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Stimulus and your Store

Small-business owners, Uncle Sam's plan includes help for you.
By Mark E. Battersby
Published: April 14, 2009
The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package passed recently by Congress, includes nearly $300 billion in potential tax savings.

Every hobby retailer can share in more than $75 billion in tax benefits for 2009 and 2010. The Recovery Act extends "bonus" depreciation, increases the Section 179 first-year write-off for newly acquired equipment and makes two new groups eligible for the work-opportunity tax credit. There is also a 5-year, rather than 2-year carryback of net operating losses (NOLs) that may return taxes paid in earlier years to the coffers of many small businesses.

Cash infusions from losses
The Net Operating Loss (NOL) carryback provision provides the greatest potential savings of all the business tax provisions in the new stimulus package. Under current law, NOLs are carried back to the two taxable years before the year that the loss arises. NOLs may also be carried forward to each of the succeeding 20 taxable years, after the year of loss.

The Recovery Act gives retailers 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. The extended NOL carryback provision has the potential to provide an immediate cash infusion to troubled businesses.

Faster, larger write-offs continued
To help small businesses quickly recover the cost of newly acquired equipment and other certain capital expenses, hobby business owners or managers 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 (Section 179) write-off. For 2009, a hobby retailer 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 9/11 terrorist attacks. It was enhanced in 2003 and extended several times. Businesses can recover the cost of capital expenditures over time according to a depreciation schedule. Last year, lawmakers allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write off 50% of the cost of depreciable property such as equipment, wind turbines, solar panels, POS systems and computers acquired in 2008.

The new rules extend for another year the 50% bonus depreciation allowed for property with a recovery period of 10 years, or longer. Unlike Code Section 179 - expensing that is available for new or used property - bonus depreciation is available only for new property or equipment.

Higher caps on vehicle write-offs
The regular dollar cap placed on vehicles used by businesses was also extended for bonus depreciation purposes. The cap for new vehicles placed in service in 2009 is raised 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 that a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might consider making an election out for a tax year are when the business: (a) has about-to-expire NOLs or (b) anticipates being in a higher tax bracket in future years.

Discounted wage payments for some new workers
The Work Opportunity Tax Credit (WOTC) rewards employers that hire member of "targeted groups," such as welfare recipients and the disabled. Under current law, businesses can claim a WOTC equal to 40% 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: (1) unemployed veterans and (2) disconnected youth.

A snake in the woodpile: COBRA
The Recovery Act allows an individual who is involuntarily separated from employment between Sept. 1, 2008, and Jan. 1, 2010, to elect to pay 35% of his/her COBRA coverage and have it treated as payment in full.

The former employer, however, will be required to pay the remaining 65% and, in effect, will be reimbursed by crediting those amounts against income tax withholdings and payroll taxes it is otherwise required to remit to the government.

Financing help on the way
The 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, 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% of any gain realized upon the sale or exchange of "qualified small-business stock" held for more than five years. That means an incorporated hobby retailer could create a unique class of stock, called Section 1244 stock, with the incentive that only part of the eventual gain would be taxed.
The Recovery Act makes small-business stock more attractive by increasing the amount of gain from the sale of small business stock (held for 5+ years) that may be excluded from 50% to 75% if issued after the legislation's enactment but before 2011.

Temporary small-business estimated tax payment relief: Not exactly a financing incentive, but it will allow small businesses to keep more money in their pockets. The Recovery Act decreases estimated tax payments for individuals whose incomes in 2009 primarily come from a small business. Rather than being required to make quarterly estimated tax payments based on 100% of their 2008 returns, the new law allows computations based on 90%.

Cancelled debt = income now deferred
When debt is forgiven, taxable income usually results unless your shop is insolvent or in bankruptcy. The new law allows some hobby shops 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 small businesses 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.

The built-in gains of corporations
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 C corporation elects to become an S corporation. This reduction applies to C corporations that convert to S corporations in tax years beginning in 2009 and 2010.

The built-in gains tax prevents incorporated retailers 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.

A little something for everyone
The Recovery Act includes an alternative minimum tax (AMT) patch for 2009. The patch was designed to insulate approximately 26 million middle-income taxpayers from the reach of the AMT. The AMT patch will save taxpayers approximately $70 billion.

The 2009 AMT patch raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are: $70,950 for joint filers and surviving spouses (up from $69,950 in 2008); and $46,700 for singles and heads of households (up from $46,200).

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. Most of the $280 billion in tax relief is concentrated within the next two years.

While the overall size of the new law is massive, some provisions have either been pared back or eliminated during the course of the political debate. For the owner or manager of any hobby store, professional advice is a necessity to ensure the operation will profit from the new Recovery Act.

Mark E. Battersby has been reporting formore than 25 years on tax and financialnews that impact small business. He is theauthor of four books plus weekly and monthly columns for various business publications.

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COBRA: Understanding the law
According to the American Recovery and Reinvestment Act of 2009 (AARA) signed by President Obama on Feb. 17, 2009, you will be required to pay 65% of the COBRA premium for any employee terminated after Sept. 1, 2008.

Who is eligible:
  • Employees who involuntary terminated (for reasons other than gross misconduct) with income less than $125,000 per year or a family income of less than $250,000 per year

  • Employees terminated after Sept. 1, 2008, and before Dec. 31, 2009

  • Employees who were participating in group coverage offered by the employer at the time of layoff

  • Group coverage will no longer be available for employees terminated from a company liquidated in a Chapter 7 bankruptcy

  • If the employee was laid off on or after Sept. 1, 2008, and did not choose COBRA within the required 60-day window, they are allowed to become eligible for COBRA again, as long as the former employer continues to exist and offer group coverage

  • The terminated employee's spouse, former spouses and dependent children

  • Employer Obligation:
  • Employer is required to pay 65% of "qualified beneficiary" COBRA for a 9-month duration; employer will be reimbursed for this amount on his quarterly payroll tax return

  • The new COBRA subsidy provisions also apply to insurers required to offer continuation coverage under state law similar to the federal COBRA law

  • Employee Obligation:
  • Terminated employee is required to pay 35% of the total cost

  • Who is NOT eligible:
  • Employees terminated before Sept. 1, 2008, or after Dec. 31,2009

  • Companies with fewer than 20 employees are not required by federal law to offer COBRA; check with benefits administrator as some states (e.g. California) require employers with fewer than 20 to offer continuation coverage

  • Terminated employees who are eligible for coverage on other group plans such as on a spouse's medical plan or Medicare are not eligible for the premium reduction

  • Terminated employees of churches and certain religious organizations

  • Provisions:
  • There is no premium reduction or reimbursements for coverage that began prior to Feb. 17, 2009

  • - Payroll Masters

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