If you haven't figured out what might be lurking in the American Recovery and Reinvestment Tax Act of 2009 that could benefit your business, don't feel alone--the new law contains more than 575 pages of tax provisions.
Some of the business-tax relief provisions apply to the 2008 tax year, while others aren't effective until fiscal 2009. Several brand new provisions offer meaningful tax relief to distressed businesses. Northeast business practice leader John Evans of tax consulting firm BDO Seidman identifies the biggest breaks:
1. Net operating loss carryback: If your business lost money last year, you can now apply the 2008 loss over as many as five previous tax years to get a refund. Previously, you could only carry back such losses two years.
Another improvement--you can cherry-pick which year or years you'd like to use. So if you had a flush year a few years back and paid a big tax bill, you can re-file that year's return, apply some 2008 losses, and generate a refund.
2. Cancellation of debt income: Usually, if you owe money but have the debt cancelled or settled, you're in double trouble, as a reclaimed debt amount is considered taxable income by the IRS. In other words, you were short on cash, couldn't pay your debt--and now you owe taxes on it. A new law alleviated this nightmare scenario for business owners who reclaim a debt in 2009 or 2010.
Starting with this tax year, any debt you cancel or settle won't be taxed for five years. The tax bill for a debt declared in 2009 won't be due until your 2014 tax bill. Even better, this rule applies to a broad swath of debt-reclamation methods, including loan modification , loan forgiveness or cash settlement.
3. S Corporation tax relief: Previously, if you incorporated your business as an S Corp, but wanted to sell the business less than 10 years later, your profit would be subject to capital gains tax. The new rule cuts that time down to seven years, making it easier for business owners to sell their companies without racking up a big tax bill.
4. COBRA: The news here isn't so good for business owners, though it does give you something comforting to tell workers you might need to lay off. The stimulus act has slashed the premiums such workers must pay to extend their health insurance under this law to just 35 percent of the total. Employers are responsible for the remaining 65 percent of the premiums.
The ray of sunshine here is your business will be entitled to a credit against any payroll taxes you owe. So after some paperwork, you should come out even--assuming you still owe enough payroll tax after the layoffs to get credit for all your COBRA payments. Fill out form 941 to get the credit.
5. Estimated tax payments: If you make estimated tax payments, you may be able to pay less. The law reduces the minimum you must pay to avoid penalties from 100 percent of the tax paid the previous year, to 90 percent. If sales have rebounded for you this year, this rule may allow you to pay less than you would have.
6. Extended/expanded breaks: A few of the stimulus bill's tax breaks are extensions or expansions of existing laws, such as the Work Opportunity Credit, which expands to cover more types of workers.
Last year's expanded first-year depreciation and bonus depreciation rules are now good through 2009 and, for some types of purchases, into 2010. The higher-depreciation limit for new vehicles in 2008 has extended into 2009, so you can write off roughly $11,000 the first year if you buy a car or truck, for business or personal use.
If your business did well last year and is continuing to flourish in 2009 despite the current economic challenges, some of these tax breaks won't help you, Evans says. The new tax relief provisions are designed to assist owners that have seen their business slump, either this year or last year.