The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package that became law earlier this year, included nearly $300 billion in potential tax savings. The business-related tax breaks in that bill included extensions of “bonus” depreciation and first year expensing write-offs for equipment and other business property. But the potential benefits do not stop there.
Cash infusions from losses
The new Net Operating Loss (NOL) carryback rules in the Recovery Act provide the greatest potential for savings. Under current law, NOLs are carried back to the two taxable years before the year the loss arises. An NOL may also be carried forward for the next 20 taxable years after the year of loss.
The Recovery Act gives woodworking businesses the choice to carry NOLs from the 2008 tax year back three, four or five years, generating a refund of taxes paid in those earlier years. Obviously, the extended NOL carryback provision has the potential for providing an immediate cash infusion to many troubled businesses.
Small business expensing
To help small businesses quickly recover the cost of newly acquired equipment and other certain capital expenses, woodworking professionals and businesses may choose to write off the cost of these expenses in lieu of recovering those costs over time through depreciation. The new Recovery Act extends the small-business expensing write-off (Section 179), increased temporarily as part of last fall’s Emergency Economic Stabilization Act.
For 2009, a woodshop or business can write off up to $250,000 of the cost of newly acquired equipment. The $800,000 ceiling, beyond which the deduction is reduced, is carried over for 2009.
A write-off bonus
Bonus depreciation was introduced as a temporary measure to stimulate the economy following the terrorist attacks on Sept. 11, 2001. Last year, lawmakers allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule. They did this by permitting businesses to immediately write off 50 percent of the cost of depreciable property such as equipment, wind turbines, solar panels, and computers acquired in 2008.
The new rules extend for another year a 50-percent bonus depreciation allowed for property with a recovery period of 10 years or longer. Unlike Section 179, expensing that is available for new or used property; bonus depreciation is available only for new property or equipment.
Also extended for bonus depreciation purposes is the regular dollar cap placed on vehicles used in the business, as part of the business or provided to the woodshop’s owner. The cap for new vehicles placed in service in 2009 is raised once again by $8,000. This increase mirrors the temporary 2008 cap increase resulting in a $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for 2009.
Remember, however, as with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might, for a tax year, consider making an election-out (opt-out) are when the woodworking business has about-to-expire NOLs or anticipates being in a higher tax bracket in future years.
Discounted wage payments
The Work Opportunity Tax Credit (WOTC) rewards employers who hire members of “targeted groups,” such as welfare recipients, the disabled, etc. Under current law, businesses can claim a WOTC equal to 40 percent of the first $6,000 of wages paid to employees in one of nine targeted groups. The Recovery Act extends the WOTC to include two new targeted groups: unemployed veterans and disconnected youth.
Generally, the WOTC is a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans, and $3,000 for qualified summer youth employees). The percentage of qualifying wages is 40 percent of first-year wages for a maximum credit of $2,400.
New-markets tax credit
Among incentives offered to investors who invest in or make loans to small businesses located in low-income communities is the New Markets Tax Credit (NMTC). The NMTC is a credit for qualified equity investments made to acquire stock in a corporation or a capital interest in a partnership that is a qualified community development entity (CDE).
The NMTC, through the CDE entity, funds investments (capital, equity or a loan) to any qualified low-income community business. The NMTC program has increased thanks to the Recovery Act’s allocation of $5 billion for 2008 and 2009.
Qualified small-business stock
Ordinary deduction treatment is available to individual investors on the sale of stock or the bankruptcy of a company. Under the old rules, an individual investor could exclude 50 percent of any gain realized upon the sale or exchange of “qualified small-business stock” held for more than five years. That means an incorporated woodshop or woodworking business could create a unique type/class of stock, called Section 1244 stock, using as an incentive the fact that only part of the eventual gain is taxable income for the investor.
Industrial development bonds
Under current law, certain manufacturing facilities are eligible for tax-exempt bond financing. The new law amends the definition of a manufacturing facility for the purposes of industrial development bond (IDB) financing to facilities used in the manufacturing or production of tangible personal property. The Recovery Act also clarifies the physical components of a manufacturing facility qualifying as “ancillary” and therefore subjected to a 25 percent limitation on the amount of bond issuance used to build or reconstruct those components.
Deferring debt income
When debt is forgiven, taxable income usually results unless the woodworking business is insolvent or in bankruptcy. The new law allows some woodshops and businesses to choose to recognize taxable income resulting from the cancellation of indebtedness over a five-year period beginning in 2014. Although all the debt discharge income will eventually be recognized, the taxpayer benefits from the deferral of tax to later years.
Some woodworking professionals would be allowed to recognize so-called “cancellation of debt income” (CODI) over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after Dec. 31, 2008 and before Jan. 1, 2011.
Built-in gains tax
The stimulus bill temporarily shortens, from 10 to seven years, the holding period for assets subject to the built-in gains tax imposed after a regular C corporation elects to become an S corporation. This reduction applies to regular corporations that convert to S corporation in tax years beginning in 2009 and 2010.
The built-in gains tax prevents an incorporated woodshop or business from avoiding corporate level tax on the disposition of appreciated assets it acquired while a regular corporation by first converting to S status. However, it also discourages S conversions in situations in which the business may not otherwise survive under regular corporation rules. The new law will give shareholders more flexibility during the current economic crisis.
Energy tax credits
Under the tax rules, businesses can claim a 30 percent energy tax credit for energy property placed in service, including fuel cell, solar, small wind energy and geothermal heat pump property.
The Recovery Act eliminates the credit cap applicable to qualified small wind energy property. This is property that uses a qualifying small wind turbine (with a nameplate capacity of not more than 100 kilowatts) to generate electricity. It does not include any such property after 2016 and, under the pre-Recovery Act tax rules, the credit can not exceed $4,000 per year.
The American Recovery and Reinvestment Act of 2009 provides immediate relief to both individuals and businesses with most of the tax incentives retroactive to Jan. 1, 2009, and much of that tax relief will be concentrated within the next two years. While the overall size of the new law is massive, some provisions have been pared back or eliminated altogether after the political debate that raged in Congress. For the owner or manager of any woodworking business, professional advice is almost a necessity to ensure the operation will profit from the new Recovery Act.
Mark E. Battersby is a freelance tax and financial writer based in Ardmore, Pa.
This article originally appeared in the May 2009 issue.