The Recovery Act has extended the 50 percent bonus depreciation rules for qualified property placed in service in 2009, thereby allowing for a higher than normal tax deduction in the year of purchase. To qualify for bonus depreciation, the property must be new and have a depreciation period of less than 20 years, or be water-utility property or computer software not covered by Section 197, or be qualified leasehold improvement property.
The 50 percent bonus depreciation can also result in greater write-offs for taxpayers who buy heavy SUVs in 2009 for business purposes. SUVs with a gross vehicle weight (GVW) rating of more than 6,000 pounds are exempt from the Section 280F depreciation limits. Between the Section 179 expensing allowance for heavy SUVs, 50 percent bonus depreciation and regular first-year depreciation, taxpayers who buy new heavy SUVs in 2009 and place them in service this year may be able to depreciate most of the cost of the vehicle.
Enhanced Section 179 Expensing
The Recovery Act has extended the increased Section 179 expense limit of $250,000 for property placed in service in 2009. As a result, many businesses can receive an immediate tax write-off for the cost of most new and used personal property. If you do not act this year, the Section 179 limit is cut almost in half for 2010. The amount must be reduced dollar-for-dollar by the amount that the property cost exceeds $800,000. That is, the Section 179 limit on property of $850,000 is $200,000 [$250,000 – ($850,000 – $800,000)].
Longer Carryback Period for Net Operating Losses
The Recovery Act allows qualifying small- and medium-sized businesses to carry back net operating losses (NOLs) generated in tax years beginning or ending in 2008 for up to five years (versus the two-year carryback rule that usually applies). Therefore, if a qualifying business uses a fiscal tax year (e.g., one ending in October), it may still have time to take actions that will create or increase an NOL for the current tax year. That NOL can then be carried back for up to five years to recover taxes paid in those years.
Built-In Gain Tax Period Shortened
When a C corporation converts to S corporation status, appreciated assets held by the corporation at the time of the conversion that are disposed within the 10-year recognition period are subject to a built-in gains tax at the highest corporate rate (presently 35 percent). For tax years 2009 and 2010, the Recovery Act has shortened from 10 years to seven years the period during which the built-in gain tax is applicable. Accordingly, the recognition period ends at the beginning of the 2009 tax year if the S corporation election was made for the 2002 tax year and the recognition period ends at the beginning of the 2010 tax year, if the S corporation election was made for the 2003 tax year. Calendar-year taxpayers who made the S election prior to 2003 can make dispositions during 2009 and 2010 without being concerned with the builtin gains tax.
Consider Selling Qualified Small Business Stock
Prior to the Recovery Act, individuals could exclude 50 percent of the gain on the sale of qualified small business stock (QSBS) held for at least five years (60 percent for certain empowerment zone businesses). To qualify for the exclusion, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that do not exceed $50 million and that meets active business requirements). Under the Recovery Act, the percentage exclusion for gain on QSBS sold by an individual increases to 75 percent for stock acquired after February 17, 2009, and before January 1, 2011.
Lower Estimated Tax Payments for 2009
Certain businesses that operate as sole proprietors, LLCs, partnerships and S corporations can reduce their 2009 estimated tax payments to 90 percent of 2008 tax under the Recovery Act. A small business owner will qualify for the reduced payments if: (1) 2008 adjusted gross income (AGI) was less than $500,000, and (2) more than 50 percent of 2009 AGI is generated from a small business. A small business is defined as a business that, on average, had fewer than 500 employees during 2008. Prior to the act, estimated tax payments were based on 100 percent of 2008 tax, or 110 percent of 2008 tax for AGIs over $150,000. Although this new rule will not reduce a small business owner’s 2009 tax liability, it can significantly help manage cash flows for 2009.
Work Opportunity Tax Credit
Employers can qualify for a tax credit known as the work opportunity tax credit that is worth as much as $2,400 for each eligible employee ($4,800 for certain veterans and $9,000 for employees who are “long-term family assistance recipients”). The credit is generally limited to eligible employees who begin work for the employer before September 1, 2011. The credit is available on an elective basis for employers hiring individuals from one or more of ten targeted groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to service rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer (two years in the case of an individual in the long-term family assistance recipient category).
Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group including: (1) qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, (2) qualified veterans, (3) qualified exfelons, (4) designated community residents, (5) vocational rehabilitation referrals, (6) qualified summer youth employees, (7) qualified members of families receiving Food Stamp assistance, (8) qualified Supplemental Security Income recipients, (9) long-term family assistance recipients, (10) certain unemployed veterans or disconnected youth who begin work for the employer during 2009 or 2010 and (11) certain individuals hired before August 28, 2009 to work in the Hurricane Katrina disaster area. Also, the credit is not available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (e.g., working as a maid in the employer's home).