Small Business Tax Strategies

Smart small business owners save thousands of dollars per year on their personal and business taxes by taking advantage of the legal loopholes that the government creates for their unique tax situation. Small Business Tax Strategies cuts through tedious tax code to reveal the bonanza of completely legal opportunities to grow personal wealth and secure an enjoyable retirement.  Learn more about Small Business Tax Strategies and the two free reports you’ll get when you subscribe...

The massive new “American Recovery and Reinvestment Act of 2009” hammered out by Congress—and promptly signed by President Obama on Feb. 17—is bursting at the seams with tax breaks designed to help both individuals and small businesses. Generally, the tax provisions are retroactive to Jan. 1, 2009.

Here’s a roundup of 14 tax strategies under the new law:

Tax breaks for individuals

1. Put new tax credit to work. The centerpiece of the president’s tax plan is the new “Making Work Pay Credit.”  For 2009 and 2010, a worker can claim a credit equal to the lesser of 6.2% of earned income or $400 for single filers; $800 for joint filers. The credit phases out at a 2% rate if your AGI is $75,000 or above for single filers; $150,000 for joint filers. 

Tip: The credit also is available to self-employed individuals. Apply it to your net earnings from self-employment activities.

2. Pocket one-time tax payment. The new law authorizes a special payment of $250 to certain taxpayers living on a fixed income, such as Social Security recipients, railroad and government retirees and disabled veterans. It’s likely the checks will be distributed in the same manner as the 2008 stimulus payments.

Tip: If you receive this one-time economic recovery check, you must reduce any Making Work Pay Credit for 2009.

3. Seek shelter from the AMT. Instead of waiting until the end of the year, Congress provided an early alternative minimum tax (AMT) “patch” for 2009.

First, the new law extends the rule allowing you to use certain personal credits to offset AMT liability. Second, it bumps up the exemption amounts that are part of the AMT calculation. The new exemption amounts for 2009 are $46,700 for single filers (up from $46,200 for 2008); $70,950 for joint filers (up from $69,950 for 2008).

Tip: The new law changes will save an estimated 26 million taxpayers from the clutches of this stealth tax. 

4. Gear up for new car-buyer deduction. If you buy a new vehicle this year, you may be entitled to a deduction for the sales and excise taxes attributable to the first $49,500 of the purchase price. But the deduction phases out if your AGI exceeds $125,000 for single filers; $250,000 for joint filers.

The list of eligible vehicles includes cars, motorcycles, light trucks, and SUVs, as long as you’re the original buyer and the vehicle doesn’t weigh more than 8,500 gross pounds. Motor homes may also qualify.

Tip: The new deduction is available only for purchases between Feb. 17 and Dec. 31, 2009.

5. Learn new education credit rules. For 2009 and 2010, the new law temporarily enhances the Hope Education Credit (now dubbed the “American Opportunity Tax Credit”).

The maximum credit of $1,800 for 2008 is available only for a student in the first two years of college. Under the revamped credit, the maximum amount of $2,500 may be claimed for all four years of study. Furthermore, the credit phases out at much higher income levels. The phaseout begins when your AGI exceeds $80,000 for single filers (up from $48,000 for 2008); $160,000 for joint filers (up from $96,000 for 2008).

Tip: The prior rules still apply to tuition paid in 2008 for a semester beginning in 2009.

6. Latch onto homebuyer’s credit. If you or another family member didn’t take advantage of the first-time homebuyer credit last year, now may be the right time.

The new law retools the credit for homes purchased in 2009. Previously, the credit applied to homes purchased after April 8, 2008, and before July 1, 2009. Under the new law, the maximum credit increases from $7,500 to $8,000 for purchases after 2008 and before Dec. 1, 2009. Plus, you don’t have to repay the credit to the IRS if you live in the home for at least three years.

Tip: The phaseout rules for the credit still apply. The credit phases out when your AGI exceeds $75,000 for single filers; $150,000 for joint filers.

7. Soften pain of unemployment. If you’ve been laid off or terminated from your job, the new law provides some relief. The first $2,400 of unemployment benefits received in 2009 is exempt from federal income tax.

Tip: Any unemployment benefits received above the $2,400 threshold remain fully taxable.

Tax breaks for small businesses

8. Ramp up Section 179 deductions. The new law preserves the higher Section 179 deduction limits for another year. Your business can write off up to $250,000 of qualified assets (including both new and used property) placed in service in 2009. Deductions are reduced on a dollar-for-dollar basis to the extent assets placed in service exceed $800,000.

Tip: Prior to this new law change, the Section 179 deduction for 2009 was scheduled to be $133,000 with a $530,000 reduction threshold.

9. Add on bonus depreciation. Similar to the enhanced Section 179 tax break, your business can claim 50% bonus depreciation for qualified new assets placed in service in 2009. This tax break applies through 2010 for certain property with a cost recovery period of 10 years or longer, transportation property and certain aircraft.

Tip: Due to the revived bonus depreciation break, the dollar cap for new vehicles subject to the “luxury car” rules for 2009 is raised by $8,000.

10. Carry back NOLs further. Ordinarily, a business can carry back net operating losses (NOLs) for a period of two years. Under the new law, a small business with gross receipts of $15 million or less can carry back NOLs for up to five years. This change applies to NOLs in tax years beginning or ending in 2008.

Tip: As soon as your business files a 2008 return claiming an NOL, you begin the process of getting cash back in your pocket.

11. Bypass bonus depreciation for credits. Under the 2008 stimulus law, a corporation was allowed to take advantage of accumulated AMT and research credits in lieu of claiming bonus depreciation on assets placed in service in  2008. The new recovery law extends this option through 2009.

Tip: Your business can change an ’08 election to 2009 or make a 2009 election when no ’08 election was made. This differs sharply from previous IRS guidance.

12. Sidestep BIG tax for S corps. The built-in gains (BIG) tax applies to C corporations converting to S corporation status. It hits the company if it disposes of appreciated assets acquired when it was a C corp. Normally, the holding period for assets subject to the BIG tax is 10 years, but the new law shortens the period to seven years for gains realized in tax years beginning in 2009 and 2010.   

Tip: This tax change gives more flexibility to business owners who might benefit from a switch to S corp status.

13. Hire more target-group workers. Your business may claim a Work Opportunity Tax Credit (WOTC) of up to $2,400 for each worker hired from one of several disadvantaged “target groups.” The new law creates two new groups eligible for the credit. For workers hired and starting work in 2009 and 2010, the WOTC covers unemployed veterans and “disconnected youth” between the ages of 16 and 24. 

Tip: Remember that the WOTC was combined with the Welfare-to-Work Credit for individuals who begin work after Dec. 31, 2006, and before Sept. 1, 2011.

14. Scale back estimated tax payments. The new law decreases the estimated tax installments required for individuals for 2009 if more than half of the income reported on your ’08 return comes from small business activities and last year’s adjusted gross income was less than $500,000. Instead of basing payments on 100% of your prior year’s tax, you may use a 90% figure. For this purpose, a “small business” is defined as a trade or business with an average of 500 or fewer employees.

Tip: The first quarterly installment for 2009 must be paid by April 15.