Lucky for businesses, they weren’t overlooked for tax relief in the American Recovery and Reinvestment Tax Act of 2009, better known as the stimulus bill. Here’s a look at the tax breaks in the bill that could benefit your business for tax years 2009, 2010, and beyond. Most of the breaks are designed to help businesses that have seen revenue decline.
Canceled Debt Relief
Ordinarily if you owe a vendor or a supplier money but negotiate a settlement with them, you would have to pay federal tax on the amount of money the vendor forgave. It can feel like a one-two punch: You don’t have enough money to pay your bills, and the Internal Revenue Service rewards you for working out a settlement with a request for money.
Fortunately the stimulus bill addresses this problem. Beginning with tax year 2009, canceled or settled debts are not taxed for five years. For instance, a debt you settle in 2009 will not generate a tax bill until 2014. This break applies to many types of debt-reclamation plans, including cash settlement, loan forgiveness, and loan modification. So whatever method you used to settle your debt will likely qualify for the tax to be postponed.
Loss carrybacks are designed to help companies that lost money in 2008, one of the toughest years in recent memory for many small businesses. Where ordinarily you could only carry back such a loss to the previous two years, the stimulus bill adds new flexibility to net-operating-loss carrybacks.
There are two changes. You can now apply the 2008 loss across up to five previous years, and you can cherrypick the previous year or years in which to take the loss. In other words, you now stand a better chance of putting money back in your pocket. If you had a great year a few years back and paid a lot of taxes, you can refile your taxes for that year, include the loss carryback, and get a refund.
The stimulus bill addresses issues of capital gains tax for owners selling their S corporations. Previously an S corp sold less than 10 years after being formed would be subject to capital gains tax. The stimulus bill cuts that time limit to seven years, enabling companies to transfer ownership sooner without incurring tax.
Reduced Estimated Tax Payments
Business owners who file quarterly estimated tax payments may qualify to pay less estimated tax. To avoid penalties you would usually have to pay 100 percent of the tax you paid the year before. Under the stimulus bill you only need to pay 90 percent of the previous-year payment.
One new provision may cost you, at least in short-term cash flow. The bill reduces the premiums recently laid-off workers have to pay to extend their health insurance under the federal Consolidated Omnibus Continuation of Health Coverage law. Instead of employees shouldering the whole burden for these post-employment health-care premiums, they now pay just 35 percent of the premium, with their former employer paying the remaining 65 percent. The IRS then reimburses employers for their COBRA payments.
The catch here is you have to owe enough payroll tax after the layoffs to cover the amount of the credit. If you have laid off everyone, you may be on the hook for the COBRA payments.
Businesses with qualified workers using COBRA can apply for reimbursement of their share of the COBRA payments on their quarterly employment tax return. Be sure to use the updated version of Form 941 to get your credit.
Tax-Break Extensions and Expansions
Besides new tax laws, the stimulus bill also extends some tax provisions that were set to expire in 2008. For instance, first-year equipment purchase deduction and bonus depreciation rules were both expanded in 2008 for a single year. Equipment write-offs doubled to $250,000 and will cover up to 50 percent of any remaining purchase costs left over after the equipment deductions. The stimulus bill makes these higher limits good through 2009. Depreciation on vehicle purchases is also extended to 2009; so the write-off for a new car or truck is still roughly $11,000.
Business reporter Carol Tice contributes to several national and regional business publications.