Some business owners may benefit from new stimulus package Tax Matters by David A. Katzman The American Recovery and Reinvestment Act (ARRA) of 2009 is designed to spur activity across the economic spectrum, which means it includes several benefits for small businesses. Here is a roundup of some of those tax breaks. The new stimulus package extends the enhanced expensing rules, which were originally increased in 2008. At that time, Section 179 expensing limits were increased from $128,000 to $250,000, with the phase-out threshold increased from $510,000 to $800,000. The new stimulus package extends this benefit through 2009. The ARRA also extends the 2008 stimulus package’s allowance of an additional 50 percent accelerated first-year depreciation for qualifying assets. Under the ARRA, this allowance will apply to property acquired through 2009, or through 2010 for some longer-lived assets. However, the law does not require businesses to use this option. Instead, some businesses may elect to accelerate alternative minimum tax (AMT) or research and development (R&D) credit recognition. This option is capped at $30 million or six percent of qualified historic AMT and R&D credits. The ARRA extends this option to credits accumulated through January 1, 2009. For businesses in hiring mode, the ARRA expands work opportunity credits to include more workers. Under previous regulations, businesses were allowed certain credits for hiring people falling into one of several categories identified as disadvantaged workers. The new stimulus package extends this group to include “unemployed veterans” and “disconnected youth.” It is available for qualified individuals hired between Jan. 1, 2009 and Dec. 31, 2010. Businesses must comply with specific criteria in order to claim this credit. Generally, unemployed veterans must have received unemployment compensation for at least four weeks during the one-year period prior to their hiring date. In addition, they must have been on active duty for more than 180 days or discharged with a service-related disability. Veterans discharged more than five years before the hiring date do not qualify. Disconnected youths are defined as people who are at least 16 but not yet 25, were not regularly attending any secondary, post-secondary or technical school during the six-months prior to hiring and are not readily employable because of a lack of a sufficient amount of basic skills. The amount of credit businesses receive for hiring these workers varies, but it is generally based on a percentage of qualified wages. Under the ARRA, qualified individuals who own small businesses with less than 500 employees may avoid penalties for underestimation of estimated taxes. The stimulus package allows taxpayers who had adjusted gross incomes below $500,000 for the preceding year, with more than half of that income coming from a small business, to avoid the usual penalties attached to underestimating taxes for the current year. Under the new program, penalties will not apply for tax years beginning in 2009 as long as the total tax payments made equals at least 90 percent of the taxpayer’s current or prior year annual tax liabilities. The ARRA also provides other, more narrowly defined, benefits. For example, beginning in 2008, unprofitable businesses with $15 million or less in revenues will benefit from an extended carry-back period for their net operating losses (NOLs). The carry-back period has been extended to five years instead of the usual two years. Additionally, previous tax elections for NOLs may be changed to reflect the new regulations, but only one change is allowed and it must be considered timely. For taxpayers who purchase stock in small businesses with less than $50 million in gross assets, up to 75 percent of gains may be excluded from taxes upon the sale of this stock. There are several qualifying factors, including a requirement that the investment must be made after the ARRA became effective through Jan. 1, 2010. The stock must also be held for at least five years. For taxpayers involved in C-to-S corporation conversions during 2002 and 2003, the holding period for assets has changed. Prior to the ARRA, taxpayers could avoid built-in gains taxes after such conversions only if assets were held at least 10 years. The ARRA reduces that period to seven years for sales occurring during 2009 and 2010. For qualifying businesses with cancelled debt or debt that was repurchased at an adjusted rate, this debt income must still be claimed for tax purposes. However, it may be deferred for up to five years and then included in gross income annually, over the five years following the deferral period. The specific type of debt must qualify and repurchases must occur between January 1, 2009 and December 31, 2010. David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.