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Business Owners Get Big Tax Cuts In Recovery Act

The American Recovery and Reinvestment Act of 2009, signed into law by President Obama last winter, is designed to spur economic growth throughout the country. In addition to numerous tax breaks aimed at individuals, there are a wealth of tax-saving opportunities for owners of small businesses. Here are several possibilities.

Section 179 deductions. Under Section 179 of the Internal Revenue Code, a business owner can currently deduct, or “expense,” the cost of business property placed in service during the year, up to an annual maximum. But the deduction is reduced if costs exceed a specified threshold. Stimulus legislation in 2008 doubled the maximum deduction of $125,000 to $250,000 for property placed in service that year, and it increased the threshold for reductions from $500,000 to $800,000. This year’s recovery act preserves these higher amounts for property placed in service during 2009.

Bonus depreciation. Last year’s stimulus law also provided a 50% “bonus depreciation” deduction for qualified business property placed in service in 2008. It applies to property with a cost recovery period of 20 years or less as well as depreciable software, qualified leasehold improvements, and water utility property. The recovery act extends this tax break for qualified property placed in service during 2009. Under this provision, the dollar cap on depreciation of “luxury cars” and comparable vehicles is effectively raised by $8,000; however, if the vehicle is sold within five years of purchase, depreciation can be “recaptured.” Also, bonus depreciation remains available through 2010 for property with a cost recovery period of 10 years or more and for certain transportation property and aircraft. (Before the latest legislation, those tax breaks were set to expire after 2009).

Net operating losses. Normally, a business can carry back net operating losses (NOLs) for a period of two years or forward for up to 20 years. This lets you use the losses when they’ll do the most good in terms of offsetting business profits. Under the recovery act, a “small business” is permitted to carry back a loss further—up to five years—for NOLs during fiscal years beginning or ending in 2008. To qualify, a business must have average gross receipts of $15 million or less for the past three tax years.

Work Opportunity Tax Credit. The recently revised Work Opportunity Tax Credit (WOTC) encourages employers to hire workers from certain disadvantaged groups. The maximum credit is $2,400 per worker. Last winter’s legislation adds two categories of qualified workers eligible for the WOTC: unemployed veterans and “disconnected youth” between the ages of 16 and 24. The additions apply to workers who are hired and start work in 2009 and 2010.

Estimated tax liability. Estimated tax rules require taxpayers, including owners of small businesses and people who are self-employed, to pay tax through quarterly installments or regular withholding. Failing to pay on time can cost you an underpayment penalty unless you qualify under a safe-harbor rule. One safe harbor protects you from penalty as long as you pay estimated tax equal to your liability the previous year (or 110% if your adjusted gross income was $150,000 or more). The recovery act reduces the requirement for 2009 to 90% of the prior year’s tax liability if more than half of your income on last year’s return came from a “small business” (in this case, a company that averaged 500 or fewer employees during the tax year).

S corporation tax. One disadvantage of converting from a C corporation to an S corporation is that the business may owe a hefty built-in gains (BIG) tax on disposition of the C corporation’s appreciated property. The BIG tax applies to gains realized during a 10-year period following the conversion. To provide S corporation owners with greater flexibility, the 2009 legislation reduces this holding period to seven years for gains realized during business fiscal years beginning in 2009 and 2010.

Qualified small business stock. If you invest in qualified small business stock (QSBS), you can normally exclude tax on 50% of the gain from selling shares you have held for at least five years. For the purposes of this tax break, a small business is one that has gross assets not exceeding $50 million. Under the recovery act, the tax exclusion is increased to 75% for QSBS acquired after February 17, 2009 and before January 1, 2011.

These are only some of the tax breaks for business included in the latest stimulus legislation. Others range from energy incentives to enhanced employee benefits. We can work with you and your tax advisor to make sure your business takes full advantage of these breaks.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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