The stimulus bill signed into law in late
February contains several tax provisions that could help businesses that
need a lift in this economy. The American
Recovery and Reinvestment Act includes tax
deductions and credits designed to fuel business growth, expansion and innovation.
“During these trying times when credit is
tight, it’s difficult to get loans from banks,”
says John Carey, CPA, JD, an associate director in the tax department at SS&G Financial
Services, Inc. “And, your customers are likely feeling the same credit squeeze you are, so
your cash flow may be suffering. Creative use
of the tax law can help improve cash flow or
even save a business that is in dire straits.”
Smart Business spoke with Carey about
tax provisions in the new law that businesses
can take advantage of to generate cash flow.
What depreciation allowances are in effect
for those considering capital expenditures?
A provision in the tax law allows for an
extra 50 percent ‘bonus depreciation’ of the
total cost of an asset in the same year a business acquires the asset (which must be qualified property). Ultimately, this translates into
increased cash flow for businesses by allowing a deduction for expenditures on the front
end rather than requiring that the entire cost
of the assets be written off over an extended
period. Bonus appreciation was set to expire
at the end of 2008, but the new law continues
the extra deduction through 2009. If you plan
to spend $100,000 on a piece of equipment,
you can write off 50 percent of the cost in
2009. That amounts to a $50,000 deduction.
Say you plan to put $10,000 down on the
equipment and make payments over several
years. Because of this tax provision, you may
actually realize a greater tax savings than
your down payment. This is why you should
discuss business expansion plans with an
accountant who can help strategize the best
way to keep cash in the company but still
spend to fuel business growth.
Is Section 179 expensing for qualified property still in place?
Section 179 allows businesses to elect to
deduct the full purchase price of a qualifying
piece of equipment purchased during the tax
year. Like bonus depreciation, this incentive is designed to encourage businesses to invest
in themselves and spend on equipment and
other property that will help fuel growth. Of
course, there are limits. A total of $250,000
can be written off, and the total amount of
equipment purchased is limited to $800,000.
The deduction phases out after this point.
The government did not roll back expensing
limits to $125,000 and $500,000 as planned,
but extended the higher limits through 2009.
Businesses can now take advantage of both
Section 179 and bonus depreciation.
Are there tax advantages for companies that
do not elect to apply bonus depreciation to
qualified purchases this year?
There is an opportunity to forgo bonus
depreciation, and instead elect to take certain
refundable tax credits. In particular, companies that are operating at a loss this year and
have credits such as the alternative minimum
tax or research and experimentation credits
that were generated in prior years, but were
not used and have been carried forward, can
‘cash in’ on those credits by electing to not
implement bonus depreciation. These credits
are refundable, which can turn them into
cash.
A company that takes these credits can still apply Section 179 expensing to qualified
property purchased this year. Careful planning is important to coordinate these benefits
in order to take full advantage of them.
What tax provisions can help companies
operating at a loss this year?
Previously, companies operating at a loss
could carry that loss back and earn a refund
on taxes paid in the two previous years. That
time period has been extended to five years,
which means a business that operated at a
loss in 2008 can carry that loss back to 2003,
2004, and so on (for five years), and get a
refund from taxes paid in those profitable
years. This refund can be a significant cash
source for companies that need the extra
boost to recover from a loss.
For companies that have converted from C
corp. status to S corp. status, what can be
expected?
If a company has converted from a C corp.
to an S corp. and has assets that have appreciated in value (built-in gains), those assets
can be taxed if they are sold. Previously, the
built-in gains tax period was 10 years. Now
it’s seven years. This benefits companies that
changed status in 2003 or prior, alleviating
them from having to pay a burdensome tax
on a sale of appreciated assets.
What hiring decisions may represent a tax
advantage?
The Work Opportunity Tax Credit applies
to businesses that hire from specified categories of employees. The stimulus bill added
two categories of individuals to this credit:
unemployed veterans and unemployed
youths ages 16 to 25. Businesses that hire
workers in these two categories — or any
other population previously identified in the
provision — can earn a tax credit.
The key is to meet with your adviser early
to discuss ways to take advantage of these
tax provisions. With the stimulus bill credits
and depreciation allowances, there are ways
to generate cash flow, now.
JOHN CAREY, CPA, JD, is an associate director in the tax department at SS&G Financial Services, Inc. Reach him at (330) 668-9696
or [email protected].
