By Paul Diamond, Web Editor, Vistage International
The U.S. government’s new stimulus plan, known formally as American Recovery and Reinvestment Act of 2009, is lengthy and involved. To save you time in finding out exactly what’s in it for you, we are presenting the most relevant credits, deductions and other incentives for business owners. Before taking any actions you should consult your accountant or chief financial officer.
President Obama’s stimulus plan intends to jump-start commerce with these incentives, deductions and credits for small businesses:
Loss accounting: The IRS currently allows businesses to carry back net operating losses for two years to offset past taxable income. The stimulus plan allows “qualified small businesses” to carry back losses for five years. (A qualified small business is one with gross receipts of less than $15 million, based on trailing average of annual gross receipts.) This means that your business can re-file prior tax returns and get a refund from the IRS by applying 2008 net operating losses against prior tax payments. Think of it as an interest-free loan from Uncle Sam. For more details see this explanation by the Tax Policy Center.
Equipment expense deductions: If you buy new equipment, you can offset next year’s taxes with it. The 2008 stimulus bill increases the Section 179 expense deduction from $128,000 to $250,000 and offers a 50 percent bonus depreciation. The 2009 stimulus bill extends this policy through the end of the year. What does this mean? Purchase a vehicle, machine or computer for your business and you can offset any taxes you might owe in 2009. Some fine print: partial deduction can be taken for purchases between $250,000 and $800,000 and a fading deduction up to $1.05 million.
Hiring incentives: Businesses that hire unemployed veterans or high-school dropouts can earn up to a $2,400 per worker credit on their taxes. The existing Work Opportunity Tax Credit lets businesses claim a tax credit of 40 percent of the first $6,000 of wages paid to certain types of employees who fall into one of nine target groups. Unemployed veterans qualify if they were discharged or released from active duty during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. High school drop-outs or “disconnected youth” are young men and women between the ages of 16 and 25 who have not been regularly employed or attended school in the past six months.
Capital gains: Investors who buy and hold stock in a small business for at least five years before selling can exclude 75 percent of the gains from taxes. (The current tax law allows you to exclude 50 percent of your gains.) Here’s the catch: the 75 percent exclusion only applies to stock issued after the stimulus bill was enacted and before 2011.
- Refinance existing loans backed by fixed assets.
- Raise its loan guarantee to 90 percent, encouraging banks to extend more capital to small businesses. This means you may qualify for a larger loan than previously.
- Offer deferred-payment loans of up to $35,000 to small businesses that need money to make payments on an existing, qualifying loan for up to six months. Repayment is required 12 months after the loan is fully disbursed.
The SBA does not lend money directly. SBA loans can be obtained through most banks, and they typically require the borrower to come up with 20-30 percent of the loan value. For more information find your local SBA office here or call the SBA “answer desk” at 800-827-5722.
S-Corp holding period: The stimulus plan temporarily shortens the holding period of assets subject to the built-in gains (BIG) tax from 10 years to 7 years. BIG tax requires a company to pay taxes on unrecognized appreciation (the net of unrecognized built-in gains and built-in losses) that existed at the time an S election is made. The BIG tax applies to C corporations which have made an S election, but not to newly formed S corps.
Extension of monetization of accumulated AMT and R&D credits: The new law extends a provision contained in the Foreclosure Prevention Act of 2008 that allows Alternative Minimum Tax (AMT) and loss taxpayers in 2009 to receive 20 percent of the value of their old AMT or research and development credits if such taxpayers invest in assets that qualify for bonus depreciation. Ask your accountant for more information if you think you qualify.
Delayed recognition of certain cancellation of debt income: Businesses that buy their own debt at a discount can now cancel their debt income over a 10-year period. More precisely, the new bill allows cancellation of debt income (CODI) to be recognized over ten years (if companies defer tax on CODI for the first four to five years and recognize this income over the following five tax years) for business debt repurchased in 2009 or 2010.
