With all the nay-saying about the American Recovery and Reinvestment Act, at least one AICPA tax expert finds it … well, stimulating. Tom Ochsenschlager is still reading through the nearly 1,100 pages, but he sees some items for individuals and for business which he predicts will have real power to boost the economy. And, he adds, there are also reasons for CPAs to be optimistic about new business coming their way because of the bill.
The list of items in the spending plan is long, and by now, well publicized. It reads a bit like a something-for-everyone spree, but Ochsenschlager points to some of the key provisions which he thinks hold real promise of working.
The Making Work Pay Credit is one. Unlike previous efforts to stimulate the economy through tax rebate checks, this credit spoons out a little extra money per pay period, giving taxpayers maybe $10 to $20 extra dollars per month. At first glance, that sounds insignificant. But, Ochsenschlager explains, it's psychological. When we got checks for several hundred dollars the government's hope was that we'd spend it and jump start the economy. Instead, many taxpayers looked at the chunk of money as a tool to pay down debt or beef up a skinny savings account. "When you get an extra $20, it's too little to save," says Ochsenschlager, "so instead you say 'Let's go out to dinner.'" Look at it that way and you realize... this just might help.
When will we start receiving the money? Ochsenschlager says it will take the IRS awhile to print and distribute new Circular E packages. So it could be May or June before money actually begins to filter into employee paychecks, which will come in the form of reduced withholding of Social Security and Medicare taxes.
Another bright spot he sees is the homebuyer credit. "This will have an impact as people who had been saving for a down payment suddenly find they have an additional $8,000 to spend," and, they don't have to pay it back. Of course, there was already a $7,500 credit in place under the Bush plan, which did require repayment after 36 months in the home. That credit is still available for homes purchased after April 9, 2008 and before January 1, 2009. The new higher credit applies only to homes purchased after 12/31/08 and before 11/30/09, says Ochsenschlager. He predicts that this will be a slow rise, since many people will drag their feet and buy towards the end of that period, waiting to be sure the market has bottomed out. But since housing is at the root of many of our economic problems, a provision like this that increases home sales is really promising, he says.
Cancellation of debt income (CODI) is not new... it's a holdover from the Bush Administration, but for beleaguered states like California with high rates of foreclosure, Ochsenschlager sees this as part of real recovery. This provision allows taxpayers who have CODI of up to $2 million related to the purchase or improvement of a home to avoid paying tax on that amount.
What about business?
The two best provisions that will boost business, says Ochsenschlager, are the Net Operating Loss carryback and the Section 179 expansion.
Businesses with under $15 million in gross receipts that were successful and paid taxes in recent years may now find themselves with net operating losses. Under the new plan, those businesses can carry back the NOL for a tax year that begins or ends in 2008 for five years, resulting in substantial refunds. At a time when getting a loan is increasingly difficult, this can provide an infusion of cash, and it does not have to be paid back. That's a leg up, says Ochsenschlager, and it may mean the difference between closing the doors and staying in business.
The second of the two best business breaks, he says, is the reinstatement of last year's higher Section 179 deduction for equipment purchased and placed in service during the year. In 2008, the deduction limit was $250,000 with an $800,000 threshold for reducing the deduction. As of January 1, the limit dropped to $133,000. The spending plan re-ups it back to $250,000 for all of 2009. This should encourage business owners to buy equipment, says Ochsenschlager, allowing them to modernize their processes, plus benefitting equipment vendors and pumping sales tax into the system.
What will this mean for CPAs?
Anytime there is a change in law or regulation, CPAs have a reason to reach out to clients and say "Are you aware of this opportunity?" says Ochsenschlager. Plus, people tend to be nervous about the changes and want guidance and decision support from their trusted financial advisors. Some of that increased business won't manifest itself till next year when 2009 tax returns are filed, while others, like the new NOL carryback rule can be applied to 2008 returns.
Whatever your opinion of the spending plan as a whole, it's a done deal. Maybe it's time to do as Ochsenschlager is doing, and that is, focus on the bright spots and find the opportunities it will bring.