By Mark E. Battersby
The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package, includes almost $300 billion in potential tax savings. Every business, including metals producers and distributors, can share in over $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 adds two new groups to those whose first-year wages are reduced thanks to the work-opportunity tax credit. The business-related tax breaks also include tax-deferred debt forgiveness income. In addition, the measure includes a five-year, rather than a two-year, carryback of net operating losses that may return taxes paid in earlier years to the coffers of many service centers and other businesses.
Cash infusions from losses
The Net Operating Loss 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. A NOL may also be carried forward for the next 20 taxable years, after the year of loss.
The Recovery Act gives metal center operators 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.
Faster, larger write-offs
To help small businesses quickly recover the cost of newly acquired equipment and certain other capital expenses, metal center operators 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, or Section 179 write-off, increased temporarily as part of last fall’s Emergency Economic Stabilization Act. For 2009, a metals distributor 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 acts. 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 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write off 50 percent of the cost of depreciable property such as equipment and computers acquired in 2008.
The new rules extend for another year the 50 percent 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.
Discounted wage payments
The Work Opportunity Tax Credit 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 new employees from nine targeted groups. The Recovery Act extends the WOTC to include two new groups: unemployed veterans and disconnected youth.
COBRA: A snake in the woodpile
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 percent of his or her COBRA coverage and have it treated as paying the full amount. The former employer will be required to pay the remaining 65 percent, however. In effect, the employer will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it is otherwise required to remit to the government.
Financing help is on the way in the form of a new tax credit and investment incentives:
n 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. 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. 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.
n 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 service center could create a unique type or class of stock, called Section 1244 stock, using as an incentive the fact that only part of the eventual gain is taxed to the investor.
The Recovery Act makes small business stock more attractive by increasing the amount of gain from the sale of small business stock held for five years or more that may be excluded from 50 percent to 75 percent for stock issued after the date of enactment of this legislation and before 2011.
n 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 financing to facilities used in the manufacturing or production of tangible personal property.
Cancelled debt, income deferred
If another person or business pays a debt owed by a company such as a service center, the amount paid becomes taxable income. Similarly, if a creditor cancels a debt, or allows it to be paid off for less than the full amount owed, the amount forgiven is generally taxable income—unless, of course the service center is insolvent or in bankruptcy. Some metals businesses would be allowed to recognize so-called “Cancellation of Debt Income” over 10 years—deferring tax on CODI for the first four or five years and recognizing 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 S 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 regular C corporation elects to become an S corporation. This reduction applies to regular corporations that convert to S corporations in tax years beginning in 2009 and 2010.
The built-in gains tax prevents an incorporated metals distributor 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.
This massive stimulus bill, the American Recovery and Reinvestment Act of 2009, contains many new tax breaks and significant enhancements to existing deductions and credits. The new law provides immediate relief to both individuals and businesses with most of the tax incentives retroactive to Jan. 1, 2009. Much of the tax relief will be concentrated within the next two years.
During the long congressional debate, some early proposals were pared back or eliminated completely. What remains overall is a massive new tax law. Thus the owner of any metals business should seek professional advice to make sure he or she recovers as much as possible from the new Recovery Act.
Mark E. Battersby is a freelance writer and consultant on tax and financial issues based in Ardmore, Pa. He can be reached at 610-789-2480 or by e-mail at MEBatt12@Earthlink.net
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