Many small business owners are in the uncomfortable situation of declaring a net loss in their businesses for the 2009 tax year. Depending on how close to breakeven you are, how the business did last year, and how you expect it to do next year, various tax strategies may be helpful.
Meet with your tax professional early to discuss your situation. Your tax pro can inform you of any existing write-offs that get extended to cover the 2009 or 2010 tax years or new laws on deck that could help your situation.
Declaring a net loss has important tax consequences because your business can only declare a loss in two of five years. If you declare a business loss more frequently, the Internal Revenue Service may review your business and reclassify it as a hobby, disqualifying the business write-offs you’ve taken during those previous years. If deferring costs and more aggressively collecting revenue could keep you in the black, it may be worth your while to do so.
Net Operating Losses
A new provision likely to affect money-losing businesses for the 2009 tax year is the net operating loss tax break. The American Recovery and Reinvestment Act created a special provision for the 2008 tax year that allowed money-losing businesses to write off their losses against five prior years instead of two. Even better, they could pick and choose which prior years to use for the write-off.
Many capitol watchers expect this break to be extended for the 2009 tax year, so check with your tax preparer to see if this special carryback provision will be valid for 2009. It also remains to be seen whether you might be able to use this break again if you used it already on your 2008 tax return.
If your business is near breakeven, carefully evaluate whether to make equipment purchases before the end of the year. On the one hand, 2009 offers hefty depreciation write-offs that may not be available in 2010. On the other hand, if you don’t have enough income to use the write-off against, you may end up forfeiting some of the potential deduction if you make the purchase before the end of the year. You may also end up pushing your bottom line into red ink when you could have stayed in the black.
There are two types of depreciation write-offs available in 2009: first-year depreciation and bonus depreciation. Both were upped in 2008, and the ARRA extended these higher limits. The first-year depreciation write-off doubled to $250,000. The bonus depreciation, which covers any purchase expense not covered in the first-year write-off, rose to cover an additional 50 percent of remaining purchase costs up to another $250,000. These depreciation levels are currently set to expire at the end of 2009.
If you are repositioning your business, it may be time to get rid of inventory that isn’t selling. Evaluate whether you have enough revenue to write off bad inventory now and get the full write-off or whether you’ll have a loss either way, in which case you might as well get rid of the duds now.
There are two kinds of debts that might affect your tax situation: debts you owe and debts customers owe you.
If you owe a debt, try to settle the debt before year end to take advantage of special ARRA debt relief provisions. Usually if you negotiate a settlement for a debt and pay less than the full amount owed, you owe taxes on the forgiven portion of the debt. But beginning with the 2009 tax year, you can settle a debt and not pay tax on the settlement amount for five years. It’s unclear when this tax break will sunset, so the safest course is to settle any debts you owe before the end of this year.
If you are owed a debt and it relates to a product you sold at markup and recorded as a sale, you should be able to take a bad-debt write-off. The write-off is just for the difference between the sale price and your cost of goods, not the full retail price.
The bad debt must be directly related to your business to qualify. Service businesses are not able to write off bad debts; the debt simply reduces your gross income.
Business reporter Carol Tice contributes to several national and regional business publications.