Stimulus Bill Tax Provisions Help Small Business, Says IRS
While builders are focusing much of their attention on informing prospective first-time buyers of the $8,000 credit created by American Recovery and Reinvestment Act signed by the President in February, the Internal Revenue Service has been working to publicize the tax provisions in the stimulus package that are available to help many small businesses and self-employed individuals.
Among key highlights for small businesses:
- Deferral of Cancellation of Debt Tax. The stimulus legislation provides a deferral for tax that would be required for debt forgiveness due to business debt restructuring (e.g. AD&C loans). Under prior law, debt forgiveness — including certain term extensions, reductions of the principal or interest rate reductions greater than 25 basis points — gave rise to tax liability. For restructurings in 2009 and 2010, the stimulus bill allows a 10-year deferral of taxes due, with five years of complete deferral followed by 20% payments of the tax annually for five years.
For example, if a bank restructures a business loan by reducing its interest rate and extending the payment term, and in the process lowers the net present value of the loan by $100,000, that $100,000 is generally taxable income for the borrower under the tax code. If this restructuring occurs in 2009 or 2010, then the payment of the tax — up to $35,000 in liability — would be totally deferred for five years. And then it would be paid at up to $7,000 a year for the next five years — one-fifth of what is owed each year.
- Net Operating Loss Carryback. Small businesses with deductions exceeding their income in 2008 can use a new net operating loss tax provision in the stimulus law to get a refund of taxes paid over the past five years instead of the usual two. This provision applies only to qualified small businesses, which are those that reported an average of no more than $15 million in gross receipts for the three tax years 2006 to 2008; (the IRS has favorably clarified that the year of the tax loss is included in the gross receipts test; thus, 2006 through 2008, rather than 2005 through 2007.) The provision only applies for NOLs in tax year 2008.
For example, a qualified business with $5 million in average gross receipts over 2006 to 2008 experienced a $1 million loss in tax year 2008. If the business reported less than $1 million in total taxable income in tax years 2007 and 2006, the business would have to carry-forward a portion of its NOL deduction from tax year 2008. Under the stimulus bill provision, the business can carry back the NOL to tax years 2003, 2004 and 2005, and transform the NOL into a timely tax refund against prior taxes paid.
To accommodate the change in the tax law, the IRS has updated Publication 536, “Net Operating Losses (NOLs)for Individuals, Estates and Trusts,” as well as instructions for Form 1045 and Form 1139, which small business will use to take advantage of the carryback provision.
- Section 179 Deduction. A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as Section 179 property.
Under the stimulus bill, qualifying businesses can expense up to $250,000 of section 179 property for tax years beginning in 2009, up from $133,000 under the previous 2009 expensing limit. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.
The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.
The Recovery Act also includes the following business-related provisions:
- Reduction of Estimated Tax Payments. Normally, small businesses have to pay 110% of their previous year’s taxes in estimated taxes. The stimulus legislation permits small businesses to reduce their estimated payments to 90% of the previous year’s taxes.
- Extension of Bonus Depreciation Deductions Through 2009. Bonus depreciation is extended through 2009, allowing businesses to take a larger tax deduction within the first year of a property’s purchase.
- Capital Gains Tax Break for Investment in Small Business. Investors in a small business who hold their investments for five years can exclude from taxation 75% of their capital gains.
There is a wide range of provisions in the American Recovery and Reinvestment Act that may be helpful to the housing industry, and NAHB has compiled a list of them along with the potential benefits they provide. To read a summary of these provisions, click here.
For more information on the housing stimulus provisions, e-mail Robert Dietz at NAHB, or call him at 800-368-5242 x8285.