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Two Expanded Business Tax Breaks Deserve Your Attention

June 22, 2009

Two valuable tax breaks were expanded earlier this year that can provide many businesses with substantial benefits if they act soon. The American Recovery and Reinvestment Act of 2009 (ARRA) extended the 50% bonus depreciation through 2009, making it more affordable for businesses to invest in asset purchases this year. The act also expanded the net operating loss (NOL) carry back period for smaller businesses with 2008 NOLs, potentially providing them with a much needed cash infusion this year.

Bonus depreciation extended

You can take the special 50% bonus depreciation allowance — in addition to normal depreciation — on certain assets placed in service during calendar year 2009. The bonus depreciation is equal to 50% of the property’s adjusted basis. Qualifying assets include: • New tangible property with a recovery period of 20 years or less, such as office furniture and equipment; • Off-the-shelf computer software; • Water utility property; and • Qualified leasehold improvement property.

In addition, bonus depreciation allowed under the same act for property with a recovery period of 10 years or longer, transportation property, and certain aircraft was extended through 2010. Even though the improved cash flow available through bonus depreciation will be a boon to companies caught in the credit crunch, there are a few traps to watch out for. As bonus depreciation expires, a “boomerang effect” is likely to impact cash flow negatively in years to come. When depreciation is front-loaded, older assets won’t provide their traditional tax shield later on, triggering higher taxable income in subsequent years.

In the final analysis, bonus depreciation doesn’t change the total amount that eventually will be written off — only the timing of the deduction. If you choose to take the 50% bonus depreciation in 2009, use that cash wisely with an eye toward subsequent years, when write-offs related to previous capital investments won’t be nearly as generous.

NOL carry back expanded

Generally, an NOL may be carried back two years to generate a current tax refund, providing a cash infusion in times of loss. For 2008 (not 2009), ARRA extends the maximum NOL carry back to up to five years for small businesses with gross receipts of $15 million or less. You can choose whether to carry the loss back two, three, four or five years. Any loss not absorbed in the prior periods is then carried forward for up to 20 years. You also can choose to waive the carry back period entirely and carry the loss forward.

So how do you decide which course to take? If the prior years have minimal refund potential and you’re confident your company will have taxable income going forward, an election to forgo a carry back in favor of a carry forward (which will minimize your future years’ estimated tax payments) may make sense. If your business can benefit from the NOL carry back, however, you may want to carry the loss back and get crucial cash back now.

ARRA-related bonus depreciation provisions (discussed above) may also be helpful in maximizing your current year NOLs. If your business uses the accrual method of accounting for tax purposes, you can increase this year’s NOL with inventory write-downs, with bad debt write-offs or through a reduction of accrued expenses. Cash basis companies, on the other hand, may benefit from accelerating depreciation deductions, maximizing retirement plan funding, selling off devalued assets or prepaying deductible expenses before year end.

In considering your business’s carry back and carry forward options, be sure you evaluate any alternative minimum tax (AMT) implications and how your decision will impact state taxes. In the case of a sole proprietorship or flow-through entity, the new rules also can apply to an individual NOL caused by losses from a qualifying small business.

Cash is king

The best advice, as always, is to check with your tax advisor about the pros and cons of the tax strategies mentioned in this article. It could be that an NOL carry back, perhaps enhanced by the 50% bonus depreciation deduction, will provide the shot of cash your company needs during these difficult times.

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