Taxes

Economic Recovery Package: What�s In It for You?

SBOCTeam — Fri, 20 Feb 2009 22:35:00 GMT

by BigIdeas4Biz

The $787 billion American Recovery and Reinvestment Act of 2009, which was signed into law on February 17, 2009, is designed to spur the economy. It makes numerous tax changes for individuals and businesses. Since sole proprietors, independent contractors, LLC members, and other owners pay tax on their share of business income on their personal returns, business-related changes become highly personal!

Most of the changes run for only a short time-two years, one year, or less. Many of the changes have income caps, so check these limits carefully to see whether you qualify. Here is an overview of some key changes that could affect you.

Buying equipment
Upgrade your computers, office furniture, machinery or equipment and get tax breaks:

Deduct the cost up to $250,000 for equipment purchased placed in service by December 31, 2009 (called first-year expensing or the Section 179 deduction).
This applies to both new and pre-owned items. The deduction applies whether you finance the purchase in whole or in part. Caution: Opting to use this write-off only makes sense if you're profitable for the year. If you don't use first-year expensing, you simply depreciate the purchase price.
Claim 50% bonus depreciation for the cost of new property placed in service by December 31, 2009. This break can be combined with first-year expensing, as well as a regular depreciation allowance, to enable most or all of the cost of qualified purchases to be deducted this year.

If you purchase a new (not pre-owned) personal car or light truck after February 17, 2009, and before January 1, 2011 (even though you use it partially for business), you can deduct state and local sales and excise taxes, regardless of whether you itemize your other personal deductions. This break doesn't apply to leased vehicles. The deduction is limited to taxes on a sticker price up to $49,500. The deduction phases out for singles with adjusted gross income between $125,000 and $135,000 ($250,000 to $260,000 for joint filers).

Getting credits
A tax credit reduces your tax bill dollar for dollar; a tax deduction saves you an amount based on your tax bracket. For example, a $1,000 credit saves you $1,000 in taxes, while a $1,000 deduction only saves you $250 in taxes if you're in the 25% tax break. Some new tax credits of note:

American opportunity credit. Now may be a great time to complete your education. If you (your spouse or dependent) is in the first four years of college, claim a tax credit in 2009 and 2010 equal to 100% of the first $2,000 of tuition and other qualified expenses, plus 25% of the next $2,000, for a top credit of $2,500. The credit phases out for singles with adjusted gross income between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
Work opportunity credit. If you hire certain disadvantaged workers, you get a tax credit (usually 40% of first-year wages up to $6,000, for a top credit of $2,400 per eligible new employee). The new law expands the group of targeted workers that can qualify for 2009 and 2010 to include certain unemployed veterans and unemployed youth who lack education and certain basic skills
Business energy credits. Going to alternative energy can save you in utility costs as well as provide you with important tax breaks. There are several tax credits to encourage investments in renewable energy production and for other alternative energy investments for your business. Note: There are also credits for making energy improvements to your home.

Getting a tax refund
If 2008 was a difficult year for your business and you show a loss, you may be able to turn that into an immediate tax refund. Net operating losses (NOLs) for small businesses can be carried back and used to offset income in prior years. Usually, the carryback period is limited to two years. For NOLs in 2008, you can choose a three-, four-, or five-year carryback (the option only applies to businesses with gross revenue of $15 million or less).

If you have an NOL and want to use this carryback, you can obtain your tax refund by filing amended returns on IRS Form 1040X, Amended U.S. Individual Income Tax Return, for those years or by filing for a quick refund (individuals use IRS Form 1045, Application for Tentative Refund, which the IRS usually acts upon within 90 days of the filing of the form).

Paying estimated taxes
Usually, to escape underpayment penalties, estimated taxes must be at least 90% of the tax shown on your current year's return or 100% of the tax on your prior year's return. The current year return threshold rises to 110% if your adjusted gross income (AGI) in the prior year was more than $150,000 (or $75,000 if married filing separately).

For 2009, the first payment of which is due April 15, 2009, there will be no estimated tax penalties if tax payments for 2009 total at least 90% of your 2008 taxes. To rely on this reduced estimated tax payment requirement, your AGI in 2008 must have been $500,000 or less, and half of your income must be derived from a small business (defined here as 500 or fewer employees).

