Congress passes Worker, Homeownership, and Business Assistance Act of 2009

On November 5, the House of Representatives by a vote of 403-12 approved H.R. 3548, the “Worker, Homeownership, and Business Assistance Act of 2009.” The Senate had passed the measure late on November 4 by a unanimous vote, so the bill is on its way to the President for his expected signature. The new law includes an important new net operating loss provision, extends the first-time homebuyer tax credit, plus a number of other changes.

First-Time Homebuyer Credit Extended and Liberalized

The new changes are not effective for purchases until after the enactment date (when the President signs). Some taxpayers may want to delay closing until after the enactment date.

Under the current provisions, a refundable tax credit is available for qualifying first-time home purchases after Apr. 8, 2008, and before Dec. 1, 2009. The maximum first time homebuyer tax credit (FTHTC) for homes purchased in 2009 is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence's purchase price. The credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. An individual is treated as a first-time homebuyer if he (and his spouse, if married) had no ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home. A taxpayer who buys a qualifying residence after Dec. 31, 2008, and before Dec. 1, 2009, may elect to be treated as having bought the home on Dec. 31, 2008, so that he may claim the credit on the 2008 income tax return.

The new Act extends the credit and liberalizes it by making it available to (1) higher-income taxpayers and (2) to existing homeowners who are qualifying “long-time residents” and who buy another principal residence. However, for the first time there will be a dollar cap on residences qualifying for the credit.

The credit is extended to apply to the purchase of a principal residence before July 1, 2010 by any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010.

The new credit phases out for individual taxpayers with modified adjusted gross income (AGI) between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase.

The new credit allows any individual (and, if married, the individual's spouse) who has maintained the same principal residence for any 5-consecutive year period during the 8-year period ending on the date of the purchase of a subsequent principal residence is treated as a first-time homebuyer. The maximum allowable credit for these taxpayers is $6,500 ($3,250 for a married individual filing separately). The $8,000 credit is still available for taxpayers that did not own a home as a principal residence for 3-years prior to purchase.

The credit cannot be claimed for buying a residence if its purchase price exceeds $800,000.

Net Operating Loss Provision

A net operating loss (NOL) can be deducted, through an NOL carryback or carryover, in another tax year in which there is net income. In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback, and then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward.

For tax years beginning in 2008, a small business taxpayer could elect to increase the carryback period from 2 years to 3, 4, or 5 years. A small business taxpayer was defined as any business whose average annual gross receipts, averaging the previous three years, was $15 million or less.

The new Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. An applicable NOL means the taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.

Generally a taxpayer may elect under this provision one tax year that the NOL can be carried back to, either 3, 4, or 5 years. However, if you were a small business and elected to carryback previously, you can elect another year for the NOL generated after the current act.

A key change in the new Act is the amount of the NOL that can be carried back to the 5th tax year. The amount of the NOL that is allowed in the 5th tax year may not be more than 50% of the taxpayer's taxable income in that year. The taxable income is determined without taking into account any NOL for the current loss year or for any tax year after the loss year.

Under current law, a taxpayer's NOL deduction cannot reduce the taxpayer's alternative minimum taxable income (AMTI) by more than 90% of the AMTI. However, the new Act suspends the 90% limitation on any NOL's carriedback due to the extended carryback period.