Small Business Incentives in the Recovery Act

The $787 billion American Recovery and Reinvestment Act of 2009 provides nearly $300 billion in tax relief.  As a stimulus package, over $280 billion in tax relief is targeted for 2009 and 2010.  Keeping with the Obama administration view that small business is the principal engine for job growth, the act has some nice benefits for small to medium size businesses.  Please note that this is a high-level overview and you should probably see a CPA or qualified tax accountant for more information about your specific situation.

CAPITAL  EXPENDITURES

One benefit for small business is the ability to immediately expense major capital purchases through the use of Code Sec. 179 and bonus depreciation (Code Sec. 168(k)).  Code Sec. 179 is limited to small business as it begins to phase out when a company spends more than $800,000 on eligible purchases.

First-year expensing was once limited to $25,000 per year and then increased to $100,000.  In 2008, the limit was increased to $250,000, and the act extended this limit through 2009.    Businesses that qualify should take advantage of this opportunity because the limit reverts to around $125,000 in 2010 with a $500,000 phase-out and could go even lower in 2011.

NOL CARRYBACKS

The act allows corporations, partnerships and sole proprietors to carryback 2008 losses for five years rather than the two years allowed in the previous law.  NOLs can provide an immediate and significant cash infusion for a cash-starved business running at a current loss if they had income in any of the previous five years.

I was consulting with a business last week who was struggling with cash flow in this current economic environment and was able to identify over $40,000 of cash sitting in his 2008 loss.  His current CPA firm had been sitting on their S-Corp return for over 6 weeks (crappy service but that is a blog entry for another day).  I recommended he light a fire under them or bring it to TriLibrium to tap into this tax refund ASAP.

The five year carryback only applies to companies with average sales of less than  $15 million over a three year period.  It should also be noted that if a business has already filed their 2008 return and elected to forgo the carryback, there is a provision in the act that allows taxpayers to revoke that election by making a new election before April 18, 2009.

QUALIFIED SMALL BUSINESS STOCK

Owners of qualified small-business stock could previously exclude 50 percent of the realized gain on the stock if the stock was acquired when issued and held for five years.  The act increased the exclusion to 75 percent of the gain, for stock issued after February 17, 2009 through the end of 2010. 

I should also point out that start-ups should consider the benefits of Code Sec. 1244.  I see far too many lay people choose the LLC model without understanding the options and benefits of other forms of business.

S CORPS

I don’t want to go into all the details but will say that the act has some special rules that would apply to C corporations that converted to an S corporation in 2001 or 2002 and are facing downsizing and need to unload assets.

ESTIMATED TAXES

The safe harbor for estimated taxes was reduced from 100 percent to 90 percent of prior year’s tax, or 90 percent of the current year’s tax.  This safe harbor is limited to taxpayers with less than $500,000 of adjusted gross income, where more than 50 percent of income is derived from a business with an average of less than 500 employees in 2008.  This benefit applies only to 2009 but should lower estimated tax payments for many people.

Economic bubbles

The cornerstone of the CPA profession is independence, integrity and objectivity.  I wish I could tell you that our financial system was going to be okay and that President Obama and our elected and appointed leaders in Washington were going to save the day.  Unfortunately, I'm highly skeptical and I have obligations to my friends, clients, family and readers to share my concerns.  Your future depends on understanding these matters.

Economic bubbles exists when asset price inflation rises beyond what income can sustain.  The ride up a bubble is exhilarating as everyone thinks they've found a fountain of gold and the ride down is devastating, as the economic system collapses and the artificially inflated values people assigned to certain assets retreat to their actual value.

One of the most famous bubbles was the Dutch tulip mania that peaked in 1637.  On the run up, people actually believed a single bulb was worth more than a house.  

We've actually experienced two bubbles in the past ten years (dot.com and housing).  These were partially fueled by cheap credit (corporate, governmental, private).

Ludwig Von Mises (1881-1973), an influential Austrian Economist wrote:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion.

The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

If this is true, current government actions to expand credit (print a $Trillion and get banks lending again) will ultimately lead to the collapse of the US currency.  A collapse occurs when people no longer have confidence in a fiat currency. Historically, thousands of currencies have collapsed.  Given time, is it possible that they all will? 

It would be unfair to freak you out without providing a solution.  The first step is to get educated and then to take action.  Two items I'm imploring you to read/watch are 

1. Chris Martenson's Crash Course.  The first sentence on the home page reads, "Ready to learn everything you need to know about the economy in the shortest amount of time?"  
2. David Korten's Agenda for a New Economy: From Phantom Wealth to Real Wealth

I'm on Chapter 17 of the 20-Chapter Crash Course, and I'm in Section 2 of Korten's book.  

The value of a CPA

I may have saved a friend well over $50,000 in taxes this weekend.

I don’t want this to be a tax column and I haven’t researched this specific issue to speak with authority but I want to point out the value of professional advice, especially when you are going through life’s transitions (marriage, death, children, divorce, starting or closing a business, etc.) and dealing with non-routine transactions.

During a casual conversation, my friend mentioned that her elderly father wanted to leave his California home to her when he died. The house has over $500,000 of potential gain in it (Market price less tax basis). Dad had or was going to simply add her name to the title with right of survivorship.

While this would get the house to her upon death, my concern here is that dad has made an Inter vivos transfer as opposed to a testamentary transfer. This difference can have significant tax implications since the beneficiary of a testamentary transfer gets a step up in basis while the recipient of an Inter vivos transfer doesn’t.

My advice to her was to talk with an attorney and her CPA to make sure they were doing this transaction correctly from both a legal and tax perspective. While it will cost some money for the professional services, I think it is better to be safe then sorry when engaged in transactions with significant financial implications.

As a CPA, I really, really like it when my clients call me for advice BEFORE these situations arise since it provides us the best opportunity to accomplish their goals and to avoid nasty surprises.