Tax News E-Alert

Volume 2, Issue 2, February, 2009

On February 17, 2009, President Obama signed the "American Recovery and Reinvestment Act" (the 2009 economic stimulus act). The purpose of this newsletter is to inform you of how this act will affect your business.

Extension of Bonus Depreciation. The new law extends the 50 percent bonus depreciation for qualifying properties purchased and placed in service in 2009.

Extension of Enhanced Small Business Expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenditures, small business taxpayers may elect to write off the cost of these expenditures in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the capital expenditure ceiling limit to $800,000 (the Section 179 deduction is reduced dollar-for-dollar for capital expenditure in excess of $800,000). The new law extends these temporary increases for capital expenditures incurred in 2009.

Expanded Loss Carryback of Net Operating Losses for Small Businesses. Under the previous law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Incentives to Hire Unemployed Veterans and Disconnected Youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The new law expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009, or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youth if they are between the ages of sixteen and 25 and have not been regularly employed or attended school in the past six months.

Observation.  Consider updating your recruiting and hiring procedures to take advantage of this credit. Also review to determine if you may be eligible for similar State or local tax breaks or subsidies (e.g. for training).

Election to Trade Bonus and Accelerated Depreciation for Otherwise-Deferred Credits is Optionally Extended.  The new law extends a previous tax provision for which a corporation can choose to forego bonus and accelerated depreciation in exchange for being allowed to use, as refundable tax credits, otherwise-deferred "pre-2006 credits" (research credits and credits for AMT paid that is attributable to tax years beginning before 2006).

Delayed Recognition of Certain Cancellation of Debt Income. An issuer realizes debt discharge income on the repurchase of a debt instrument for less than its adjusted issue price.  A repurchase includes the retirement of a debt instrument, conversion of a debt instrument into stock of the issuer, or exchange of a newly-issued debt instrument for an existing debt instrument. Under the old law, the debt discharge income realized on the repurchase of a debt instrument had to be recognized in the year of repurchase.

Under the new law, a taxpayer can elect to have debt discharge income from the reacquisition of an applicable debt instrument after December 31, 2008, and before January 1, 2011, included in gross income ratably over the fix tax years.  The income inclusion period is from 2014 through 2018.

Observation.  While the taxpayer benefits from having the tax deferred to later years, he should not make the deferral election if it has an expiring or unused NOL that can be used to offset the debt discharge income or if the debt discharge income qualifies for one of the exclusions which may be more beneficial than the deferral.

Qualified Small Business Stock. The new law increases the exclusion for gain from the sale of certain small business stocks held for more than five years from 50% to 75% for stocks issued after the enactment date and before 2011.

S Corp Holding Period.  Under the new law, no tax is imposed on the net unrecognized built-in-gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years.  In other words, the holding period of assets subject to the built-in gains tax is reduced from ten years to seven years if the S corporation election was made in the 2002 or 2003 tax year.

I hope this information is helpful.  Please feel free to contact me at 310-697-1501 or rwelling@rwac.com if you would like more details about this or any other aspect of the new law. 

Best regards,

Richard Welling

Richard Welling & Co., LLP

3625 Del Amo Blvd., Suite 290

Torrance, CA 90503

(310) 697-1500

www.rwac.com

This publication is designed to provide accurate and authoritative information and is distributed with the understanding that legal, tax, accounting, and financial planning issues have been checked with resources believed to be reliable. Some material may be affected by changes in law or in the interpretation of such laws. Do not use the information in this article in place of personalized professional assistance. If you need to discuss any issues found in this article, give us a call. Copyright 2008