CLIENT ALERT
Recent Small Business Tax Law Breaks
On May 20, 2009, the IRS issued a press release encouraging small businesses to take advantage of tax-savings opportunities created under the 2009 economic stimulus act passed earlier this year. The American Recovery and Reinvestment Tax Act of 2009 (“2009 Act”) became law on February 17, 2009. This Client Alert describes some of those tax breaks that may be of interest to you or your clients.
1. 2008 Net Operating Losses May Be Carried Back 5 Years.
Many small businesses that incurred a net loss for 2008 (annual expenses exceed income) (“2008 NOL”) can choose to carry that NOL back for up to 5 years, instead of the usual 2 years. The extended carryback period may provide an opportunity to receive a tax refund for taxes paid in any of the previous 5 years (e.g., 2003 through 2007). An important limitation on this tax break is that it is limited to businesses with average annual gross receipts of $15 million or less for the three-year period (e.g., 2005 to 2007) preceding the loss year (2008).
The 2008 loss year is defined as the taxpayer's net operating loss for any taxable year ending in 2008, or if the taxpayer so elects, its net operating loss for any taxable year beginning in 2008. Two or more companies under common control may be required to aggregate their gross receipts to determine if the $15 million gross receipts test is met for the preceding three years.
The election to carry-back the 2008 NOL to 2003, 2004, or 2005 may be made by filing Form 1045, Form 1139, or an amended return. This election must be filed within 6 months after the due date (excluding extensions) of the return for the taxable year of the NOL (e.g. 2008). This option is available for most eligible taxpayers but only for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by September 15, 2009. For eligible individuals (including those who have flow-through NOLs from a partnership or S corporation), the deadline is October 15, 2009.
2. Bonus Depreciation and Expensing of Capital Costs Creates Significant Tax Break for Investment in New Assets.
To encourage the investment by companies in business assets (such as equipment, machinery, computers, etc.), the 2009 Act extends through 2009 the special 50% deduction for the cost of new business personal property (so-called “Bonus Depreciation”), and, for qualifying small businesses, a 100% deduction up to $250,000 for the cost of such property (the so-called “Section 179 Deduction”). The cost of real property is not eligible for these tax breaks. The portion of the cost of property in excess of the Bonus Depreciation is depreciated under the remaining life of the property in accordance with the normal tax depreciation rules.
Only new property is eligible for this tax break, which must be acquired by December 31, 2009. Property that is produced by the taxpayer for its own use may also be eligible if production of the property has begun by December 31, 2009.
These first year accelerated tax deductions for capital costs of qualifying purchases can substantially reduce so-called “phantom income” that otherwise results when depreciable assets are purchased, since a substantial portion of the tax deduction for the cost is allowed in the year of the purchase rather than spread over the life of the asset.
3. Avoiding Income Tax on Cancellation/Write-Down of Debt.
To provide relief for troubled businesses, the 2009 Act provides tax relief to businesses that reacquire or satisfy, in whole or in part, their own debt at a discount during 2009 or 2010. This new rule allows businesses to defer taxable income that otherwise arises from the cancellation, satisfaction or retirement of debt at a discount. For example, the write-down by a creditor of a claim, or the repurchase by a company of its debt, may qualify for the tax deferral. It should be noted that there are other exceptions to taxation for the cancellation of debt at a discount, including the so-called “insolvency exception” which permits an insolvent company to exclude from taxable income debt forgiveness (although certain so-called tax attributes of such businesses are required to be reduced).
The importance of the new exception under the 2009 Act is that it applies to any business that acquires its debt at a discount, whether the business is solvent or insolvent. The tax break allows solvent, operating businesses to elect to defer the taxable income completely until 2014, and then report the income ratably (20% of the income each year) over five years (e.g., 2014 through 2018).
If you, your clients or your tax advisor have questions or need assistance with any of these items or are considering whether to implement business strategies that take advantage of these favorable developments in the tax law, please contact Meyers, Roman, Friedberg & Lewis at 216-831-0042 and ask for our tax partner, Mario Fazio (ext. 139).
IRS CIRCULAR 230 DISCLAIMER: To the extent that this written communication, including attachments, may address certain tax issues, this written communication is not intended or written to be used, and cannot be used by any persons to avoid any potential tax penalties that may be asserted by the Internal Revenue Service. In addition, this communication may not be used by anyone in promoting, marketing or recommending the transaction or any matter addressed herein.
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