Take Advantage of 2009 Tax Incentives Before It's Too Late
Everybody likes to save money on taxes; however, with so many tax law changes it is hard to keep up with them all. In fact, did you know there are more than 100 current tax provisions that are set to expire in the next two years alone? Therefore, it is important to know what the current law is so you know what you can do to help reduce your individual and/or business tax burden. And in several cases, you need to act quickly to take advantage of temporary provisions meant to help stimulate the economy and benefit taxpayers for 2009 and 2010.
FOR INDIVIDUALS:
First-time homebuyer credit expanded again
Earlier this year, President Obama signed into law the American Recovery and Reinvestment Act to help stimulate the economy. One of the most popular provisions of this act was the First Time Homebuyer Credit, which was expanded again on Nov. 6. The new law allows a first-time homebuyer a refundable tax credit of up to $8,000. It also allows a person who has been in their main residence for at least five years to receive up to $6,500 for the purchase of a new main residence. The home must be purchased or under contract by April 30, 2010 and must close by June 30, 2010 to qualify. There are also income limitations that apply on this credit.
Elimination of required minimum distribution for IRAs for 2009
A new provision for 2009 is the elimination of the required minimum distribution for IRAs and defined contribution retirement plans. This provision was put in to allow your retirement account a chance to rebound from the declining market in 2008. If you have already taken your distribution in 2009 you have until Nov. 30, 2009 to roll the money back into your retirement account without it being taxable to you. This is only available for 2009 and required distributions will resume in 2010.
Deduction of sales and excise taxes on new vehicles for 2009
There is also a provision to deduct the sales and excise taxes imposed on the purchase of a new vehicle (8,000 lbs or less) up to a purchase price of $49,500. This can be used even if you do not itemize your deductions. No deduction is allowed if your gross income is over $135,000 (or $260,000 if married filing a joint tax return). This will expire at the end of 2009.
Go “Green” and earn a credit for purchases of non-business energy efficient property
Another way to save on taxes this year is to purchase certain non-business energy efficient property such as high-efficiency air conditioners or water heaters. It also may include energy-efficient windows, doors, insulation materials and certain roofs. This credit is 30 percent of the cost of the equipment up to $1,500. The credit is available for both 2009 and 2010.
529 college savings plan distributions for computers
If you are a student or have a child in college, you can now take money out of a 529 college savings plan to pay for computers and other related educational expenses. This includes internet access and related services to be used by the student. This is available for 2009 and 2010.
Up to $2,400 in unemployment compensation excluded from income for 2009
If you received unemployment compensation is 2009, you can now exclude up to $2,400 from your income. This tax provision is only available this year.
Teachers can take advantage of deduction for supplies for 2009
If you are a teacher, the above-the-line deduction for teaching supplies is available for 2009. If you have not spent up to $250 this year, you may want to stock up on supplies in order to capitalize on this deduction since this provision is set to expire at the end of 2009.
FOR BUSINESSES:
Five-year NOL carrybacks not just for small businesses
Net operating losses (NOLs) generated in 2008 or 2009 for almost any type of business are allowed to be carried back up to five years in 2009. Normally, carrybacks (refunds of prior taxes) are limited to two years and are only available to eligible “small” businesses. Note that unless 2008 was carried back before Nov. 6, 2009, only one year’s NOL (2008 or 2009) is eligible for extended carryback. As well, NOLs carried back the full five years are limited to 50 percent of the taxable income in that year.
Last chance to take advantage of higher limits on purchased property
Section 179 of the IRS code allows businesses to deduct the full price of qualifying property purchased or financed during the same tax year up to $250,000. This amount will decrease to $134,000 in 2010. The limit for total amount of equipment purchased is $800,000. Other qualifiers include the taxpayer must have taxable income in excess of the amount deducted; the deduction cannot create or increase a net operating loss and the deduction is only allowed for property placed in service for use in active trades or businesses.
Bonus depreciation to expire next year
Businesses that exceed the $250,000 deduction limit can take bonus depreciation on new (and certain leased) property of 50 percent on the amount that exceeds the limit. And then also take normal depreciation on the rest.
Qualified building improvements eligible for quicker depreciation in 2009
Certain non-residential leasehold (a fixed asset) improvements to buildings older than three years can be depreciated more quickly than will be allowed in 2010, as long as they are not part of common areas, structural framework or enlargement of the property. Furthermore, qualifying leaseholds are eligible for the 50 percent bonus depreciation discussed above. Restaurant buildings and retail businesses are subject to additional qualifiers, but also eligible.
Additional planning recommendations for businesses…
- Defer recognition of income – Most tax planning boils down to deferring tax liability and accelerated expenses. But for businesses operating on the accrual basis of accounting, opportunities here are limited. However, many businesses can change to the cash method and could be allowed automatic IRS approval going back to the beginning of the year.
- Self-employed retirement plans – If you are self-employed, setting up a retirement plan before year end will let you deduct contributions that don’t actually need to be paid until next fall. The only exception is a SIMPLE plan, which needed to be set up by Oct. 1. To take advantage of the deduction, take care when setting up the plan. There are exact rules involved that need to be followed, especially if you have employee participants in the plan.
- Make sure you have basis – If your business is an S corporation, partnership or LLC, plan ahead to ensure that if the company has losses, owners have enough basis so that the losses won’t be suspended. Basis is generally created by the contribution of money to the entity and is reduced by losses and distributions from the entity.
- Don’t forget about AMT – The alternative minimum tax (AMT) is more of a problem for individuals than corporations, but you’ll want to make sure pass through entities do not cause AMT problems for owners. I.e., plan for it so there are no surprises. AMT NOLs from prior years can only offset 90 percent of current AMT income. And be careful with Section 179 deductions. If the owners have more than one entity and have more than $250,000 of 179 allocated to them, the excess is lost forever. Another problem is the fact that the income test is made at both the individual and the entity level. This can have an effect of temporarily suspending the deduction if the individual has no net business income.
For more information:
Individual taxes – Cindy Mitchell, CPA, senior manager, email
Corporate taxes – Mike Hydell, CPA, manager, email