With many of these tax provisions set to expire at the end of 2009, business taxpayers with the cash and the credit score considering purchases of business equipment may want to maximize their potential tax savings before the end of the year. Taking advantage of these tax benefits can reduce current taxable income and increase cash flow.

Bonus depreciation

Bonus depreciation and Code Sec. 179 expensing are the primary business incentives set to expire at the end of 2009. Congress extended 50 percent additional first-year bonus depreciation through December 31, 2009 in the 2009 Recovery Act. You deduct 50 percent of the property’s cost basis in the first year, before reducing the basis for normal depreciation computed over the property’s recovery period (formerly called its useful life), including the first year. However, you can irrevocably “elect out” of bonus depreciation.

Bonus depreciation is available for property with a depreciation (recovery) period of 20 years or less, water utility property, off-the-shelf computer software, and qualified leasehold property (farming equipment also qualifies for bonus deprecation, as well as first-year expensing). The property must be new, and therefore begin with the taxpayer. It must be purchased and “placed in service” before December 31, 2009.

Vehicle depreciation

Through 2009, Congress raised the limits on depreciation of “luxury” automobiles for 2009. The first-year depreciation limit, which is ordinarily $3,060 for vehicles purchased in 2009, has been raised to $11,060 (an $8,000 increase) through the end of the year for property that would otherwise qualify for bonus depreciation. The both limits are higher for vans and trucks. To qualify, the vehicle must be used more than 50 percent for business. For the additional $8,000 deduction, the vehicle must be new. Used vehicles first used in a taxpayer’s business still qualify for a deduction, but only up to the $3,060 limit.

First-year expensing

In lieu of bonus depreciation, you can elect to write off part, or all, of the cost of one or more assets, up to the limit on “Code Section 179 expensing.” The limit is $250,000 through 2009. Unlike bonus depreciation, first-year expensing applies to tax years beginning in 2009. Therefore, a fiscal-year taxpayer is not faced with a December 31, 2009 deadline for acquiring property and placing it into service. Additionally, expensing can be claimed on used as well as new property, unlike bonus depreciation.

Note. If you expense property that is also eligible for bonus depreciation, you should deduct the expensed amount from the property’s basis before claiming deprecation. First-year expensing is limited to your taxable income for the year, and cannot be used to generate or increase a net operating loss for the current year. Thus, if you are operating at a loss you should not claim expensing.

The amount that you can expense must be reduced dollar-for-dollar by the amount of the Code Section 179 property placed in service during the year exceeds a specified threshold. The threshold for 2009 is $800,000. The benefit does not fully phase out until investment reaches $1.05 million.

Shortened recovery period

Congress reduced the recovery period from 39 years to 15 years for leasehold improvements, restaurant property and retail improvement property placed in service by December 31, 2009. Leasehold improvements also qualify for bonus depreciation as well.

Investing in assets for your business is not just about taxes. You need to consider whether buying business assets makes financial sense this year. However, if you are contemplating investing in your business this year, act before the end of 2009 to take advantage of these incentives.

If you have questions about these and other tax incentives for investing in your business, please call our office. In customizing a plan to your special business needs, we also will be ready to revisit any year-end strategy should Congress decide to extend, with or without modification, any of the depreciation and expensing tax benefits now available

If you have any questions about how ARRA will affect your business, please contact our office.

De minimis fringe benefits

A de minimis fringe benefit is any property or service whose value is so small or minimal that accounting for it would be administratively impracticable. Such benefits are excluded from an employee’s gross income. Examples of de minimis fringe benefits include:

Occasional overtime meals and meal money. To qualify as a tax-free de minimis fringe benefit, the meal or meal money must be provided to your employees so that they can extend their normal workday, thereby enabling them to work overtime. Such meals and meal money can only be provided occasionally. This means that they generally cannot be provided routinely, when overtime work is a common occurrence or are contractually mandated for overtime work. Occasional snacks may also qualify as a de minimis fringe benefit but if the snacks are provided daily, they would not qualify.

Occasional transportation. Transportation costs can also qualify as de minimis fringe benefits. Taxi-fare for an employee to return home after working late, for example, may be a de minimis fringe benefit. The transportation must be occasional.

Holiday gifts. Traditional holiday gifts, such as a Thanksgiving turkey, with a low fair market value can generally qualify as a de minimis fringe benefit. However, cash or a cash equivalent such as a gift certificate in lieu of the property, do not qualify. In fact, cash and cash equivalent fringe benefits, no matter how little, are never excludable as a de minimis fringe benefit, except for occasional meal money or transportation fare.

E-filing. Electronically filing an employee’s tax return, but not paying for someone to prepare the return, may qualify as a de minimus fringe benefit.

Telephone calls. An employer may treat the cost of local telephone calls made by employees as a de minimis fringe benefit.

Working condition fringe benefits

A working condition fringe benefit is any type of property or service provided to your employees to the extent that the cost of such property or services would have been deductible by the employee as a trade or business expense, depreciation expenses, or as if the employee paid for the property/services himself or herself. Working condition fringe benefits have special tax rules for employers and employees.

