On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 (the “ARRA”) into law. The ARRA contains a mixture of direct spending provisions and tax incentives designed to accelerate investment in the economy and the creation of jobs. Although the ARRA allocates spending and tax cuts for a wide range of projects, including infrastructure, transportation, energy and healthcare, the ARRA offers very few direct benefits to the retail real estate industry. Certain aspects of the ARRA will be of interest to those who deal with retail real estate. In particular:
Five-Year Carryback of Net Operating Losses.
A net operating loss (“NOL”) arises when the amount by which a business taxpayer’s deductions exceed its gross income. In theory, the Internal Revenue Code (the “Code”) recognizes that the annual accounting concept that is generally strictly applied can mean that a business taxpayer with income in some years and losses in others would pay more income tax than a taxpayer in the same net income (or loss) position whose income remains constant over the same time period. To provide for income “averaging” for the business taxpayer who has NOLs, the Code provides that NOLs incurred in one year can be “carried back” and “carried forward” for a specified period of time. In effect, the annual accounting rule is relaxed with respect to those NOLs. Prior to the ARRA, a business was generally able to carry back NOLs from one year and use them to offset business-related taxable income in the preceding two years and also, if necessary, carry forward and use any remaining NOLs over the next 20 years. Generally speaking, a NOL is carried back to the earliest year it can be used and then offsets business taxable income for that year. Any remaining NOL is then carried forward to each successive year in which it can be “absorbed” (in whole or in part). If any of the NOL remains at the end of the carry forward period, the remaining NOL expires. The ARRA allows “eligible small businesses” (generally meaning business taxpayers whose average annual gross receipts do not exceed $15 million) to offset taxable income with an “applicable 2008 NOL” as far back as five preceding taxable years. For purposes of the ARRA, an applicable 2008 NOL is a NOL arising during a single taxable year that ends or begins in the 2008 calendar year.
Typically, a business taxpayer was allowed to depreciate 50 percent of the adjusted basis of so-called “qualified property” (which includes, among other items, certain “qualified leasehold improvement property”) first placed in service (i.e., the date such item was first used) by the taxpayer during the 2008 calendar year in connection with the taxpayer’s trade or business or otherwise for the production of income. In general, qualified leasehold improvement property are improvements to the interior of a non-residential building that are made pursuant to a lease. In addition, the Code extended the benefit to certain “transportation property” (tangible personal property used in the business of transporting people or property) or longer-lived property (property with a cost recovery period by depreciation of at least ten years) that was first placed in service during the 2008 or 2009 calendar year. The ARRA has extended the 50 percent bonus depreciation benefit to apply to property first placed in service prior to January 1, 2010, or prior to January 1, 2011, with regard to transportation property or longer-lived property.
Expensing Depreciable Business Assets.
Section 179 of the Tax Code allows a taxpayer with a small annual investment to immediately deduct such costs in lieu of depreciating the cost of such investment over time. This benefit is appealing because, generally speaking, the income tax benefit of an immediate, full deduction is greater than that associated with depreciation over time. Prior to the ARRA, the $250,000 aggregate cost that could be deducted for depreciable property first placed in service by the taxpayer during 2008 was subject to future decreases. The ARRA extends the $250,000 aggregate expense deduction for property placed in service through 2009.
Cancellation of Debt Income.
The ARRA contains a provision that is designed to facilitate debt workouts in today’s difficult economic environment. Income from the cancellation of indebtedness (“CODI”) is, generally speaking, taxable income that results when debt is discharged for less than its face value. CODI is generally required to be recognized and taxed as ordinary income by the taxpayer in the year the discharge occurs. The ARRA now allows certain CODI arising in 2009 or 2010 to be taxed over a five-year period beginning roughly in 2014 and ending roughly in 2018. For a more detailed discussion of CODI and the ARRA, please see the Cox, Castle & Nicholson, LLP Client Alert titled “Economic Stimulus Legislation Provides Income Tax Deferral of Certain Cancellation of Indebtedness Income.”
Recovery Zone Bonds.
The ARRA authorizes $10 billion in recovery zone economic bonds and $15 billion in recovery zone facility bonds. These bonds are currently contemplated to be invested in infrastructure, job training, education and economic development in areas with significant poverty, unemployment or home foreclosures. The availability of such bonds may spur retail development by allowing municipalities to invest in future projects funded by these bonds.
Renewable Energy Loan Guarantees.
The ARRA authorizes $6 billion in loan guarantees for investments in renewable energy system projects as authorized by Section 1705 of the Energy Policy Act of 2005. To be eligible, projects must commence construction by September 30, 2011. This may benefit building and/or land owners interested in installing solar panels or other renewable energy systems on their properties.
The foregoing is a highlight of certain significant portions of the ARRA, and a discussion of general interest only. It is not intended to constitute income tax advice or to be a substitute for careful tax planning under the guidance of a tax professional. Further, it is not intended or written to be used, and it cannot be used, by anyone for the purpose of: (i) avoiding penalties that may be imposed under United States federal tax laws; or (ii) promoting, marketing or recommending to another party any transaction or matter described herein.
For more information about this article, or to discuss any retail development or commercial leasing matters, please contact Gary Glick (310-284-2256), Scott Grossfeld (310-284-2247), or Dan Villalpando (310-284-2278) of Cox, Castle & Nicholson’s Retail Development Group.