Editor’s note: This is the first of a three-part series on the stimulus law by members of CBIZ Tofias and Mayer Hoffman McCann P.C.
The American Recovery and Reinvestment Tax Act of 2009 (ARRA), popularly known as the stimulus bill, ranks among the most controversial laws in our nation’s history. But no matter how you feel about the law, you need to know at least the highlights of the provisions that may apply to you and your business. If you don’t, you may miss significant tax-saving opportunities and/or possibly run afoul of the IRS.
Many changes in the ARRA have retroactive effective dates. Some apply only to 2009, while others apply through 2010 or beyond. Make sure to check the effective dates carefully.
• Bonus depreciation. The popular first-year 50 percent bonus depreciation has been extended through 2009 for most property and through 2010 for certain longer-lived property and specific types of transportation property. Eligible property generally includes new depreciable property with a recovery period of 20 years or less, computer software and qualified leasehold improvements. The provision also extends the $8,000 increase in luxury auto depreciation limits on property eligible for bonus depreciation.
• Enhanced expensing of depreciable property. The increased expensing limits for depreciable property that expired at the end of 2008 also have been extended through 2009. This provision allows businesses with active trade or business income to immediately expense up to $250,000 of tangible personal property placed into service during the year. The maximum amount of the deduction begins to phase out when the total of eligible purchases exceeds $800,000.
The tax benefits from leveraging these two provisions can be tremendous. If a qualifying company buys and starts using $500,000 of equipment that is normally depreciated over five years, the company can immediately deduct 80 percent of the cost, or $400,000. Both the increased expensing and bonus depreciation also apply for Alternative Minimum Tax (AMT) purposes. These provisions are great opportunities to quickly recover the cost of major asset purchases, but they may not be around for long. Consider whether you should move up your timetable for making major equipment investments so that you can accelerate your deductions.
• Election to forgo bonus depreciation and increase credit limitations. A corporation can continue through 2009 to elect the use of accumulated research or minimum tax credits in lieu of claiming bonus depreciation for eligible qualified property placed into service after March 31, 2008. That election may be useful, for example, when a business is already in a loss position for the year and would not benefit from claiming the additional depreciation.
• Net operating loss (NOL) carry-back. Businesses with average revenue that does not exceed $15 million can elect a longer period for carrying back NOLs, in lieu of the current two-year carry-back period. This election allows eligible businesses to carry back 2008 losses to 2003, 2004 or 2005. Fiscal year-end corporations can choose to carry back losses generated in either the tax year beginning or ending in 2008. Individuals with NOLs resulting from losses from eligible pass-through entities or a sole proprietorship also qualify for the extended carry-back period. The 20-year carryover period for unused losses remains unchanged, as does the AMT limitation permitting only 90 percent of the loss to be used for AMT purposes. To qualify, a business cannot average more than $15 million in gross receipts for the three-year period preceding the loss year. Certain related businesses will be combined for purposes of the three-year average revenue test, and businesses less than three years old may have to take into account the revenue of a predecessor company.
The new NOL provision is a great way to generate cash by claiming refunds of taxes paid in previous years when your profits may have been greater. If you anticipate 2008 losses, you may want to file your 2008 tax return early so you can file amended returns for the earlier years and claim your refunds. What if you do not have losses to carry back in 2008? Corporations may still be able to get quick cash by filing Form 4466, Application for Quick Refund of Overpayment of Estimated Tax. Though not part of the new law, this can be a great help to corporations that made estimated tax payments when projections indicated a stronger 2008 but realize they need the money now, before they are ready to file their tax returns. Form 4466 must be filed by March 15 for calendar year corporations.
• Exclusion of gain on sale of qualified small-business stock. The act increases the amount an individual can exclude from gain on the sale of certain small-business stock held for more than five years from 50 to 75 percent. The provision applies to stock issued after the enactment date and before 2011. The balance is still taxed at the lesser of ordinary income rates or 28 percent. The stock must be original issue stock held by a noncorporate investor in a C-corporation, the gross assets of the corporation may not exceed $50 million at the time of issue, and the corporation must actively conduct a trade or business. •
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
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Drew Colman (dcolman@cbiztofias.com) is a director at CBIZ Tofias and a principal at Mayer Hoffman McCann P.C. – Tofias New England Division, an independent CPA firm. Local offices are located in Newport and Providence, as well as New Bedford.
