Small Business Tax Strategies
Are you collecting your maximum tax breaks from the massive economic stimulus law?
The IRS just issued a fact sheet touting the tax perks available to small business owners under the new American Recovery and Reinvestment Act of 2009. (IRS FS-2009-11) Smart small business owners should be aware of key provisions.
Here are eight key provisions:
1. Bonus Depreciation
The new law extends the special depreciation deduction that was available in 2008 to acquisitions of qualified new (not used) assets in 2009. This provision enables a business to deduct 50% of the cost of an asset in the year it is placed in service. The extension applies to qualifying assets placed in service in 2009 (2010 for property with a cost recovery period of 10 years or longer and certain transportation property).
2. Acceleration of Business Credits
Corporations that acquire eligible business property are granted an extra year to accelerate certain tax credits in lieu of claiming bonus depreciation. The extension applies to eligible business property placed in service in 2009 (2010 for property with a cost recovery period of 10 years or longer and certain transportation property).
3. Section 179 Expensing
A small business can elect to expense up to $250,000 of the cost of qualified assets placed in service in its tax year that begins in 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles (SUVs).
Note: The $250,000 allowance for 2009 is reduced if the cost of all Section 179 property placed in service during the year exceeds $800,000.
4. Net Operating Losses (NOLs)
If a small business had expenses exceeding its income for its taxable year beginning or ending in 2008, it can elect to carry the loss back for up to five years instead of the usual two years. For small businesses that were profitable in the past but lost money in 2008, that could mean a special tax refund. To be eligible, the business must have an average of no more than $15 million in gross receipts over a three-year period. Note: This option is available only for a limited time. For example, a corporation operating on a calendar-year basis must file an NOL carryback claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.
5. Estimated Tax Payment
For 2009, eligible individuals can make quarterly estimated tax payments equal to 90% of their 2008 tax liability under a modified safe-harbor method. Previously, this safe harbor had to be based on 100% of your 2008 liability (or 110% if your 2008 AGI exceeded $150,000). You may qualify if you received more than half of your gross income from your small business in 2008 and meet certain other requirements. See IRS Pub. 505, Tax Withholding and Estimated Tax, at www.irs.gov/pub/irs-pdf/p505.pdf.
6. Discharge of Business Debt
The new law allows certain businesses that repurchase specific types of debt in 2009 and 2010 to pay taxes on cancellation of debt income over a five-year period, beginning with the 2014 tax year.
7. Qualified Small Business Stock
Now there’s an added incentive to invest in small businesses. The exclusion for qualified small business stock (QSBS) is increased from 50% (60% for enterprise zone QSBS) to 75% for any gain from the sale or exchange of QSBS issued after Feb. 17, 2009, and before Jan. 1, 2011. The stock must be held for more than five years. This provision is not available to C corporation investors.
8. S Corp Built-in Gains Tax
For tax years beginning in either 2009 or 2010, the new law eliminates the corporate level tax on built-in gains of an S corporation that converted from C corp status at least seven tax years before the current tax year.
The IRS also refers to COBRA subsidies in the new fact sheet. Under the new law, employees involuntarily terminated after Aug. 31, 2008, and before Jan. 1, 2010, may be able to continue health insurance coverage for a nine-month period by paying only 35% of the premiums. Employers must pay the remaining 65%.
Tip: The employer’s costs can be recovered through a payroll tax credit or reduced withholding.
Consult a local tax professional to maximize these tax saving opportunities.