Small businesses have been hit the hardest by the current recession. Before the tax saving opportunities of the American Recovery and Reinvestment Act of 2009 (ARRA) ends, the following top 10 tax incentives should be carefully analyzed. These incentives are either newly created, expanded or extended and offer a wide variety of tax benefits.
- First year 50 percent bonus depreciation. ARRA has extended the popular bonus depreciation allowance available in 2008 to qualifying purchases made in 2009. This enables businesses to deduct half the adjusted basis of qualifying business property placed in service during the year.
- Section 179 expense increase. Small businesses can elect to expense up to $250,000 of the cost of property qualifying under IRC section 179. This advantageous deduction would have reverted to only $133,000 without ARRA and applies to property placed in service during 2009, provided total qualifying expenditures do not exceed $800,000. At that limit, the maximum benefit begins to decrease.
- Expanded net operating loss carryback (NOL). Small businesses having expenses that exceed income can now choose to carry the loss back for up to five years, rather than the previously allowed two years. For small businesses that were profitable in the past but lost money in 2008, this can mean a significant refund. A calendar-year business must file by September 15, 2009 to take advantage of this tax saving opportunity.
- Discharge of business indebtedness. Qualifying businesses can repurchase specific types of debt during 2009 and 2010 and postpone payment of tax on cancellation of debt income to the five year period beginning in 2014.
- Estimated tax requirement modified. Many individual small business taxpayers may be able to defer paying a larger part of their 2009 tax obligation until the end of the year. Individuals will qualify if they receive more than half of their gross income from their small business in 2008 and meet other requirements.
- S Corporation built-in gains holding period. During 2009 and 2010, ARRA eliminates the corporate level tax on built-in gains of an S Corporation that converted from a C Corporation at least seven tax years before the current year.
- Acceleration of certain business credits. Entities that acquire eligible business property have an additional year to accelerate certain tax credits in lieu of bonus depreciation deduction. Business property must be placed in service during 2009.
- Exclusion of gain on sale of certain small business stock. This section of the law provides an additional incentive for investment in small businesses. There is an increase in the exclusion from 50 percent to 75 percent of the gain from the sale or exchange of qualified small business stock acquired after February 17, 2009 and before January 1, 2011 and held for more than five years. This exclusion is available only to individual investors, not corporations.
- Increased transportation fringe benefits exclusions. ARRA increased the monthly tax exclusion for employer-provided commuter transportation and transit pass benefits to $230 per month. These qualified transportation fringe benefits can generally be deducted as wages for income tax and payroll tax purposes. This exclusion can lower the corporation's employment taxes.
- New targeted group added to work opportunity tax credit. The work opportunity tax credit is allowed for wages paid to individuals of nine disadvantaged targeted groups during a one or two year period, depending on the group. The credit ranges from 25 percent to 40 percent of the wages paid to qualified individuals. ARRA added two new targeted groups:
- Unemployed veterans
- Disconnected youth
In addition to these top 10 tax incentives, there are few honorable mentions to note. There are several energy incentives included in ARRA that could also impact small businesses. For any business generating renewable energy, there are advantageous modifications to the renewable energy production tax credit (see related story). There are also options available to elect the energy investment credit in lieu of the production tax credit. Renewable energy grants are being offered to businesses for energy investment credit property placed in service before 2014.
As some of these tax benefits have a short life expectancy, now is the time to act.
Mary F. Bernard, CPA/MST is a tax principal and director of state and local tax services at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.