The $787 billion American Recovery and Reinvestment Act of 2009 provides nearly $300 billion in tax relief. As a stimulus package, over $280 billion in tax relief is targeted for 2009 and 2010. Keeping with the Obama administration view that small business is the principal engine for job growth, the act has some nice benefits for small to medium size businesses. Please note that this is a high-level overview and you should probably see a CPA or qualified tax accountant for more information about your specific situation.
One benefit for small business is the ability to immediately expense major capital purchases through the use of Code Sec. 179 and bonus depreciation (Code Sec. 168(k)). Code Sec. 179 is limited to small business as it begins to phase out when a company spends more than $800,000 on eligible purchases.
First-year expensing was once limited to $25,000 per year and then increased to $100,000. In 2008, the limit was increased to $250,000, and the act extended this limit through 2009. Businesses that qualify should take advantage of this opportunity because the limit reverts to around $125,000 in 2010 with a $500,000 phase-out and could go even lower in 2011.
The act allows corporations, partnerships and sole proprietors to carryback 2008 losses for five years rather than the two years allowed in the previous law. NOLs can provide an immediate and significant cash infusion for a cash-starved business running at a current loss if they had income in any of the previous five years.
I was consulting with a business last week who was struggling with cash flow in this current economic environment and was able to identify over $40,000 of cash sitting in his 2008 loss. His current CPA firm had been sitting on their S-Corp return for over 6 weeks (crappy service but that is a blog entry for another day). I recommended he light a fire under them or bring it to TriLibrium to tap into this tax refund ASAP.
The five year carryback only applies to companies with average sales of less than $15 million over a three year period. It should also be noted that if a business has already filed their 2008 return and elected to forgo the carryback, there is a provision in the act that allows taxpayers to revoke that election by making a new election before April 18, 2009.
QUALIFIED SMALL BUSINESS STOCK
Owners of qualified small-business stock could previously exclude 50 percent of the realized gain on the stock if the stock was acquired when issued and held for five years. The act increased the exclusion to 75 percent of the gain, for stock issued after February 17, 2009 through the end of 2010.
I should also point out that start-ups should consider the benefits of Code Sec. 1244. I see far too many lay people choose the LLC model without understanding the options and benefits of other forms of business.
I don’t want to go into all the details but will say that the act has some special rules that would apply to C corporations that converted to an S corporation in 2001 or 2002 and are facing downsizing and need to unload assets.
The safe harbor for estimated taxes was reduced from 100 percent to 90 percent of prior year’s tax, or 90 percent of the current year’s tax. This safe harbor is limited to taxpayers with less than $500,000 of adjusted gross income, where more than 50 percent of income is derived from a business with an average of less than 500 employees in 2008. This benefit applies only to 2009 but should lower estimated tax payments for many people.