Summary
Despite the economy remaining largely in the doldrums, there were a variety of benefits which should not be overlooked by taxpayers who are able to take advantage of them. Keying on those which would have the most likely application for the small, medium and large local businesses which comprise the majority of the Firm’s clientele, as well as the individuals behind them, this article seeks to highlight the new and previously existing provisions which could generate significant impact.
Business-Related Provisions
- Net Operating Loss Carrybacks. The enhanced NOL provisions now allow businesses with gross receipts of less than $15M to carry back losses incurred in 2008 and/or 2009 against income earned three, four or five years prior thereto. If a business carries back a loss five years, it may use all income from years five through one to absorb such loss, and carry forward any remaining loss into the future. This is a significant expansion of the prior NOL rules and affords businesses suffering current losses real relief.
- Section 179 Accelerated Depreciation. Small business depreciation rules have similarly been expanded to allow up to $250,000 of depreciation to be deducted in 2009 (up from $125,000 in 2008). Qualifying businesses may not purchase depreciable assets of more than $800,000 for the year. These deductions are on top of the regular annual depreciation, and provide immediate benefit for significant portions of the annual outlay for new equipment and assets.
- COD Income Deferral or Exclusion. Modifications to debt instruments, such as restructurings or foreclosures, may result in cancellation of indebtedness (COD) income. Typically, COD income is includable in taxable income in the year in which it arises. However, various exceptions exist to this general rule, some old and some new, including bankruptcy, insolvency and COD income related to qualified real property indebtedness (QRPI). Under the “traded debt” rules, a modification to a present debt instrument may generate COD income even if such debt has not been significantly modified. Therefore, if you are seeking to work out any debt-related issues you have with a lender, be sure you are aware of, and address, any COD income issues stemming from a modification thereto.
- Make Sure You Have Adequate Basis. For partners of flow-through businesses, including LLC members, make sure you have adequate basis to fully utilize any losses that are passing through to you. S corporation shareholders should ensure that any loans that are taken on are made directly to the S corporation, to ensure that they will provide basis to the shareholders.
- Great Planning Opportunities Exist. Because of the likelihood that your business may bear a significantly lower fair value than in the past, the ability to implement various techniques for transferring wealth and ownership to successor generations and key employees on a more tax-advantaged basis is greatly enhanced. These techniques include, among others, gifting of interests, selling of interests and conveying a business, or portion thereof, into a family limited partnership or like entity. If you are considering such a technique, now may be the time to act.
Individual and Estate Planning Provisions
- First-Time Homebuyer Credit. This credit program has recently been extended through April 30, 2010, and provides an $8,000 credit against the qualifying purchase of a principal residence. To qualify, a purchaser must be under a binding contract by April 30, 2010 and close on such purchase by June 30, 2010. Non first-time homebuyers may also avail themselves of this program, for up to a $6,500 credit, provided they have lived in their current residence for five consecutive years in the last eight-year period. The credit is available for homes having a purchase price of not more than $800,000. The credit program: (i) begins to phase out for single filers with modified adjusted gross income (AGI) above $125,000, and phases out completely at $145,000; and (ii) begins to phase out for married taxpayers filing jointly at $225,000, and phases out completely at $245,000.
- Anticipated Tax Rate Increases. Due to the likelihood that both the ordinary income and capital gain income tax rates, will increase, the normal protocol of deferring income and accelerating deductions may be put upside down. As such, thought should be given to accelerating income (for events which are certain to occur in the future) and deferring deductions to take advantage of the present rate structure. This could include choosing to elect out of bonus depreciation or postponing payments until the next year (for cash basis taxpayers). However, the impact of the alternative minimum tax (AMT) should be analyzed before undertaking such actions.
- Traditional-to-Roth IRA Conversions. Looking ahead, in 2010, the income ceiling of a modified AGI of $100,000 for taxpayers seeking to convert their traditional IRAs to Roth IRAs is being lifted. Unlike traditional IRAs, qualified distributions from a Roth IRA are nontaxable to the recipient after he or she attains the age of 59 and ½ and there are no minimum distribution rules once the holder reaches age 70 and ½. Generally, a conversion to a Roth IRA is most beneficial if you have a number of years until retirement, anticipate that you will be in a higher tax bracket in the future and have sufficient cash to pay for the tax on conversion. If converting one or more traditional IRAs to a Roth IRA is appealing to you, but you have previously been unable to convert due to the prior restrictions, 2010 may be the year to do it.
- Annual Gift Tax Exclusions. If you are seeking to reduce the amount of your estate and/or seek to gift monies to your children, relatives or others, be mindful of the annual gift tax exclusion, which is currently $13,000 for single taxpayers and $26,000 for married taxpayers. Gifts made within these limits are not subject to any gift tax, and this is a powerful annual way to reduce the value of your estate.
- Charitable Gifts. If you are inclined to make a significant gift to a charity, it may behoove you to consider gifting appreciated stock to your charity. If you give the actual appreciated stock, as opposed to its cash value, you avoid the capital gains on the appreciation of such stock. Alternatively, you may want to consider using other techniques to make a large charitable gift, such as a grantor retained annuity trust (GRAT), a defective trust or contributions from a family limited partnership or like entity holding assets bearing a depressed current value.
For additional information or guidance on these topics, or to discuss your specific circumstances, please do not hesitate to contact us at (301) 251-1180.