The stimulus plan’s handouts and tax breaks can come at a cost. The bill imposes new safeguards against fraud, waste and abuse. Employers that receive certain funds from the bill will have to comply with new “whistleblower” laws. The stimulus bill “includes whistleblower protections that are deeper and different from those that are familiar to many employers,” says Allen Roberts of the law firm Epstein Becker & Green, P.C.. For more information on these provisions see this article: Stimulus Package Brings Sweeping Whistleblower Protections or contact your legal team.
For those who have been laid off, the stimulus plan will expand and extend unemployment benefits.
More unemployment compensation, less taxes on it: Weekly unemployment checks will increase by $25. Unemployment recipients will not have to pay income taxes next year on the first $2,400 of unemployment benefits received in 2009.
Subsidized COBRA: The federal government will pay up to 65 percent of the COBRA health-insurance premiums for nine months. People who have lost their jobs after Sept. 1, 2008 will qualify for this aid. Those who initially refused COBRA have 60 days to accept it under the new terms. The benefit isn’t available for people who earn more than $125,000 in 2009.
Tax breaks for middle-income earners
The stimulus package offers some incentives to encourage middle income earners (under $95,000 in adjusted gross income) to put more of their income back into the marketplace.
“Making Work Pay” tax credit: This credit reduces the tax withholdings in your paycheck. Your paycheck will contain roughly an extra $30 per month or $400 per year ($800 for families). The credit phases out between $150,000 and $190,000 in adjusted gross income for married couples filing jointly and between $75,000 and $95,000 for single filers.
One-time cash payment: If you receive Social Security or Supplemental Security Income or are a disabled veteran, you may be eligible for a one-time $250 payment. This benefit counts against the “Making Work Pay” credit for those who are eligible and currently working.
Car buyers have a small write-off to look forward to when purchasing traditional gasoline-engine cars, while buyers of plug-in hybrids can get a significant perk.
Above-the-line deduction for auto purchase: If you spend up to $49,500 for a new car, light truck or motorcycle this year, you can deduct a portion of your state and local sales taxes for the deal. The deduction is phased out for individuals earning more than $125,000 and couples earning more than $250,000. You don’t have to itemize to claim the deduction. The downside is that it’s not a huge savings—a $25,000 vehicle purchase might get you roughly a $500 deduction if you make less than $80,000. Additionally, the deduction can’t be taken by those who deduct state and local sales taxes in lieu of state and local income taxes.
Plug-in electric credit: A $2,500 tax credit is available for those purchasing plug-in electric cars which are not yet available for sale. Additionally, buyers can get up to another $5,000 in credits depending on battery life and how many plug-ins are sold in the U.S. Toyota and GM plan to offer plug-in electric cars in the first quarter of 2010.
Homeowners and buyers
The stimulus package offers incentives to buy a first house or make your existing home more energy efficient.
Credit for first-time home buyers: A tax credit of up to $8,000 is available for first-time home buyers purchasing homes on or after January 1, 2009 and before December 1, 2009. The credit is subject to phase-out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for joint filers).
Tax credits for home Energy-Efficient improvements: For those who want to upgrade their homes, many types of energy-efficient products could qualify for a 30 percent tax credit, up to $1,500 per project. The credit covers windows, doors, roofs, insulation, heating and air-conditioning systems and hot-water heaters, to name a few. See a list of those credits here.
Parents paying for college tuition can receive a tax credit and new deductions.
American opportunity tax credit: A $2,500 higher-education tax credit is available for those paying for the first four years of college. The credit is subject to a phase-out for taxpayers with adjusted growth income in excess of $80,000 ($160,000 for joint filers). The new credit temporarily replaces the Hope Credit with offered $1,800 for two years.
Pell grant: The Pell Grant for low-income students will rise by $500, to $5,350 this year and $5,550 next year.
Computers as an education expense: Computers and computer technology can qualify as education expenses in Section 529 education plans in 2009 and 2010.
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