By Robert Steere, Toolkit Staff Writer

There has been a lot of hoopla about the stimulating effects on the economy resulting from The American Recovery and Reinvestment Act of 2009 (the ARRA). Let's look together at the tax reduction provisions of the ARRA that relate to small business, and you can judge just how stimulating it will be for your business in the coming year.

A handful of provisions in the ARRA offer potential benefits to small businesses. These include "bonus" depreciation, increased first-year expensing of capital assets, 5-year carryback of net operating losses (NOLs), temporary reduction of estimated tax payments, expanded Work Opportunity Tax Credit, and others described below.

Extension of "Bonus" Depreciation and Expensing of Capital Assets

For 2008, businesses could speed-up the deduction of costs related to the purchase of capital assets in two significant ways: First, by fully expensing the cost of depreciable business assets in the year of acquisition up to a total amount of $250,000, and second, by taking extra deductions equal to 50 percent of the cost as "bonus" depreciation in the year of acquisition. The ARRA extends these special deductions to assets purchased in 2009.

Thus, if your business needs new assets that qualify for accelerated deductibility using either first-year expensing or bonus depreciation, and if your business can benefit from the accelerated deductions given your tax position in 2009, this will be a great time to reap the benefits of these provisions. In 2010, bonus depreciation likely disappears while first-year expensing limits likely get cut roughly in half. But remember, don't buy a piece of new equipment just to take advantage of a tax break before it disappears. Only buy it if you believe your business needs it to improve sales and profits, and only if your business can afford it.

5-Year Carryback for Small Business NOLs

The ARRA provides an immediate benefit to normally profitable small businesses that feel the sting of a substantial net operating loss in a tax year either beginning or ending in 2008. Such small businesses (businesses with gross receipts less than $15 million) can carryback their 2008 NOL for as many as five years (instead of the usual two), and apply the loss to their previous years' income. The NOL carryback potentially produces tax refunds for the prior years, which give a small business an immediate infusion of cash, which, in turn, may keep a struggling business from closing its doors.

Reduced Estimated Tax Payments for Small Business Persons in 2009

The ARRA temporarily reduces the estimated tax payments required of small business persons during 2009. Normally, estimated tax payments must equal 100 percent or more of the tax liability from the prior tax year. Your 2009 estimated tax payments must equal only 90 percent of the prior year's tax, thanks to the ARRA. This means that less needs to be paid to the IRS during the year. It won't affect your ultimate tax liability for the year, but it serves as a modest cash flow benefit.

Work Opportunity Tax Credit Expanded

The Work Opportunity Tax Credit expands as a result of the ARRA, providing a tax credit of up to $2,400 for businesses that hire additional employees from two new targeted groups: Unemployed veterans discharged in 2008, 2009 or 2010 and "disconnected youth" between the ages of 16 and 25 who haven't been regularly employed or in school for the last six months prior to employment. If your business needs to add employees, you may benefit from this credit.

Delayed Recognition of Income from Cancellation of Debt

Cancellation of a debt typically results in taxable income to the debtor when the debt is canceled or repurchased for an amount less than the adjusted issue price. The ARRA allows certain businesses to defer recognition of income from cancellation of debt for certain types of business debt repurchased in 2009 or 2010. If your business has income from cancellation of debt, you may be able to defer the tax consequences for several years.

Acceleration of AMT and R&D Credits in lieu of Bonus Depreciation

Instead of taking bonus depreciation, businesses can elect to speed-up recognition of their alternative minimum tax (AMT) credits and research and development (R&D) credits. When recognized, these credits reduce tax liability dollar for dollar. The amount of credits that can be recognized is based on the amount the business invests in property that qualifies for bonus depreciation. The ARRA extends this provision through 2009, and allows businesses to take a larger portion of its AMT or R&D credits instead of taking bonus depreciation. This has value only if your business has excess credits that can be used to reduce tax liability.

Increased Exclusion of Gain on the Sale of Qualified Small Business Stock

To encourage individual investors to purchase the stock of small businesses, the ARRA upped the portion of the gain excluded from income on certain sales of small business stock. The law previously excluded from income 50 percent of the gain on sales of qualified small business stock held for more than five years. For qualifying stock acquired between February 17, 2009 and December 31, 2010, the ARRA provides for an exclusion of 75 percent instead of 50 percent of the gain. This provision serves as an indirect benefit to small businesses because of the incentive it provides for individuals to invest in small businesses.

C Corp to S Corp Conversion: Built-in Gains Holding Period Reduced

The ARRA temporarily shortens from ten to seven years the holding period for assets subject to the built-in gains tax imposed after a C corporation elects to become an S corporation. This holding period reduction applies to any C corporation that has converted to an S corporation. During 2009 and 2010, an S corporation can sell the assets held more than seven years without being taxed on built-in gains. This is a benefit for a very narrow range of small businesses.

Now that you have had a chance to see some of the provisions of the ARRA that relate to small businesses, you can see for yourself what value these tax benefits will provide for your business. You probably have recognized that most of these benefits apply to a very small subset of business owners, and that they don't have broad application to small business owners generally. Hopefully, you will find something in the package that provides a benefit to your business.

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Posted March 12, 2009.