View PDF

The enactment of the American Recovery and Reinvestment Act of 2009 resulted in initiatives to attempt to help businesses and individuals. Though we are waiting to see the impact of the efforts to free up available credit, the Recovery Act includes tax breaks and incentive items designed to help small businesses that can be taken advantage of right away. As the small business owner closely monitors cash flows, reduces expenses, and makes difficult decisions to promote the health of the business, the recent tax incentives should be considered and included as part of the financial plan.

Bonus Depreciation
Businesses recover the cost of capital property over time through depreciation. The Recovery Act allows for immediate write-off of the 50% of the cost of eligible property acquired before January 1, 2010. This allows for a higher tax deduction in the first year on purchases of new property providing a current tax incentive to invest in capital property.

Section 179
In addition to the bonus depreciation above, small businesses can quickly recover the entire cost of certain capital expenditures by electing a full write off in the year of acquisition instead of depreciating over time. The amount permitted to be written off in the initial year has been increased to up to $250,000 for property placed in service during 2009. The limit of $250,000 is phased out once the capital expenditures incurred exceed $800,000.

Net Operating Loss Carryback
Eligible small businesses are permitted to carry their 2008 net operating losses back for five years. In order to qualify for this increased carryback period, a business must have average gross receipts of $15 million or less. This could have a significant impact on cash flows allowing businesses to obtain a refund for taxes paid in previous periods.

Small Business Estimated Taxes
Qualified individuals are allowed to make estimated tax payments that are based on 90% of the prior year’s liability, as opposed to 110% of the prior liability method used in recent years. This reduction is only in place for 2009 and could help reduce the cash burden of meeting estimated tax requirements.

S Corporations
Following the conversion of a C Corporation to an S Corporation, a corporate level tax is imposed on an S Corporation’s net recognized built-in gains. The tax is imposed if the gain is recognized during the 10 year recognition period following the election to be treated as an S Corporation. However, under the Act, for a tax year beginning in 2009 or 2010, no tax will be imposed on the net recognized built-in gain of an S Corp if the seventh tax year in the 10-year recognition period preceded the tax year.

Qualified Small Business Stock
The gain excluded from an individual’s income from the sale or exchange of small business stock was increased to 75%. The increased exclusion applies to new original issue stock acquired after February 17, 2009 and before December 31, 2010 and held for at least five years.

While the plan may not be provide small businesses a cure for the current economy, by understanding and utilizing the tax breaks and incentives above, your small business should be positively impacted. We encourage you to contact us to discuss in more detail how these measures can be applied to your current situation.