Vehicles. If an employer-provided vehicle is used 100 percent for business and the use is substantiated, use of the vehicle is considered a working condition fringe benefit. The value of use of the vehicle is not included in the employee’s wages. However, when an employer-provided vehicle is used by the employee for both personal and business purposes, an allocation between the two types must be made. The portion allocable to the employee’s personal use is generally taxable to the employee as a fringe benefit. The portion allocable to business use is generally considered a working condition fringe benefit and is excludable from the employee’s income. 

No additional cost services

If an employer-provided service does not cause the employer to incur any substantial additional costs, it may qualify as a “no additional cost service” and be excludible from the employee’s income. The service must be offered to customers in the employer’s ordinary course of business. Some of the most common examples are airline, rail and bus tickets and hotel and motel rooms provided at a reduced rate or at no cost to employees. This benefit can be offered to retired employees as well as active employees. There are special rules for highly-compensated employees.

If you are considering alternatives to salary compensation, and would like to know what your options are, please contact our office. We can discuss the tax benefits and drawbacks of providing your employees with various types of fringe benefits.

Bonus Depreciation. The ARRTA extends bonus depreciation under the 2008 Economic Stimulus Act, allowing businesses to immediately write-off an additional 50-percent of the cost of qualifying depreciable property placed in service before 2010. The additional 50-percent first-year bonus depreciation applies retroactively to capital expenses incurred on or after January 1, 2009. Qualified property includes most types of new property, including equipment, computers, tractors, wind turbines and solar panels.

The ARRTA also extends through 2010 additional first-year bonus depreciation for property with a recovery period of 10 years or longer, for transportation property (for example, tangible personal property used to transport people or property, and for certain aircraft).

Note. Effective January 1, 2009, the ARRTA law also increases the regular dollar caps for new passenger vehicles placed in service after 2008 and before 2010 by $8,000 when bonus depreciation is claimed.

Code Sec. 179 Expensing. For 2009, the ARRTA extends the Code Sec. 179 expensing amounts, which had been increased by the 2008 Economic Stimulus Act. For 2009, the Code Sec. 179 expensing amount is $250,000 and the investment ceiling is $800,000.

Five-Year NOL Carryback. The ARRTA allows certain small businesses to elect a five-year carryback of net operating losses (NOLs) arising in 2008. Only qualified small businesses with average gross receipts of $15 million or less qualify for the longer carryback. Eligible businesses can elect to carryback 2008 NOLs three, four or five years. The new carryback treatment applies only to NOLs arising in tax years beginning or ending in 2008. Quick refunds apply if your business qualifies.

AMT/R&D Credits Election. Through 2009, the ARRTA temporarily extends the ability of businesses to accelerate the recognition of a portion of their accumulated AMT and research and development (R&D) credits instead of taking bonus depreciation. In effect, this allows an immediate cash refund for these credits.

Work Opportunity Tax Credit. Businesses can claim a Work Opportunity Tax Credit (WOTC) generally equal to 40 percent of the first $6,000 of wages paid to employees who are in one of nine targeted groups. The ARRTA adds (1) unemployed veterans and (2) disconnected youth to the list of targeted groups. The new categories apply to individuals who are hired and begin work in 2009 or 2010.

Cancellation of Debt Income. Under the ARRTA, eligible businesses can make an (irrevocable) election to recognize certain cancellation of debt income (CODI) ratably over a five-year period, beginning in 2014. The election applies to certain types of business debt repurchased by the business after during 2009 and 2010.

S Corp Built-In Gain Period. Current law provides that if a C corporation converts to an S corporation the conversion is not a taxable event. However, the S corporation usually must hold its assets for 10 years after the conversion in order to avoid being taxed on any built-in gains that existed at the time of the conversion. For S corp sales of their C corp assets  in 2009 and 2010, however, the ARRTA temporarily shortens the holding period, from 10 to seven years, for sales of assets subject to the built-in gains tax imposed after such a conversion.

Qualified Small Business Stock. Pre-ARRTA law allowed noncorporate investors to exclude 50 percent of the gain from the sale of certain qualified small business stock (QSBS) held for more than five years. The ARRTA increases the exclusion to 75 percent for QSBS acquired after February 17, 2009 and before 2011. A “qualified small business” is one that does not have more than $50 million in assets and conducts an active trade or business.

Estimated Tax Payments. For individual taxpayers with income from small businesses, the ARRTA temporarily reduces 2009 required estimated tax payments for certain small businesses. Under the new law, 2009 quarterly estimated tax payments may now be based on 90 percent – instead of 100 percent – of the taxpayer’s 2008 returns. For purposes of the new provision, a “small business” is one that does not employ more than an average of 500 people, and the individual’s adjusted gross income is less than $500,000. The individual also must certify that at least 50 percent of the gross income shown on his or her return for the preceding tax year was income from a “small trade or business.”

Energy Incentives. A number of the energy tax incentives in the ARRTA are targeted to businesses. The ARRTA:

• Extends and modifies the Code Sec. 45 renewable production tax credit.
• Expands the Code Sec. 48 energy investment credit to include qualified small wind energy property.
• Allows the Code Sec. 48 investment tax credit to be claimed in lieu of the Code Sec. 45 production tax credit.
• Removes the individual dollar limits on certain energy tax credits for qualified small wind energy property, qualified solar water heating property, and qualified geothermal heat pumps.

If you have any questions about the business incentives in the ARRTA, please contact our office.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.