Small Business Tax Law Breaks

September 21, 2009
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On May 20, 2009, the IRS issued a press release encouraging small businesses to take advantage of tax-saving opportunities created under the 2009 economic stimulus act passed earlier this year.

Here are brief descriptions of some of those tax breaks that may be of interest to you or your clients.

NET OPERATING LOSS CARRY-BACK

Many small businesses that incurred a net operating loss (NOL) for 2008 can choose to carry that NOL back for up to five years, instead of the usual two years. The extended carry back period may provide an opportunity to receive a tax refund for taxes paid in any of the previous five years (i.e., 2003 through 2007). An important limitation on this tax break is that it is limited to businesses with average annual gross receipts of $15 million or less for the three-year period (i.e., 2005 to 2007) preceding the loss year (2008).

The 2008 loss year is defined as the taxpayer’s net operating loss for any taxable year ending in 2008, or if the taxpayer so elects, the net operating loss for any taxable year beginning in 2008.

The election to carry-back the 2008 NOL to 2003, 2004, or 2005 may be made by filing Form 1045, Form 1139 or an amended return. This election must be filed within 6 months after the due date (excluding extensions) of the return for the taxable year of the NOL (i.e., 2008). This option is available for most eligible taxpayers but only for a limited time. A corporation that operates on a calendar year basis, for example, must have filed a claim by Sept. 15, 2009. For eligible individuals (including those who have flow-through NOLs from a partnership or S-Corporation) the deadline is Oct. 15, 2009.

DEPRECIATING NEW ASSETS

To encourage the investment by companies in business assets (such as equipment, machinery, computers, etc.), the 2009 act extends through 2009 the special 50 percent deduction for the cost of new business personal property (so-called bonus depreciation), and for qualifying small businesses, a 100 percent deduction up to $250,000 for the cost of such property (the so-called Section 179 Deduction).

The cost of real property is not eligible for these tax breaks. The portion of the cost of property in excess of the bonus depreciation is depreciated under the remaining life of the property in accordance with the normal tax depreciation rules.

Only new property is eligible for this tax break, which must be acquired by Dec. 31, 2009. Property that is produced by the taxpayer for its own use may also be eligible if production of the property has begun by Dec. 31, 2009.

The first year accelerated tax deductions for capital costs of qualifying purchases can substantially reduce so-called “phantom income” that otherwise results when depreciable assets are purchased, since a substantial portion of the tax deduction for the cost is allowed in the year of the purchase rather than spread over the life of the asset.

WRITE-DOWN OF DEBT

To provide relief for troubled businesses, the 2009 act provides tax relief to businesses that reacquire or satisfy, in whole or in part, their own debt at a discount during 2009 or 2010. This new rule allows businesses to defer taxable income that otherwise arises from cancellation, claim, or the repurchase by a company of its debt at a discount.

For example, the write-down by a creditor of a claim, or the repurchase by a company of its debt, may qualify for tax deferral. It should be noted that there are other exceptions to taxation for the cancellation of debt at a discount, including the so-called “insolvency exception” which permits an insolvent company to exclude from taxable income, debt forgiveness (although certain so-called tax attributes of such businesses are required to be reduced).

The importance of the new exception under the 2009 act is that it applies to any business that acquires its debt at a discount, whether the business is solvent or insolvent. The tax break allows solvent, operating businesses to elect to defer the taxable income completely until 2014 and then report the income ratably (20 percent of the income each year) over five years.

Publication date: 09/21/2009

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