The Stimulus' Key Small Business Tax Provisions
The stimulus bill signed into law by President Barack Obama on Feb. 17, formally known as the American Recovery & Reinvestment Act, provides $288 billion in tax relief to individuals and companies. But how much of that will benefit small business owners—and how? You can read the 407-page law posted online, but we wonder how many members of Congress managed that. Instead, columnist Karen E. Klein has made things a bit easier by highlighting the law's most important tax provisions applying specifically to small firms. Bear in mind, these changes only apply to federal tax liability, not state.
Net Operating Loss Carryback. The law will extend the "carryback" period for net operating losses generated by small companies from two years to five. This means that if your company lost money in 2008, but paid taxes on profits sometime in the past five years, you can apply last year's loss to prior-year taxes—and potentially get a refund on taxes you paid in the past. The provision was initially drafted to apply to all companies except for financial institutions, but its scope was narrowed considerably during the bill's final negotiations. It now applies only to 2008 and to companies with less than $15 million in annual sales, says Chris Hunter, an attorney with Morgan Miller Blair in Walnut Creek, Calif. If you've already filed your 2008 tax return, you can amend it to take advantage of the carryback provision.
Equipment Deductions and Depreciation. The Section 179 tax deduction allows small businesses to immediately expense new equipment or machinery. In 2009, thanks to the stimulus legislation, the maximum deduction will be $250,000. (It had been scheduled to decrease to $133,000). In order to tailor this benefit for smaller companies, there is an upper expenditure limit on the deduction.
The law also includes an extension of the existing bonus depreciation provision, which allows businesses to immediately deduct half of the cost of qualifying purchases rather than depreciating them over time. If you purchase qualified tangible assets (which can range from computers to manufacturing equipment but not real estate) in 2009, your company needs to start using them in 2009 to take advantage of this provision, says Tim Speiss, partner in charge of the personal wealth advisory group at Eisner, a Manhattan accounting firm.
Making Work Pay Tax Credit. This tax cut refunds a maximum of $400 to single filers making less than $75,000 and $800 to married couples filing jointly and making less than $150,000. Those who qualify will see the amount deducted from their paychecks. Self-employed business owners, even though they don't get paychecks, should talk to their accountants about taking advantage of this one. They may be able to reduce their quarterly payments of estimated tax to reflect the tax cut, or pay the full estimated tax and wait get back money at the end of the year, Hunter says.
Holding Period for S-Corporations This provision temporarily shortens the holding period of S-corp assets that can be sold without tax on built-in gains. (Business owners can choose to sell either the stock or the assets of their corporations, depending on a complex formula of taxation treatment.) A built-in gain is the difference between the fair market value of the assets and their tax basis at the time an S-corp election was made.
This provision shortens the period from 10 to seven years for sales occurring in 2009 and 2010, says Dave Shantz, CPA with accounting firm CBIZ's San Diego office. It applies to profitable Subchapter C-corps that have elected to be taxed under S-corp rules. Many C-corp owners become S-corps, to eliminate double taxation and for other reasons, he says.
By reducing the holding period to seven years, this provision will allow many business owners to retire earlier without facing two layers of taxation on their business assets, Shantz says. "For companies that have highly appreciated assets, they'll be able to sell earlier and get much better tax treatment than before. We're going to have many clients selling three years earlier than they thought possible," he says.