Recovering With New Tax Breaks
The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package, includes nearly $300 billion in potential tax savings. Every masonry contractor can share in more than $75 billion in business tax benefits for 2009 and 2010.
The Recovery Act helps ease the out-of-pocket cost for new equipment. So-called “bonus” depreciation is available for another year, and the larger, Section 179 first-year write-off for newly acquired equipment has been given another year. Two new groups have been added to those whose first-year wages are partially underwritten, thanks to the work-opportunity tax credit. The business-related tax breaks also include tax-deferred debt forgiveness income. There is also a five-year, rather than a two-year, carryback of net operating losses (NOL) that may return taxes paid in earlier years to the coffers of many masonry contractors and masonry construction businesses.
Cash Infusions From LossesThe NOL carryback provision provides the greatest potential savings of all the business tax provisions in the new stimulus package. Under current law, NOLs are carried back to the two taxable years before the year that the loss arises. NOLs may also be carried forward to each of the succeeding 20 taxable years, after the year of loss.
The Recovery Act gives masonry contractors the choice to carry NOLs from the 2008 tax year back three, four or five years, generating a refund of taxes paid in those earlier years. Obviously, the extended NOL carryback provision has the potential for providing an immediate cash infusion to many troubled businesses.
Faster, Larger Write-offs continuedTo help small businesses quickly recover the cost of newly acquired equipment and other certain capital expenses, masonry contractors may choose to write-off the cost of these expenses, in lieu of recovering those costs over time through depreciation. The new Recovery Act extends the small business expensing, aka Section 179, write-off, increased temporarily as part of last fall’s EESA. For 2009, a masonry contractor can write-off up to $250,000 of the cost of newly acquired equipment. The $800,000 ceiling, beyond which the deduction is reduced, is carried over for 2009.
A Write-off BonusLast year, lawmakers allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off 50 percent of the cost of depreciable property, such as equipment, tractors, wind turbines, solar panels and computers acquired in 2008. The new rules extend for another year 50 percent bonus depreciation allowed for property with a recovery period of 10 years or longer. Unlike Code Section 179, expensing that is available for new or used property, bonus depreciation is available only for new property or equipment.
Higher Caps on Vehicle Write-offsAlso extended for bonus depreciation purposes is the regular dollar cap placed on vehicles. The cap for new vehicles placed in service in 2009 is raised, once again, by $8,000. This increase mirrors the temporary 2008 cap increase resulting in at $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for 2009.
Remember, however, as with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might, for a tax year, consider making an election-out (opt-out) are when the masonry contractor: (a) has about-to-expire NOLs, or (b) anticipates being in a higher tax bracket in future years.
Discounted Wage Payments for Some New WorkersThe Work Opportunity Tax Credit (WOTC) rewards employers that hire member of “targeted groups,” such as welfare recipients, the disabled, etc. Under current law, businesses can claim a WOTC equal to 40 percent of the first $6,000 of wages paid to employees of one of nine targeted groups. The Recovery Act extends the WOTC to include two new targeted groups: (1) unemployed veterans, and (2) disconnected youth.
Qualified Small Business StockOrdinary deduction treatment is available to individual investors on the sale of stock or the bankruptcy of a company. Under the old rules, an individual investor could exclude 50 percent of any gain realized upon the sale or exchange of “qualified small business stock” held for more than five years. That means an incorporated masonry contracting business could create a unique type/class of stock, called Section 1244 stock, using as an incentive the fact that only part of the eventual gain would be taxed to the investor.
The Recovery Act makes small business stock more attractive by increasing the amount of gain from the sale of small business stock held for five years or more that may be excluded from 50 percent to 75 percent for stock issued after the date of enactment of this legislation and before 2011.
Temporary Estimated Tax Payment ReliefNot exactly a financing incentive, but it will allow small businesses to keep more money in their pockets. The Recovery Act decreases estimated tax payments for individuals whose incomes primarily come from a small business in 2009. Rather than being required to make quarterly estimated tax payments based on 100 percent of their 2008 returns, the new law allows computations based on 90 percent.
The “Making Work Pay” tax credit included in the Recovery Act increased the take home pay of workers and required employers to use new payroll tax withholding tables. Self-employed masonry contractors who are not subject to wage withholding can receive the credit in advance by reducing the amount of their estimated tax payments. Remember, however, that it is easy to overshoot the mark and become liable for underpaying estimated tax penalties.
Cancelled Debt = Income Now DeferredWhen debt is forgiven, taxable income usually results, unless the masonry contractor or business is insolvent or in bankruptcy. The new law allows some masonry contractors to choose to recognize taxable income resulting from the cancellation of indebtedness over a five-year period, beginning in 2014. Although all the debt discharge income will eventually be recognized, the taxpayer benefits from the deferral of tax to later years.
Some masonry contractors and businesses would be allowed to recognize so-called “cancelation of debt income” (CODI) over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after Dec. 31, 2008, and before Jan. 1, 2011.
Something For Us As WellThe Recovery Act includes an alternative minimum tax (AMT) patch for 2009. The patch was designed to insulate about 26 million middle-income taxpayers from the reach of the AMT. The AMT patch will save taxpayers about $70 billion.
The 2009 AMT patch raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are: $70,950 for joint filers and surviving spouses (up from $69,950 in 2008); and $46,700 for singles and heads of households (up from $46,200).
This massive stimulus bill, the American Recovery and Reinvestment Act of 2009, provides immediate relief to both individuals and businesses with most of the tax incentives retroactive to Jan. 1, 2009. Most of the $280 billion in tax relief is concentrated within the next two years. For masonry contractors, however, professional advice is almost a necessity to ensure their operation will profit from the new Recovery Act.
About the Author
Mark E. Battersby is a tax and financial advisor, freelance writer and columnist.