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 JCarey@SSandG.com.