Tax Law Changes for 2009
By Vistage member Jeff Call, Managing Director of Personal Financial Services, Bennett Thrasher PC
The federal stimulus plan and other legislation has created significant tax law changes that offer tax-savings on both personal and business tax positions. Below are explanations of the changes and strategies you can employ to take advantage of the new laws and complement your overall financial plan.
Changes Affecting Businesses
The stimulus plan, also known as American Recovery and Reinvestment Act of 2009 (ARRA) includes incentives for businesses and will create tax savings and additional cash flow that can be used to spur economic growth.
Extended Bonus Depreciation and IRC Section 179 Expensing
ARRA extends the additional 50 percent first-year depreciation through 2009. The act also extends the temporary $8,000 increase in the first-year depreciation limit that applies to passenger automobiles that qualify for 50 percent bonus depreciation. In addition, ARRA also extends the 2008 limits relating to Section 179 expensing. For 2009, the maximum that a taxpayer can expense using Section 179 is $250,000 (this amount is reduced dollar for dollar for the cost of qualifying purchases in excess of $800,000). If you are considering significant fixed asset purchases in the near future, it may make sense to accelerate these to the 2009 tax year to take advantage of these deductions.
Net Operating Loss (NOL) Carrybacks
The act allows small businesses (less than $15 million in gross receipts) to elect to extend the general 2-year carryback rule for 2008 NOL’s to 5 years. Tax rates are expected to increase after the tax cuts enacted during the Bush administration expire in 2010. For NOL’s generated beginning in 2009, it may be more beneficial to elect to carry the losses forward to reduce taxable income that is likely to be taxed at higher rates.
Recently, Congress passed an amendment to the NOL provision and extended it to 2009 and to include all businesses, not just those with income under $15 million as was the law for 2008. A taxpayer may make the election for only one taxable year, and the amount of any NOL carried back to the 5th taxable year is limited to 50% of the taxpayer?s income from that year. Those that made the eligible small business election carryback for 5 years in 2008 are eligible to make the election again in 2009. Eligible small businesses are also not subject to the 5th year 50% income limitation mentioned above.
Consolidated Omnibus Budget Reconciliation Act Continuation Premium Subsidy (COBRA)
The law requires certain group health plans to allow terminated employees to continue to participate in the group plan for a specified period of time after separation from employment. ARRA provides that for a period up to nine months an assistance-eligible individual is treated as having paid any premium required for COBRA coverage if the individual has paid at least 35% of the premium. Thus, if the eligible person pays at least 35% of the premium, the group health plan must treat the individual as having paid the full required premium and the individual is entitled to a 65% subsidy on the premium. If, as an employer, you provide this subsidy, then you can claim a corresponding credit on your quarterly/annual employment tax return (Form 941).
Tax Planning Tips for Businesses
While 2009 tax returns are not due until April 15, 2010, the time to evaluate your 2009 tax situation is right now. Certain tax planning strategies can increase your cash flow, but you must take action prior to the end of the year.
Strategies for Businesses with Increased Profits in 2009
If you expect your 2009 tax bracket to be higher than last year, look for opportunities to accelerate deductions or defer income. Deferring income to a year with a lower tax rate will decrease the taxes on that income. Similarly, accelerating deductions into the year with a higher tax rate will increase the value of that deduction.
- Opportunities to Defer Income
- Delay collection of business debts, rents, and payment for services (if operating on the cash method of accounting)
- Defer year-end compensation/bonuses to right after year-end
- Defer sale of capital gain property or take installment payments rather than lump-sum payments
- Postpone retirement plan distributions that are not required
- Opportunities to Accelerate Deductions
- Make next year’s charitable contributions before year-end
- Make deductible interest and property tax payments due in January prior to year-end
- Make Q4 state estimated tax payments prior to year-end (make sure that you will not be subject to the Alternative Minimum Tax for 2009)
- Accelerate alimony payments
You may not be able to control some of the items above, but it?s prudent to identify where you have some flexibility in the timing of these items.
Strategies for Businesses with Decreased Profits in 2009
If you expect the financial struggles of the past 15 months to put you in a lower tax bracket than previous years, you should look for opportunities to accelerate income and defer deductions. Hopefully 2010 will be a more prosperous year for your business and recognizing income during 2009 with the lower tax rate could provide significant savings. This timing strategy may not have a significant impact for your 2009 tax planning, but could have a major impact on your 2010 tax planning.
Take Advantage of Tax Cuts Before They Expire
Many of the tax cuts that were enacted during the Bush administration are set to expire at the end of 2010. As mentioned above, the billions of dollars spent on economic recovery efforts during 2009 will likely be paid for, in part, by tax increases on high net-worth individuals.
While no one knows for sure how tax rates will change, these are some changes that might take place:
- Top marginal tax rate may increase from 35 to 39.6 percent.
- 15 percent qualified dividend and long-term capital gain tax rates may increase to 20 percent.
- Healthcare bill may impose a surtax of 5.4 percent on singles with Adjusted Gross Income (AGI) over $500,000 and joint filers with AGI over $1 million.
- High-income taxpayers may lose up to 80 percent of their itemized deductions (charitable contributions, real estate taxes, state income taxes, and interest ) if their income is high enough.
Given these possible scenarios, revenue or income may be more valuable to you in 2010 than 2011. As you plan for the 2010 tax year, it?s important to keep these potential changes in mind.
With likely changes in law coming, proactive tax planning is more important than ever. We encourage you to be in touch with your tax adviser regarding your personal tax planning strategy to determine the tools and techniques that will place you in the best financial position.