Tax Act of 2009

Stimulated Yet?

The new economic stimulus package known as the American Recovery and Reinvestment Act of 2009 was signed into law by President Obama on February 17, 2009. The $787 billion new law, which contains nearly $300 billion in tax relief (of which $280 million is concentrated in the first two years), is a massive and ambitious program intended to pull the U.S. economy out of recession.

Regardless of your opinion about the plan or political affiliation, there are some significant tax incentives available to closely held business owners. Unfortunately, as is often the case, some of these incentives are provided in a neatly wrapped package complete with plenty of “red tape” and limitations.

KEY BUSINESS INCENTIVES AND OTHER PROVISIONS

Bonus depreciation

This year is a great time to purchase equipment if you are planning to expand. The bonus depreciation provision of 2008, which allows first-year depreciation of 50 percent of the cost of new equipment additions, was extended through December 31, 2009. We believe this provision will help many businesses, whether they are struggling to compete or trying to grow their operations.

Increase in luxury auto depreciation

The $8,000 increase in the first-year luxury passenger auto limitation was also extended through December 31, 2009.

Section 179 expensing for capital expenditures

Certain businesses can write-off the entire cost of up to $250,000 of capital expenditures for equipment purchased in 2009, subject to certain limitations related to maximum capital purchases and taxable income.

Monetization of AMT and R&D credit carryforwards

This is a way to convert unused credit carryforwards into cash refunds. C-Corporations and certain S-Corporations may convert part of their alternative minimum tax and research and development tax credit carryforwards into currently refundable credits by foregoing bonus depreciation on equipment purchases.

NOL carryback for small businesses

Taxpayers with net operating losses can carry the losses back and apply for refunds of taxes previously paid. The Act increases the carryback period to five years, previously two years, for 2008 tax losses incurred by small business taxpayers with $15 million or less of gross receipts.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit essentially provides businesses with a $2,400 credit for each employee hired from certain targeted groups. This was expanded to include unemployed veterans and certain disconnected youth.

S-Corp Built-In Gain Period

This provision applies to S-corporations that recognize built-in gains on the sale of assets in tax years beginning in 2009 and 2010. The new law temporarily shortens the potential built-in gains period, following S election, from 10 years to seven years for asset sales that would have otherwise been subject to the built-in gains tax.

Employer-provided transportation

Under the Act, the amount that employees may receive as tax-free fringe benefits for employer-provided transportation and van pool arrangements is the same as the amount they may receive tax-free for employer-provided parking.

COBRA premium assistance

COBRA requires that involuntarily terminated employees are entitled to continue certain insurance coverage previously provided by their employers for a limited period of time, provided the former employee pays the premiums for that coverage. Persons terminated from September 1, 2008 through December 31, 2009 may elect to pay only 35% of the COBRA coverage. The former employer will be required to subsidize the remaining 65% but will receive reimbursement by claiming a credit on subsequent payroll tax returns. The temporary subsidy ends on the earlier of nine months after the subsidy starts, or whenever normal COBRA protection would end.

INDIVIDUAL TAXPAYER INCENTIVES AND TAX BREAKS

New homebuyer credit

For purchases of new principal residences made through November 20, 2009, the maximum for this 10 percent credit has been increased to $8,000 (certain limitations and phase-outs apply). The law also eliminates any required repayment to the IRS after 36 months in the home. Unfortunately, purchases of homes in 2008 subject to the $7,500 credit will continue to be governed by the original first-time homebuyer credit enacted last year and will still require repayment over fifteen years.

Deduction for sales and excise taxes on new car purchases

This is a new, above-the-line (meaning non-itemizers can qualify) deduction applying to new cars purchased on or after Feb. 17, 2009 and before Jan. 1, 2010. Sales and excise taxes on vehicles qualify (applies to SUVs and light trucks as well, but not over $49,500 in price). This new deduction phases out at higher income levels ($125,000 single, $250,000 married).

Education credit

The HOPE Education Credit has been renamed the American Opportunity Tax Credit. The credit has been increased from a maximum of $1,800 to $2,500 and also makes 40% of the credit refundable.

Estimated tax relief for Business Owners

Certain individual taxpayers who are small business owners may qualify to pay in reduced safe-harbor tax estimates of 90 percent of their 2008 tax liability.

Computers as qualified education expenses

Computers and computer technology (including Internet access) will be considered qualified education expenses for Section 529 plans in 2009 and 2010.

New Making Work Pay income tax credit

This new credit is intended to boost workers’ take home pay and encourage them to spend more. The credit is limited to the lesser of 6.2 percent of earned income or $400 for individuals or $800 for families, subject to certain income level phase-outs. This credit ends after 2010.

ENERGY INCENTIVES

The new law also creates or expands a litany of energy related tax credits including the following:

• Credit for advanced energy manufacturing facilities
• Electricity production credit from renewable resources
• Alternative energy investment credit
• Residential energy property credit
• Residential energy efficient property credit
• Plug-in electric drive vehicle credit
• Neighborhood electric vehicle credit
• Alternative fuel vehicle refueling property credit

To see more resources and details related to the new tax law, please visit our web site at http://www.hsccpa.com/resources/news_alerts.html.

In these challenging economic times we must be diligent to take advantage of all available opportunities to reduce taxes and increase cash flow. To maximize the benefits of this planning and avoid paying more than your fair share of taxes, it’s important to understand how the new law affects you and your business. Be sure to discuss these matters with your CPA or other trusted business and financial advisor.