When figuring estimated taxes for 2009, take into account the new Making Work Pay credit if you're self-employed. The credit, which is the crown jewel of the new law, is $400 for singles or $800 for joint filers. The credit phases out for singles with AGI between $75,000 and $95,000 and for joint filers with AGI between $150,000 and $150,000. The credit is paid to employees by means of adjusting their payroll withholding; for self-employed people, reduce your estimated tax payments accordingly.

Preparing for payroll changes
If you have employees (including yourself), expect revised withholding tables for 2009 in late spring to reflect the Making Work Pay credit. These new tables will help you adjust employee take home pay to reflect the credit, which is retroactive to January 1, 2009.

Businesses with more than 20 employees and that offer COBRA health coverage will also have to adapt to new federal subsidy for involuntarily terminated workers after September 1, 2008, through the end of 2009. The federal government will pay 65% of COBRA premiums for these former employees and the payments will be made by means of a reduction in an employer's payroll taxes (with some credit to employers if the subsidy exceeds payroll taxes).

What To Do With Your Refund?

SBOCTeam — Wed, 30 Jan 2008 16:06:00 GMT

Spend it wisely, and take a closer look at your quarterly payments

By Robert Tie, CFP

Congratulations - you've just received a sizeable check from the IRS! Sure, you knew it was coming and how much it would be. But still your pulse quickens, and you're mildly euphoric. Somehow this feels almost as good as getting cash from a client.
But is a large refund reason to celebrate? "Certainly not," says Eric Rigby, CPA, of RFG, Inc., a New Orleans tax and accounting firm that serves entrepreneurs. "Never give the IRS an interest-free loan." All too often, he says, small business owners do exactly that when they pay too much in estimated taxes. "So resolve to plan better next time," advises Bea L. Nahon, CPA, of Nahon CPA, a Bellevue, Washington firm providing tax and other services to small businesses. "Check in with your CPA at mid-year," she says. "You'll get better at managing your tax payments, and you'll develop a deeper understanding of all your business finances."

First Things First
What's the best way to begin the rest of your life as a taxpayer? The answer is to put your refund to work in the smartest ways possible. In working with their respective clients and also as volunteer advisers with the American Institute of Certified Public Accountants, Nahon and Rigby both recommend three sure-fire ways to get a big bang for your refund buck.

1. Set up an emergency fund
Cash flow is the lifeblood of any enterprise. And yet Rigby encounters enough undercapitalized businesses to make him worry with good reason. "When Hurricane Katrina slammed into New Orleans, a lot of small business owners saw their income plummet and their expenses soar," he says. "So priority number one is an emergency fund. Plan ahead, and you'll weather the storm."
How big a fund do you need? That depends on how long you might reasonably expect to be short of cash. A money market fund or other sufficiently liquid reserve will earn you only a minimal return. So use your refund to help set aside just enough to meet recurring expenses for, say, six months. Then spread your largest risks among highly rated disability, property, business continuity, and other insurers, as appropriate.

2. Pay down your debt.
"Do it now," says Nahon. You can't beat the cost benefit numbers behind this sage advice. Trouble is, spending money is more fun than repaying it. "Don't hesitate," she insists. "This is a perfect opportunity to improve your finances and your peace of mind."

3. Set up a retirement plan.
"It's never too early to start saving for retirement, and there are few better places to invest your refund," Rigby says. So, he advises, find out which type of plan is appropriate for your situation, and set it up.

The two types of retirement plan are:

IRA based plans

Payroll Deduction IRA

Simplified Employee Pension (SEP)

SIMPLE IRA

Safe Harbor 401(k)

Defined Contribution and Defined Benefit plans

Automatic Enrollment Safe Harbor 401(k)

401(k)

Profit Sharing

Defined Benefit

Their characteristics are too complex to usefully summarize here. But IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, concisely explains each plan. Read it through, noting contribution methods, limits, and other plan features that correspond to your needs and preferences, as well as those of your employees. You'll then be well prepared to consult your financial services provider and discuss your options.

Off to a Good Start
"Of course, if you've already addressed those three priorities," says Nahon, "consider using your refund to boost your marketing budget." A large refund, Nahon notes, is usually due to a significant drop in revenue, since small business owners typically try to avoid penalties by basing their current estimated payments on the total tax from their prior year's return. "That means it's time to put some extra money into marketing," she advises. "But first ensure that you've adequately funded your more urgent needs." Once you've fulfilled those goals, you'll really have something to cheer about.

Robert Tie is a Certified Financial Planner and business writer.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.