 2009 (Jan. 1, 2010 for certain longer-lived property), an additional depreciation deduction under Code Sec. 168(k) was allowed in the placed-in-service year equal to 50% of the adjusted basis of "qualified property."

New law. For property placed in service after Dec. 31, 2008, in tax years ending after that date, the Recovery Act provides an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of "qualified property." The property generally must be acquired before Jan. 1, 2010 and must be placed in service before Jan. 1, 2010 (before Jan. 1, 2011 for certain longer-lived property).

Observation: "Qualified property" as defined in Code Sec. 168(k)(2), includes most types of new property other than buildings.


There is no AMT depreciation adjustment for qualified property recovered under Code Sec. 168(k), which provides for the additional 50% first-year depreciation allowance.

To qualify for bonus first year depreciation:

... The original use of the property must commence with the taxpayer after Dec. 31, 2007.

... The taxpayer generally must purchase the property (a) after Dec. 3 1, 2007, and before Jan. 1, 2010, but only if no binding written contract for the acquisition was in effect before Jan. 1, 2008, or (b) pursuant to a binding written contract which was entered into after Dec. 31, 2007, and before Jan. 1, 2010.

... The property generally must be placed in service after Dec. 31, 2007, and before Jan. 1, 2010. An extension of the placed in service date of one year (i.e., to Jan. 1, 2011) applies to certain property with a recovery period of ten years or longer and certain transportation property.

Retroactively effective for vehicles bought and placed in service after 2008 and before 2010, the Recovery Act also increases by $8,000 the first-year depreciation dollar limit for a passenger auto that is "qualified property" meeting the original use and acquisition and placed-in-service requirements (explained above).

Observation: The inflation-adjusted dollar caps for 2009 have not been released yet by IRS. If the inflation-adjusted dollar caps for 2009 are the same as for 2008, the maximum first-year depreciation allowance for a vehicle that's qualified property would be $10,960 for a new passenger auto acquired and placed in service in 2009, and used entirely for business; for a light truck or van the limit would be $11,160.

One-year optional extension of election to trade bonus and accelerated depreciation for otherwise deferred credits.

A corporation can, under the Code Sec. 168(k)(4) election that is made for its first tax year ending after Mar. 31, 2008, but also covers all later tax years, choose to forego bonus and accelerated depreciation for "eligible qualified property" in exchange for the present allowance, as refundable tax credits, of otherwise-deferred "pre-2006 credits" (research credits from tax years beginning before 2006 and credits for AMT paid that is attributable to tax years beginning before 2006).

In general, "eligible qualified property" is defined by reference to "qualified property" as defined for bonus depreciation purposes. Thus, under pre-Act law, both qualified property and eligible qualified property didn't include property placed in service after Dec. 31, 2008, except for certain aircraft and certain long-production-period property that had, instead, a Dec. 31, 2009 placed-in-service deadline (the placed-in-service rule).

Under the progress expenditure rule for qualified property, long-production-period property could qualify for the Dec. 31, 2009 placed-in-service deadline only to the extent of adjusted basis attributable to manufacture, construction or production before Jan. 1, 2009. Under the progress expenditure rule for eligible qualified property, long production-period property could qualify for the Dec. 31, 2009 placed-in-service deadline only to the extent of adjusted basis attributable to manufacture, construction or production before Jan. 1, 2009 and after Mar. 31, 2008.


New law. For property placed in service after Dec. 31, 2008, in tax years ending after that date, the Recovery Act expands the definition of "eligible qualified property" by:

(1) changing the placed-in-service deadline for "qualified property" to Dec. 31, 2009, but for aircraft and long-production-period property, to Dec. 31, 2010; and

(2) changing the progress expenditure rule for eligible qualified property to provide that long-production-period property can qualify for the Dec. 31, 2010 placed-in-service deadline only to the extent of adjusted basis attributable to manufacture, construction or production after Mar. 31, 2008 and before Jan. 1, 2010.

Observation: The effect of the above changes on the Code Sec. 168(k)(4) election is to extend the election to cover property placed in service by Dec. 31, 2009 (Dec. 31, 2010 for aircraft and long-production-period property discussed above) instead of, as under pre-Act law, property placed in service by Dec. 31, 2008 (Dec. 31, 2009 for aircraft and long production-period property). However, taxpayers can decline the extension (see below).

Option to decline the extension.

A taxpayer that made the Code Sec. 168(k)(4) election for the first tax year ending after Mar. 31, 2008 may elect to not have Code Sec. 168(k)(4) apply to "extension property."

"Extension property" is property which is eligible qualified property solely by reason of the changes listed as items (1) and (2) above.

Observation: Thus, a taxpayer that made the Code Sec. 168(k)(4) election for the first tax year ending after Mar. 31, 2008 has the option of not applying the election to property that is eligible for the election solely because the election was extended as described above.

If a taxpayer doesn't make the election to decline the extension of the Code Sec. 168(k)(4) election, a separate bonus depreciation amount, maximum amount, and maximum increase amount are computed and applied for eligible qualified property that is extension property and eligible qualified property that isn't extension property.

Observation: An effect of separate computations for eligible qualified property that is extension property and for eligible extension property that isn't extension property would appear to be the possibility of cumulatively doubling the amount of otherwise deferred pre-2006 credits that are presently allowed as refundable credits under the election.