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How the stimulus package can save your business money.
By Mark E. Battersby
The American Recovery and Reinvestment Act of 2009 is a nearly $800 billion stimulus package that includes nearly $300 billion in potential tax savings. Every small business can share in more than $75 billion in tax benefits for 2009 and 2010.
Of interest to most tent rental and event planning businesses are the business-related tax breaks, including extensions of the tax write-offs for adding new equipment to the business. The Recovery Act extends “bonus” depreciation, increases the Section 179 first-year write-off for newly acquired equipment and adds two new groups to those whose first-year wages are reduced, thanks to the Work Opportunity Tax Credit (WOTC). There is a five-year, rather than two-year, carryback of net operating losses (NOLs) that may return taxes paid in earlier years to some troubled businesses.
The NOL carryback provision provides the greatest potential savings of all the business tax provisions in the new stimulus package. The Recovery Act gives businesses the choice to carry NOLs from the 2008 tax year back three, four or five years, generating a refund of taxes paid in those years.
The new rules extend for another year 50-percent bonus depreciation allowed for property with a recovery period of 10 years or longer. Unlike Code Section 179, expensing that is available for new or used property, bonus depreciation is available only for new property or equipment.
Also extended for bonus depreciation purposes is the regular dollar cap placed on vehicles. The cap for new vehicles placed in service in 2009 is raised by $8,000. This increase mirrors the temporary 2008 cap increase, resulting in a $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for 2009.
Remember, however, as with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might consider making an election-out are when the business: (a) has about-to-expire NOLs, or (b) anticipates being in a higher tax bracket in future years.
The WOTC rewards employers that hire members of “targeted groups,” such as welfare recipients and people with disabilities. Under current law, businesses can claim a WOTC equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups. The Recovery Act extends the WOTC to include two new targeted groups: (1) unemployed veterans and (2) disconnected youth.
Many incorporated businesses will find it easier to attract investors thanks to an expanded tax incentive for investors. Under the old rules, an individual investor could exclude 50 percent of any gain realized upon the sale or exchange of “qualified small business stock” that had been held for more than five years. The Recovery Act makes this unique type of stock, called Section 1244 stock, more attractive by increasing the amount of gain from the sale of stock held for five years or more that may be excluded from 50 percent to 75 percent for stock issued after the date of enactment of this legislation and before 2011.
The stimulus bill temporarily shortens from 10 to seven years the holding period for assets subject to the built-in gains tax imposed after a regular “C” corporation elects to become an “S” corporation. The built-in gains tax prevents an incorporated business from avoiding corporate level tax on the disposition of appreciated assets it acquired while a regular corporation by first converting to S status. However, it also discourages S conversions in situations in which the business may not otherwise survive under regular corporation rules. The new law will give shareholders more flexibility during the current economic crisis.
There is more among the tax provisions of this massive stimulus bill. The new law provides immediate relief to both individuals and businesses, with most of the $280 billion in tax relief concentrated within the next two years. However, for the business owner, professional advice is almost a necessity to ensure the operation will profit from the new Recovery Act.