The Stimulus Act Business Summary
In a separate post, which most of you have received, I have published a brief summary of the recently enacted American Recovery and Reinvestment Tax Act of 2009 (also known as the Stimulus Act) as it applies to individuals. This post will summarize the provisions of the Act applicable to businesses. I will follow this with others going into somewhat more detail for each of these provisions.
- The favorable 50% bonus depreciation deduction now applies for property acquired after December 31, 2007 and placed in service during 2009 (and 2010 in the case of certain longer-lived and transportation property). Taxpayers having unused AMT or research credits may elect to accelerate these credits in lieu of taking bonus depreciation.
- The “Section 197” election for a business taxpayer to expense property purchases was due to be reduced to $125,000 for 2009. The $250,000 amount available for 2008 has now been extended and covers equipment purchased in tax years beginning in 2009. The other limitations to use of the maximum section 179 deductions are basically unchanged.
- The Internal Revenue Code has for years contained a provision that allowed a current year net operating loss (NOL) of a business to be carried back to the two immediately preceding tax years in order to effect an immediate tax refund for taxes paid in those years. Any remaining NOL did not disappear, but could be carried forward for an additional 20 years following the loss year. Certain extended carryback provisions applied to certain disaster areas and industries. The Act has modified the NOL carryback provisions by adding additional, elective, carryback periods for small businesses. A small business is defined as one have a three-year average of less than $15,000,000 in gross receipts. Electing small businesses may now elect to carry a 2008 or 2009 loss back as far as five years. However, if more beneficial, the taxpayer may also elect to carryback only as far as the fourth or third years preceding 2008. Careful, this is a one-time election and may require significant planning to produce the maximum tax refund (that is, you can only make the longer carryback election for losses incurred in 2008 or 2009, but not both 2008 and 2009). Note that this provision may be applicable to 2008 tax returns currently being prepared.
- Here’s a change that is applicable to “qualified” individuals, estates, and trusts making estimated tax payments in 2009 and having business income from “small” sole proprietorships, S corporations, and partnerships in 2008. Under present law, the required annual estimated payment was to have been the lesser of 90 percent of the actual tax on their 2009 return or 100 percent (110 percent for 2008 AGI of more than $150,000) of the tax shown on their 2008 return. This 100 or 110 percent amount has been reduced to 90 percent. A “qualified” person is one whose AGI in 2008 did not exceed $500,000 ($250,000 if married and filing separately) and who certifies that more than 50 percent of their 2008 gross income came from a “small business.” The Service will issue regulations as to how a taxpayer makes this certification. For this purpose, a “small business” means a trade or business having an average of less than 500 employees in 2008.
- The law currently contains a “work opportunity tax credit” for up to 40 percent of “qualified first-year wages” (generally providing a credit not exceeding $2,400 per new employee) paid to members of certain targeted groups. The classes of targeted groups have been expanded to include “unemployed veterans” and “disconnected youth” hired in 2009 or 2010. I’ll expand this explanation, including definitions, in a future post.
- Regular “C” corporations, or any person involved with a trade or business, who “reacquires” outstanding business debt for less than the remaining balance of that debt is required to recognize “discharge of indebtedness” income. In other words, you must take into income the amount you no longer have to repay. One reacquires outstanding debt by paying it off, renegotiating the note with the lender, or issuing new debt in place of the old. Typically, this income is recognized in the year of cancellation. Under the Act, a taxpayer may elect to recognize income resulting from forgiveness of business debt in 2009 or 2010 ratably over five years beginning in 2014. This spreads the income hit equally over tax years 2014 – 2018. Note: this applies to business debt only, not personal mortgage indebtedness. That may be the subject of separate legislation.
- Under present law, non-corporate taxpayers may exclude from income 50 percent of any gain resulting from the sale or exchange of “qualified small business” stock held for five years. In the case of such stock acquired after February 17, 2009 and before January 1, 2011, the Act raises the amount excludable to 75 percent. The bad news is that the five-year holding period still applies. Taxpayers will not realize any benefit from this provision for sales of such stock before February 17, 2014. A “qualified small business” is a C corporation with assets of less than $50 million.
- S corporations that once were regular C corporations are subject to a special “built-in gains tax” for 10 years on any realized gain (including goodwill) that arose in their C corporation tax years. This produces “double tax” (once to the corporation, again to the shareholders) for that gain. For tax years beginning in 2009 and 2010, this 10-year period is reduced to 7 years. If it makes good business sense, S corporation with appreciated assets from C corp years more than 7 years ago may want to dump those assets in 2009 or 2010 and be taxed only once (at the shareholder level) on such gains.
These are the only provisions applicable to most businesses. There are other provisions applicable to particular industries, tax-exempt bonds, and energy incentives. I’ll flesh out later the provisions I have summarized above. In the meantime, if you have any questions, please email or call me.
Ronnie
Copyright 2009 Ronnie C. McClure, PhD, CPA