educational

Tax Changes in 2009

On Feb. 17, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the "Recovery Act" or the "Act"). Most of the tax changes are targeted to affect qualifying small businesses. This article provides a summary of the key tax changes affecting businesses that survived the debates in Congress and made it into the Act.

New Asset Purchases
The Recovery Act affects businesses acquiring new assets by extending the bonus depreciation on certain qualified property (which was set to expire at the end of last year) and increasing the first year write-off expense limits under what is referred to as a 'Section 179' election.

First year bonus depreciation provides a taxpayer with an election to accelerate 50 percent of an asset's depreciation to the year of purchase while the Section 179 election allows qualifying businesses a write-off of up to $250,000 of the cost of certain new asset purchases. The maximum amount of the write-off under Section 179 is phased out for businesses that acquire more than $800,000 of eligible assets, and is therefore generally available to smaller businesses.

A business that cannot benefit from bonus depreciation (e.g., a company that is in a loss before taking into account depreciation) may have accumulated unusable R&D or Alternative Minimum Tax credits (e.g., because of income limitations in prior years). Last year, these businesses were incentivized to acquire new assets and, by election, were able to forego bonus depreciation and instead accelerate the use of those accumulated credits to offset tax. The Recovery Act extends this law to asset purchases in 2009.

Net Operating Losses
Another tax incentive for qualifying businesses comes in the form of increasing the net operating loss (NOL) carry-back period from two years to five years. Under the new law, businesses with less than $15 million in annual gross receipts may be able to take advantage of the new expansion of the NOL period. As such, businesses that qualify could potentially receive refunds from previous years. For example, a company that generates an NOL in 2008 may be able to carry back that loss to 2003. If the company had taxable income and paid tax in 2003, a deduction for the NOL in that year (as a result of the carry-back) could mean an immediate refund of 2003 taxes.

Additional Tax Incentives to Businesses
The Recovery Act also includes favorable tax changes in respect to companies that acquire their own debt at a discount, hire certain workers (under the work opportunity credit), and invest in renewable energy projects. Small business owners may also be eligible for reduced estimated taxes in 2009 if they rely on the available safe harbors.

Montage Services Inc. provides international and domestic tax consulting and advisory services, primarily for corporations. To inquire about a particular tax issue or seek consulting services, contact Scott Wentz, managing director, at (415) 963-4016 or scott@montage-services.com.

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