It’s loaded with private business tax breaks.
Every day, the headlines report more bad news regarding the economy. Unemployment and foreclosures are up; stocks are down, along with consumer confidence and national GDP. National banks, major manufacturers and other large financial institutions are on the verge of failing. The country has now officially been in a recession for more than a year.
On a more local level, everybody from the blue collar worker to the business owner is feeling the effects of what is going on in the national economy. It is not uncommon to drive through a neighborhood and see multiple “for sale” signs or even “foreclosure” signs. Many people fear losing their jobs; with this fear comes diminished consumer spending. Diminished consumer spending, of course, leads to more fear and even less spending.
For certain, the country is experiencing its greatest economic challenge since the early ’80s and, some argue, since the Great Depression. In an attempt to right the ailing economy, the Obama Administration and Congress enacted the American Recovery and Reinvestment Act of 2009 (ARRA). While some opponents labeled the ARRA a “spending bill,” many experts take the position that it is at least one step of many in the right direction toward recovery.
Our analysis reveals that while the ARRA will not act as a trump card for the economy’s woes, the individual provisions contained within it encourage and provide incentives for many to 1) invest and 2) reduce the tax burden on many closely held businesses.
Since 2001, Section 179 expensing amounts have grown considerably to encourage business investment. Last year, Section 179 expensing was raised to $250,000 and was set to expire December 31, 2008. The ARRA has raised the Section 179 expense amount back from its default $133,000 to $250,000. The investment phase-outs are once again dollar-for-dollar for investments made, beginning at $800,000 and ending at $1,050,000. In other words, if a company makes $850,000 in qualifying capital investments in the year 2009, its Section 179 expense is limited to $250,000. If the same company invests $1,000,000 in capital investments during 2009, its Section 179 expense eligibility is limited to $50,000. Once the company invests $1,050,000 in qualifying capital investments, the Section 179 expense is reduced to zero. Thus, it is intended to assist small land private companies to make capital expenditures. Section 179 expense is elective and may be taken in its full eligible amount, in part or not at all.
Bonus depreciation was initially revived for the 2008 tax year and ended December 31, 2008. The ARRA extended the bonus depreciation to include 2009. Under bonus depreciation, small- and mid-market closely held companies are eligible to deduct an additional 50 percent of the property’s basis in the year of acquisition. (This deduction is separate from any Section 179 deduction.) To qualify for bonus depreciation, the property must be of “original use.” In other words, the equipment must be brand new to qualify for bonus depreciation. Additionally, the property must be eligible for Modified Accelerated Cost Recovery System (MACRS) 20-year-period-or-less, water utility property, off-the-shelf computer software or MACRS 10-year-period-or-longer transportation property.
To many small- and mid-market businesses, bonus depreciation offers a healthy opportunity to grow a company with capital investments and take advantage of some key tax in-centives. Bonus depreciation is an elective provision and does not have to be taken against taxes. Since bonus depreciation is claimed for both regular and alternative minimum tax (AMT) calculations, taxpayers can elect out for AMT reasons as well. Once the election to opt out is made, consent to reverse the election must be granted by the IRS before the election can be reversed.
S Corporation Built-In Gains Period
Many closely held businesses are survivors of the ’60s, ’70s and even into the ’80s, when S corporations and limited liability companies (LLCs) were not in existence or popular. As a result, many closely held businesses began their corporate existence as C corporations and continue as such to the present day. They have carried the double taxation burden all this time to escape the draconian built-in gains rules which impose corporate-level tax on gains on assets generated from C corporation existence for a period of formerly 10 years. C corporations have done this, even if staying a C corporation was adverse to their business interests and economic viability.
The ARRA changes this rule in a substantial way. For C corporations converting to S status in 2009 and 2010, the new built-in gains rule only applies for 7 years and not 10 years. This provision is a windfall and makes 2009 and 2010 excellent years to convert from C corporate status to S status. Combined with the case law developing from The Martin Ice Cream case and the development of “personal goodwill,” the time is ripe to consider converting your C corporation to an S corporation, or even exiting the business as the capital gains and corporate level taxes are lessened with the tax law.
Net Operating Loss Carryback
The ARRA extends the two-year carryback for small businesses to five years. This applies to taxpayers with $15 million in gross receipts or less.
Work Opportunity Tax Credit
The ARRA provides businesses with a tax credit of up to $2,400 for hiring individuals from certain targeted groups. These groups now include unemployed veterans and disconnected youth. If you need new workers, give the targeted groups a chance and get a tax credit for hiring someone.
Qualified Small Business Stock
Those holding stock in certain businesses with assets under $50,000 previously could exclude up to 50 percent of their gain from selling stock that was held for five years or longer. To qualify, the stock must be issued after August 10, 1993, and must be acquired by the taxpayer “at its original use.” Under the ARRA, 75 percent of stock held in the same business can be excluded.
Applications For The Material Handling Industry
The material handling industry is still composed of many fragmented companies. Each company typically makes revenues ranging from less than $25 million to $50 million. Additionally, many are throwbacks to the era when C corporations were the only corporate form available. With this said, material handling companies are among companies targeted by the ARRA.
Material handling companies should:
- Consider investing in order to grow their companies and capital equipment base.
- Consider converting their old C corporation status to another worthy status such as an LLC, S corporation or the like.
- Take measures to reduce their annual tax liability. If you have any questions on how to accomplish this, contact the center and talk to one of our professionals.
Many experts predict that the current recession will be with us for two years or longer. The ARRA will be the first of many stimulus and tax cut acts enacted to benefit business owners. While the current economic climate may be perilous, with proper planning from appropriate tax and financial counsel, silver linings can be found and opportunities seized.
While businesses find their values to be downtrodden during recessions, a recession can also be a good time to begin an exit and succession planning strategy, when the capital-gains rate, as well as the dividend rate, is 15 percent.
The next economic crest can be the best time for you to shine. Don’t hesitate; take steps now to make maximum use of the new tax laws. Procrastinating may result in not just lost opportunity, but a in higher tax bill as well.
|Meet the Author
Marcus S. Renwick is an attorney at the Center for Financial, Legal & Tax Planning, located in Marion, Illinois, and on the Web at www.taxplanning.com.