Pertinent Perils

Something for Everyone

While the emergency loan program legislated into effect by the stimulus bill may have limited benefits for small business owners, there are other provisions to encourage capital investment that are worth considering.  The American Recovery and Reinvestment Act provides certain incentives, for a very brief time frame, for small businesses considering capital investment:

• Faster recovery of certain investments in business property. If your small business invests in new property or equipment in 2009, there are two means to increase deductions related to those capital expenditures:

Increased limit on Section 179 expense. You may expense, rather than depreciate, the cost of machinery, equipment, vehicles and other tangible property placed in service in 2009, up to a maximum deduction of $250,000. The cost of property in excess of $250,000 may be depreciated over its life. In 2010, the Section 179 cap will drop from $250,000 to $133,000 (indexed for inflation). After 2010, the cap returns to the prior limit of $25,000. The Section 179 deduction cannot exceed taxable income, but it may be carried over to future years. However, it phases out for capital expenditures above $800,000 and limits the tax break to smaller businesses.

Bonus depreciation allowed in 2009. You may deduct up to 50% of the cost of “qualified property” (defined as almost any capital expenditure other than buildings) purchased and placed in service in 2009.  You may take the benefit of both the Section 179 expense and the bonus depreciation. However, the basis for depreciating the property must first be reduced by the Section 179 expense.

• Extended net operating loss (NOL) carry-back period. Typically, a net operating loss may be carried back two years and forward twenty years to offset taxable income. For NOLs created after Dec. 31, 2007, the Recovery and Reinvestment Act provides a five-year carry-back period. So if your business paid taxes in the prior five years, the NOL may be carried back to the fifth prior year and each succeeding year to offset income and refund taxes. This benefit is available provided that your business gross income did not average more than $15 million in the three years leading up to the NOL. To claim the refund, eligible businesses must file Form 1139 by Sept. 15. Eligible individuals must file by Oct. 15 using Form 1045.
• Shortened period for taxing S corporation built-in gains. Corporations which elect S corporation status are not taxed at the corporate level. Instead, the income, deductions and credits are reported by the owners. If a C corporation elects S corporation status, any gain inherent in property owned by the corporation at the time of the election and sold within 10 years of the election will be taxed at the maximum corporate rate (currently 35%). The Recovery and Reinvestment reduces the 10-year period to seven years in 2009 and 2010. This will benefit corporations that became S corporations (or acquired property from a C corporation) between 1999 and 2003.  How Congress thinks a backward-looking adjustment will motivate forward-looking investment is beyond me, but I guess the lobbyists have been busy.
• Benefits for small business owners. You may exclude 75% of the gain from qualified small-business stock acquired after Feb. 17 of this year and before Jan. 1, 2011. To qualify, the stock must be held at least five years and acquired at the original issue date. This provision will benefit individuals after Feb. 17, 2014, upon satisfying the five-year holding period. Certain limitations apply to the exclusion, which is normally 50% of the gain. In addition, if you receive more than 50% of your income from a small business, the required 2009 estimated tax payments are lowered. Normally, estimated tax payments must equal or exceed the lesser of 90% of the current year tax or 110% of the prior-year tax obligation. In 2009, taxpayers who qualify only make estimated payments based on the lesser of 90% of the 2008 tax or 90% of the 2009 tax. This provision benefits taxpayers with 2009 income greater than 2008.

One caveat: I am not an accountant, so print out this entry and discuss this information with your accountant to get the advice that is specific to your unique situation.