This is the time of year when a certified public accountant can come in handy. Not only is tax time approaching, but some tax provisions have come to an end as of Dec. 31, while new ones are taking effect. CPA Michael Hanna, partner at the firm Sullivan & Co., recently cleared up some of the confusion.
PBN: How are you helping clients generate cash flow in these tough economic times?
HANNA: On the good news front, the incentives related to net operating loss tax deductions have been expanded. Now, the carry-back provisions have been extended from two years to five years for losses incurred in 2009 and 2008. This provides the ability to recoup prior taxes from earlier years and is especially meaningful given the economic challenges of 2009. It is important to note, however, that because Rhode Island doesn’t allow carry-back of business losses, companies should be sure to consider both federal and state implications to maximize the benefits.
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PBN: Should businesses stop investing in capital assets now that accelerated depreciation incentives have ended?
HANNA: Absolutely not. While the American Recovery and Reinvestment Act of 2009 extended the option for small business taxpayers to write-off the cost of certain capital expenditures – and take advantage of bonus depreciation in the year of the acquisition – businesses still need capital assets. Businesses are well-advised to be on alert in hopes that these deductions will be reinstated. Until then, businesses should take advantage of current low interest rates whether financing with banks or manufacturers.
PBN: Is the government still supporting research and development through tax credits?
HANNA: Although federal R&D credits – originally designed to promote research and development spending above and beyond certain thresholds – expired at the end of 2009, there is still a benefit for Rhode Island tax purposes. In most cases, the elimination of this provision will not severely impact current operations and strategies because businesses don’t make R&D decisions based solely on taxes – although the tax credit was certainly a great perk.
PBN: What is the tax effect when a business has certain debt cancelled or forgiven by a lender?
HANNA: This is a little tricky. For businesses that borrowed money from a commercial lender and the lender later canceled or forgave the debt, the cancelled amount may, indeed, be taxable as income. In order to provide relief to these struggling businesses, the IRS will allow businesses to defer taxable income from debt forgiveness. Specifically, for debt forgiven during 2009 or 2010, businesses can defer the taxable income until 2014 and report the income ratably over five years.
PBN: What other tax benefits are you talking about with clients to increase cash flow?
HANNA: One very specific but often overlooked option for businesses that own – or have renovated – property purchased after 1986 is undertaking a cost segregation study. This process allows businesses to accelerate depreciation of buildings for tax purposes and, ultimately, free up cash. In many instances, businesses can convert some of the real estate from real property to personal property and reduce taxes accordingly.
