Homebuyers and Businesses With Operating Losses Get Boost in New Tax Bill
Two major economic stimulus provisions were passed on November 6, 2009, with the signing of the
Worker, Homeownership, and Business Assistance Act of 2009: one designed to spur the housing market and the other to provide relief to businesses with current tax losses.
The present $8,000 refundable tax credit for first-time homebuyers has been extended to purchases made on or before April 30, 2010, and a new $6,500 credit has been added for existing homeowners who acquire a different principal residence. “With the extension, more taxpayers will be able to take advantage of the popular homebuyer credit,” says Andy Biebl, tax principal with LarsonAllen. “But they should also be aware of a number of new eligibility restrictions.”
For businesses with 2008 or 2009 losses, Congress now allows a flexible three, four, or five year carryback of a tax loss to earlier years to recover refunds. Larger businesses with more than $15 million of average gross receipts can electively apply this rule to only one current loss year, while smaller businesses may use this provision for two years.
First-time homebuyer credit extended
The first-time homebuyer credit,
as established in the American Recovery and Reinvestment Act of 2009, was scheduled to expire on November 30, 2009. But the new legislation extends the expiration date to purchases made on or before
April 30, 2010.
Further, there is a binding contract exception that effectively extends the deadline by two months. A first-time homebuyer qualifies for the credit if a binding contract is entered into on or before April 30, 2010, and the residence is actually purchased on or before June 30, 2010. Also, a one year extension of these deadlines is added for overseas military and other service members.
The credit is computed as 10 percent of the purchase price of the residence up to $8,000. A first-time homebuyer is defined as one who has not owned a principal residence in the 36-month period preceding the purchase. In the case of a married couple, both must meet this test. A purchase cannot be from a related party, nor may the residence be acquired by gift or inheritance.
Expanded income test
In addition to extending the credit, Congress has liberalized the income eligibility test. Previously, single filers lost eligibility as their adjusted gross income for the year of purchase moved from $75,000 to $95,000. Joint filers had the credit phased out as their income moved from $150,000 to $170,000. But now for purchases made after November 6, 2009, single filers qualify for the full credit if their adjusted gross income is under $125,000, and joint filers are eligible until their income exceeds $225,000. The credit for both categories of taxpayers phases out over a $20,000 income range above these thresholds.
New tax credit for existing homeowners acquiring different principal residence
Existing homeowners who have owned and occupied the same principal residence for at least five of the preceding eight years now also qualify for a tax credit on the purchase of a different residence after November 6, 2009. For these taxpayers, the credit is also 10 percent of the purchase price, but limited to $6,500. The same income phase-outs as the first-time homebuyer credit apply. And the same expiration date of April 30, 2010 applies, including the binding contract exception applicable to purchases by June 30, 2010.
Example: Bill and Julie have resided in their present residence for the past seven years. On March 1, 2010, they close on the purchase of a different residence at a cost of $300,000. Bill and Julie qualify for a $6,500 tax credit in their 2010 tax return, whether the cost of this home is more or less than their former residence, and whether it is a newly constructed or previously owned home. However, their adjusted gross income must be under $225,000 to claim the full credit.
Planning tip: A taxpayer may elect to claim the credit as if the home was purchased on December 31 of the prior tax year. Accordingly, in the above example, Bill and Julie could claim the $6,500 credit in their 2009 Form 1040 rather than waiting until the filing of their 2010 return, in order to more rapidly receive their tax refund. If this election is made, their 2009 income is used to determine eligibility.
New eligibility restrictions
The homebuyer credit has a number of new limitations, all effective for purchases after November 6, 2009:
- A residence does not qualify if the purchase price exceeds $800,000.
- The taxpayer must have reached age 18 on the date of purchase (or if married, one of the spouses must have reached 18).
- The purchaser cannot be eligible to be claimed as a dependent by another taxpayer for the year of the purchase. For example, a 20-year-old college student who did not provide more than half of his or her own support for the year of purchase does not qualify for the first-time homebuyer credit.
- A copy of the executed settlement statement for the purchase of the home must be attached to the taxpayer’s Form 1040 (Individual Income Tax Return).
- A more expansive related-party definition now applies, prohibiting transactions such as a sale by a taxpayer to a daughter-in-law or son-in-law.
The homebuyer credit continues to be subject to a three-year recapture rule. If the taxpayer sells or otherwise disposes of the residence within 36 months of the purchase, the tax credit must be recaptured. Exceptions apply, however, in the case of the death of the taxpayer, an involuntary destruction of the home, or a marital dissolution. Also, a new exception is added for military and other service members who receive government orders.
Expanded business loss carryback opportunities for large and small enterprises
In general, a business with an operating loss may apply that loss to the prior two tax years for offset of taxable income and recovery of tax refunds. For the 2008 tax year,
Congress enacted a special elective three, four, or five year carryback, but this was only available to an eligible small business. Taxpayers qualified as an eligible small business if average annual gross receipts for the three-year period ending with the loss year were under $15 million. Larger businesses were not able to use this expanded loss carryback period in 2008.
The new legislation allows any business, small or large, to electively use the three, four, or five year loss carryback for a net operating loss for the 2008 or 2009 tax year (for fiscal year businesses, the loss year may be either the tax year ending in 2008, 2009, or 2010). The election is limited to only one loss year. However, a small business that is beneath the $15 million gross receipts test and has used the prior provision for a 2008 loss may make an expanded loss carryback election for a second year.
For larger businesses that elect to use the expanded carryback rule, a loss carryback to the fifth earliest year is restricted. In that case, only 50 percent of the taxable income in the fifth prior year may be offset by the loss carryback.
“Larger businesses that now qualify for this elective choice should carefully analyze prior income and tax rate levels, as well as selection of the proper loss year, in order to optimize the tax refunds,” Biebl says. “In some cases, it may be appropriate to defer the decision until the magnitude of any 2009 tax loss can be determined.”
For more information, contact a tax principal in your region.