As the economy teeters on the brink of collapse, our elected officials have tried to provide some provisions to benefit businesses. There are not many provisions, but there are at least some. Disregarding the opposition, the legislators should be congratulated for at least trying to do something to stimulate the economy. As this article identifies, most of the rule changes relate to more rapid depreciation of business equipment.
So what are some of the provisions that could benefit a business?
1. SMALL BUSINESS DEPRECIATION LIMITS EXTENDED
Section 179 Depreciation Deduction Increase Extended
The provision that was passed by the Republican administration that increased a business’s ability to deduct in the year of acquisition the cost of qualifying depreciable assets up to $125,000 in 2007, and $250,000 in 2008 was extended through years ending no later than December 31, 2009. Current immediate deduction, within IRC §179 of up to $250,000 for businesses that purchase no more than $800,000 of assets is allowable. If companies purchase more assets than the limitation amount, $800,000, then there is a dollar for dollar reduction in the §179 limit deduction as assets exceed the limit.
Remember that limitations apply not only at the company level, but also owners of pass through entities have the limitation applied at their personal level as well.
Bonus Depreciation Extended
The new tax act also extended the fifty percent bonus depreciation for "new qualifying" property acquired and placed in service on or before years ending no later than December 31, 2009. As this is also a depreciation convention, it coordinates with the IRC § 179 deduction, but the "bonus depreciation" is taken after §179. Unlike §179, there is no phase out of the deduction at a certain level of asset purchases, i.e. $800,000 for §179.
Passenger Automobile Bonus Depreciation
The restriction on luxury depreciation on vehicles was generally capped at $2,960 in the year of acquisition. A special exception existed for vehicles weighing more than 6,000 pounds (think "gas guzzler"). The 2008 tax act increased the first year depreciation on automobiles to allow for usage of $8,000 of bonus depreciation as well as regular depreciation. The prior administration’s legislation has been extended for an additional year.
6,000 Pound Gas Guzzlers, SUV’s and Trucks
In case you still want to purchase a vehicle weighing over 6,000 pounds, which is a SUV or a truck, then the first year’s depreciation is increased to $25,000 via IRC §179. After the §179 deduction, bonus depreciation is still available during the first year. After both bonus depreciation and §179 depreciation, regular depreciation is available, as well.
Note that pick up trucks with truck beds at least six feet long and loaded vehicle weight of over 6,000 pounds are exempt from the $25,000 limit and qualify for the regular IRC§ 179 limitations.
Also note that business usage of 50% or more is still required to depreciate a "business" vehicle.
Bonus Depreciation Swap for Unused AMT or R&D Credits
What happens if your company is losing money? Extra depreciation increased your loss, and if it is §179 depreciation you may not be able to use it anyway (for example, a pass through entity). The tax benefit from the depreciation extensions of existing legislation passed by the prior administration or extended by the current administration may be useless. Corporations may elect to treat up to 6% of unused AMT and R&D credits that occurred prior to 2006 as refundable credits, if an election is made in lieu of more rapid depreciation. The election applies in a narrow scope.
a. Straight line depreciation must be used for ALL assets acquired after March 31, 2008 and prior to 2009;
b. Bonus Depreciation would not be allowed for qualifying assets purchased or acquired after March 31, 2008 and prior to 2009.
2. WORK OPPORTUNITY TAX CREDIT EXPANDED
Prior rules allowed a Work Opportunity Tax Credit of 40% of the first $6,000 of wages for certain targeted groups. The new tax act creates two additional classifications of covered employees for the credit. Theses two categories are Unemployed Veterans and Disconnected Youth.
To qualify as an "unemployed veteran" the individual must have been discharged or released from active duty after serving for at least 180 days during the 5 year period ending on the hiring date and must have received unemployment compensation for at least 4 weeks during the 1 year period ending on the hiring date.
To qualify as a "disconnected youth" an individual must be an unskilled individual from age 16 through age 24 who has not been regularly employed and has not attended school in the six months preceding the date of hiring. IRS Form 8850 has specifics that can guide you in this process.
3. 5 YEAR CARRY BACK OF NET OPERATING LOSSES
An eligible small business may now elect to extend the carry back of a net operating loss from 2 years, up to 5 years. The loss may also still be carried forward as well. To qualify as an "eligible small business", the business must have average gross receipts for the 3 year period prior to the operating loss of no greater than $15,000,000 per annum- if the business has been in operations for such length of time. However, if such business has not been in existence for 3 years and therefore cannot pass the 3 prior year period test, then the shorter time period of the businesses’ existence may be used as a measuring point. Generally the election must be made by the due date, including extensions for filing the tax return for the year in which the loss is incurred. Special transition rules exist for using such rule for the 2008 tax year.