Dig into stimulus act to find tax relief

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Dig into stimulus act to find tax relief
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The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package that became law earlier this year, included nearly $300 billion in potential tax savings. The business-related tax breaks in that bill included extensions of “bonus” depreciation and first year expensing write-offs for equipment and other business property. But the potential benefits do not stop there.

Cash infusions from losses
The new Net Operating Loss (NOL) carryback rules in the Recovery Act provide the greatest potential for savings. Under current law, NOLs are carried back to the two taxable years before the year the loss arises. An NOL may also be carried forward for the next 20 taxable years after the year of loss.

The Recovery Act gives woodworking businesses the choice to carry NOLs from the 2008 tax year back three, four or five years, generating a refund of taxes paid in those earlier years. Obviously, the extended NOL carryback provision has the potential for providing an immediate cash infusion to many troubled businesses.

Small business expensing
To help small businesses quickly recover the cost of newly acquired equipment and other certain capital expenses, woodworking professionals and businesses may choose to write off the cost of these expenses in lieu of recovering those costs over time through depreciation. The new Recovery Act extends the small-business expensing write-off (Section 179), increased temporarily as part of last fall’s Emergency Economic Stabilization Act.

For 2009, a woodshop or business can write off up to $250,000 of the cost of newly acquired equipment. The $800,000 ceiling, beyond which the deduction is reduced, is carried over for 2009.

A write-off bonus
Bonus depreciation was introduced as a temporary measure to stimulate the economy following the terrorist attacks on Sept. 11, 2001. Last year, lawmakers allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule. They did this by permitting businesses to immediately write off 50 percent of the cost of depreciable property such as equipment, wind turbines, solar panels, and computers acquired in 2008.

The new rules extend for another year a 50-percent bonus depreciation allowed for property with a recovery period of 10 years or longer. Unlike Section 179, expensing that is available for new or used property; bonus depreciation is available only for new property or equipment.

Vehicle write-offs
Also extended for bonus depreciation purposes is the regular dollar cap placed on vehicles used in the business, as part of the business or provided to the woodshop’s owner. The cap for new vehicles placed in service in 2009 is raised once again by $8,000. This increase mirrors the temporary 2008 cap increase resulting in a $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for 2009.

Remember, however, as with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might, for a tax year, consider making an election-out (opt-out) are when the woodworking business has about-to-expire NOLs or anticipates being in a higher tax bracket in future years.