|
|
|
|
 |
|
November 2009 Year-End Tax Planning for Businesses Business owners have a number of tax-saving opportunities – some short-lived – that are available to companies of all sizes For business owners, certain short-lived tax benefits associated with the recent economic stimulus efforts make informed tax planning before December 31 a must. This article discusses a few of the tax-saving opportunities – expiring, continuing and newly created – available to businesses of all sizes. Take Advantage of Newly Expanded 5-year NOL Carryback. The new Worker, Homeownership and Business Assistance Act of 2009 (WHBAA), which was signed into law on November 6, expands the net operating loss (NOL) carryback privilege to virtually all businesses. The new law is an improvement over the earlier American Recovery and Reinvestment Act of 2009 (ARRA), which allowed only "eligible small business" (ESB) taxpayers to carry-back a net operating tax loss (NOL) for either three, four or five years. The ARRA provision was a beneficial exception to the two-year carryback rule that usually applies. However, the expanded NOL carryback privilege was allowed only to an ESB for a calendar year 2008 NOL or for an NOL generated in a fiscal tax year that began or ended in 2008. (To be an ESB, the business must have had average annual gross receipts of no more than $15 million for the three-year period that ended with the loss year.) But the newly enacted WHBAA gives a similar expanded NOL carryback privilege to virtually all businesses, large and small alike. Specifically, the new expanded carryback deal is allowed for an NOL that is generated in a tax year that ends after 2007 and begins before 2010 (which means 2008 and 2009 for a calendar-year taxpayer). An NOL generated in one of these years can be carried back for three, four or five years. Once again, this is a beneficial exception to the two-year carryback rule that applies to most NOLs. However, the new election generally can only be made for one tax year that ends after 2007 and begins before 2010. An election to take advantage of the new expanded NOL carryback privilege must be made by the due date (including any extension) of the return for the taxpayer's tax year that begins in 2009. Once made, the election is irrevocable. Small businesses can use the expanded NOL carryback privilege for two years. Let's say that an eligible small business taxpayer took advantage of the prior-law expanded NOL carryback privilege (allowed by the ARRA) for its calendar-year 2008 NOL. If the business also has an NOL for calendar-year 2009, it can take advantage of the new expanded carryback privilege allowed by the new law for its 2009 NOL. In other words, the taxpayer can benefit twice from the expanded NOL carryback privilege: once with the prior-law deal for its 2008 NOL and again with the new deal for its 2009 NOL. Limitation. If your business makes a new election under the WHBAA to carry back an NOL to the fifth preceding tax year, the amount carried back to that year is limited to 50% of the taxable income for that year. . Consider Paying a Dividend. The maximum federal rate on dividends is scheduled to skyrocket from the current 15% to 39.6% starting with 2011. Therefore, now may be a good time to convert some of your C corporation wealth into cash at a very manageable (or perhaps no) tax cost. If you’re a shareholder in a closely held C corporation, the current federal income tax rate structure is helpful to your cause. If the company pays you a taxable dividend, the maximum federal rate is only 15%. Better yet, if the taxable income of a stockholder (e.g., you or perhaps a child to whom you’ve given stock) is low enough, there won’t be any tax at all on this income, assuming Kiddie Tax doesn’t come into play. Seize Temporary Tax Breaks for Equipment and Software Purchases. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property, you might consider doing so before year-end to maximize your 2009 deductions. Here’s why: Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2009, the maximum Section 179 deduction is a whopping $250,000. However, the allowable deduction is reduced dollar-for-dollar to the extent the amount of qualifying property placed in service during the year exceeds $800,000. For tax years beginning in 2010, the maximum deduction is estimated to drop back to about $134,000, with reductions estimated to begin when more than $530,000 of qualifying property is placed in service. 50% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can claim first-year bonus depreciation equal to 50% of the cost (reduced by the Section 179 deduction) of most new equipment and software acquired and placed in service by December 31 of this year. The 50% first-year bonus depreciation break will expire at year-end unless Congress takes further action. Swap Bonus Depreciation for Refundable Credits. The bonus depreciation rule that is in effect through December 31, 2009, permits businesses to claim an additional first-year deduction equal to 50% of the adjusted basis of new property placed in service during the year. This generally results in favorable tax consequences for most taxpayers. Recognizing that taxpayers incurring losses may not benefit from accelerating their depreciation, Congress included a tax law provision that allows corporations to make an election to forego taking bonus depreciation in order to claim, as refundable tax credits, a portion of their deferred pre-2006 tax credits (i.e., unused research tax credits and AMT credits). These refundable credits are limited under several computations. One of these limits requires a threshold amount of new equipment purchases during the year, based on the amount of carryover credits, in order to gain the maximum refundable credit for 2009. For example, a corporation with $50,000 of unused credits would need to acquire about $38,000 of new equipment during 2009 to maximize its refundable credit. Recent IRS guidance advises how and when to make this election. This guidance is very detailed and complex, and we can provide assistance in determining whether this new law is applicable to your business and whether you would benefit from electing not to claim bonus depreciation this year. Buy a Heavy Vehicle. As you may be aware, businesses can claim substantial deductions for heavy (over 6,000 pounds gross vehicle weight) SUVs, trucks, and other vehicles used primarily (over 50% of the time) in the business. For a heavy SUV, the business can deduct up to $25,000 of the SUV’s cost in the year it is purchased. Also, the rules that limit the amount of annual depreciation allowed on passenger automobiles do not apply to heavy SUVs. This means that 50% of the remaining cost of the heavy SUV can be written off as bonus depreciation in the year it is purchased, and the balance is then written off over five years. All this can add up to a substantial first-year deduction. For example, the maximum first-year depreciation deduction for a $65,000 heavy SUV placed in service during 2009 and used 100% for business will generally be $49,000. The maximum first-year depreciation deduction for a $65,000 passenger auto placed in service during 2009 and used 100% for business will only be $10,960. A heavy SUV is any four-wheel vehicle that is primarily designed to carry passengers on public streets, roads and highways and has a GVWR (gross, or loaded, vehicle weight rating) of more than 6,000 pounds but not more than 14,000 pounds. (To see a list of vehicles – SUVs and non-SUVs – that may meet the GVWR requirement for larger deductions, visit www.sw-cpa.com/suv.) A vehicle that otherwise meets this definition is not classified as an SUV, and thus qualifies for more favorable tax advantages (below), if any of the following applies:
For these heavy non-SUVs, the full expensing deduction ($250,000 for 2009) is available. That means that businesses will often be able to write off the full cost of the vehicle in the year it is purchased. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |