Year End 2009 - BusinessesTax planning for year-end 2009 presents unique opportunities and challenges for small business taxpayers to reduce or defer federal income tax liability. While traditional planning techniques remain fundamentally important considerations this year, new opportunities and pitfalls born from recent legislation and changes in the tax laws in response to our current financial crisis provide planning variables unique to this year end. This letter discusses important year-end tax planning strategies -- from the tried and true techniques to new considerations for our economic situation -- that can operate to reduce the tax burden for your small business. BUSINESS STRUCTURE The structure of your business determines how business income will be taxed. While C corporations are subject to two levels of tax, income, losses, deductions, and credits of S-corps, partnerships and limited liability companies (LLCs) are passed through to the owners and reported on their individual income tax returns. Plain-vanilla sole proprietorships, too, have their place in tax planning, with a traditional Schedule C attached to Individual Form 1040 for a business enterprise engaged in either full or part time sometimes the best choice. Not only is the structure of the business important, but with sole-proprietorships and pass through entities, the individual tax situation of their owners is a particularly significant factor in year-end tax planning. In regular C corporations, year-end planning can mean deferring some of the profits by deferring dividends into the next year. ACCOUNTING METHODS The accounting method used by your business is a factor that impacts year-end tax planning strategies. Your accounting method is important to tax planning because it affects your ability to time and shift income and deductions between 2009 and 2010. Whether your business operates on a cash or accrual basis will determine when income must be recognized for tax purposes and when expenses are deductible. Cash-basis business that anticipate being in the same or lower tax bracket in 2010 than 2009 because of the economy can smooth out their taxable income by deferring income to 2010 and accelerating deductions this year. To push income into 2010, cash-basis businesses can delay billing clients or customers (for example, wait until mid-January) for services and products so that payment is not received until 2010. Alternatively, if you anticipate your business's taxable income to be lower in 2009, you may want to accelerate income in 2009 and defer deductions until next year. For accrual basis taxpayers, the right to receive income, rather than actual receipt, determines the year of inclusion in income. Expenses are deductible in the year in which all events have occurred to establish the liability of an amount certain. Accrual method businesses might consider deferring income by delaying the shipment of products or provision of services until the beginning of the 2010 tax year. The American Recovery and Reinvestment Act of 2009 (ARRA) provides a number of tax incentives for businesses. Here is a summary of the key ARRA provisions, in numerical order, which may impact small businesses: 50-Percent Special Depreciation Allowance/Bonus Depreciation (Section 1201) The new law extends the 50-percent special depreciation allowance that was available for 2008 acquisitions to acquisitions of qualifying property in 2009. This provision enables businesses to deduct half the adjusted basis of qualifying property in the year it is placed in service. The extension applies to qualifying property placed in service in 2009 (2010 for long production period property and certain transportation property). Section 179 Expensing (Section 1202) During 2009, small businesses can elect to expense up to $250,000 of the cost of qualifying property under section 179. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sports utility vehicles. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000. Expanded Net Operating Loss Carryback (Section 1211) Many small businesses that had expenses exceeding their income for 2008 can choose to carry the loss back for up to five years, instead of the usual two years. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period. This option is available for most eligible taxpayers for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009. Estimated Tax Requirement Modified (Section 1212) Many individual small business taxpayers may be able to defer until the end of the year paying a larger part of their 2009 tax obligation. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small business in 2008 and meet other requirements. Discharge of Business Indebtedness (Section 1231) The act allows certain businesses that repurchase specific types of debt in 2009 and 2010 to pay taxes on cancellation of debt income over a five year period, starting with tax year 2014. Exclusion of Gain on the Sale of Certain Small Business Stock (Section 1241) ARRA provides an extra incentive for investment in small businesses. The new law provides an increase in the Section 1202 exclusion from 50 percent (60 percent for enterprise zone qualified business entity stock) to 75 percent for any gain from the sale or exchange of qualified small business stock acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. This provision is limited to individual investors and not available to corporations. S-Corporation Built-in Gains Holding Period (Section 1251) For tax years beginning in either 2009 or 2010, the new law eliminates the corporate level tax on the built-in gains of an S-Corporation that converted from C-corporation status at least seven tax years before the current tax year. COBRA: Health Insurance Continuation Subsidy (Section 3001) Under the new law, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elect COBRA health continuation coverage, are entitled to receive a 65 percent subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee must be treated as having paid the required COBRA premium if the individual pays 35 percent of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) may recover the other 65 percent by taking the subsidy amount as a credit on their quarterly employment tax return. Extension of Renewable Energy Production Tax Credit (Section 1101) The new law generally extends the “eligibility dates” of a tax credit for business facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy. The new law extends the "placed in service date” for wind facilities to Dec. 31, 2012. For the other facilities, the placed-in-service date was extended from Dec. 31, 2010 (Dec. 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013. Election of Investment Credit in Lieu of Production Credit (Section 1102) Businesses that place in service facilities that produce electricity from wind and some other renewable resources after Dec. 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources. A business may not claim both credits for the same facility. Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103) The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008. Coordination with Renewable Energy Grants (Section 1104) Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010. In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities). Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123) The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000. Increased Exclusion Amount for Commuter Transit Benefits and Transit Passes (Section 1151) The new law increased to $230 the monthly tax exclusion for employer-provided commuter transportation and transit pass benefits, effective from March through the end of 2009. Employers can generally deduct these qualified transportation fringe benefits as a business expense. These benefits are also excluded from an employee's wages for income tax and payroll tax purposes. Because of this exclusion from employee wages, the employer can reduce the amount paid in employment taxes. DEDUCTIONS Deduction planning is an integral aspect of year-end business tax planning. There are many important deductions beyond the Code Sec. 162 deduction for ordinary and necessary business expenses that may benefit many small businesses by lowering their tax liability. Year-end bonuses also require care. Paying year-end bonuses in December or January can create a significant compensation-based business deduction. For example, businesses can deduct in 2009 a bonus paid in 2010, as long as the obligation is paid within two and one-half months of the close of 2009. Accrual businesses can take a deduction in 2009 for bonuses not actually paid to employees until 2010 as long as (1) the employee does not own more than 50 percent in value of the business's stock, (2) the bonus is properly accrued on the company's books before the end of 2009, and the bonus is paid within two and one-half months of 2010. LOSS DEDUCTIONS Business losses sustained during the tax year generally can be deducted. For pass through entities such as S corps, LLCs and partnerships, losses will be passed through and deducted on the owners' personal income tax returns. Loss deductions can be taken for:
Net operating losses, in particular, will be something that many more businesses unfortunately will need to become familiar with during the present economic downturn. A trade or business has a net operating loss (NOL) when its allowable deductions exceed its gross income for the tax year. Generally, an NOL can be carried back 2 years and carried forward 20 years--the carryover period (businesses in specially designated disaster zones may be entitled to a 5 year carryback). The first year of the carryover period is the year after the NOL arises; thus, it becomes important to determine the correct year in which gross income is recognized and deductions are taken. The carryback period is especially valuable since the carryback can immediately reduce any taxable income for those prior two years, entitling the business to an immediate cash tax refund upon filing an amended return. EXTENDED INCENTIVES Among the most significant changes made by the new law are a revised research tax credit, extension of accelerated depreciation for leasehold and restaurant improvements, and enhanced deductions for certain charitable contributions of food, books and computer equipment. Especially notable for small businesses, an "alternative simplified credit" has not only been extended but raised to a level at which smaller businesses have a greater tax incentive to spend money on research. Also good for both the environment and a lower bottom line tax, the new law has extended the energy deduction for energy efficient commercial buildings through 2013. Planning to take full advantage of these changes should start now. GIVE OUR OFFICE A CALL Most tax laws work based on the calendar year. Once December 31 passes, the opportunities to change your business's fate as to what it must pay in income taxes for the year significantly diminish. As you may gather from those opportunities and pitfalls outlined in this letter, virtually every business can benefit from a year-end tax plan. Please call our offices early enough if you have any questions or need assistance in customizing a plan for your business. Sincerely yours, Patrick J Rubey 309 W Washington #350 | Chicago, IL 60606 | Tel:(312)917-1107 | Email: pjrcpa@ameritech.net |
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