Tax Law Changes and Other Tax Considerations

How Will They Affect Your Business?

On November 6, 2009, the President signed the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA). This and many other factors can affect your business’ taxable income for 2009 and beyond. Some of the below changes are beneficial, and some are not.  

Net Operating Loss (NOL) Carrybacks
Under the prior law, NOLs generally could be carried back two years and forward 20 years. The new law gives most businesses longer carryback options. Under the WHBAA, most taxpayers (some exceptions apply, e.g., TARP recipients) may elect to increase the carryback period for an applicable NOL from two years to three, four or five years. An applicable NOL means the taxpayer's NOL for any tax year ending after December 31, 2007 and beginning before January 1, 2010.

The amount of the NOL that can be carried back to the fifth tax year before the loss year may not be more than 50 percent of the taxpayer's taxable income for that fifth preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year. The 50 percent limitation does not apply to an eligible small business with respect to an election made under pre-Act law. Once made, the extended carryback election is irrevocable.

Larger businesses with over $15 million of average gross receipts can electively apply this rule to only one current loss year, while smaller businesses may use this provision for two years.

Additional Federal Unemployment Tax Act (FUTA) Surtax Extension
The WHBAA provides that the 6.2 percent FUTA tax rate continues to apply through June of 2011, and the 6.0 percent rate applies for the remainder of calendar year 2011 and for later years. That is, the temporary 0.2 percent surtax is extended for one-and-a-half years, through June 30, 2011.

Refundable Tax Credit
The present $8,000 refundable tax credit for first-time homebuyers has been extended, and a new $6,500 credit has been added for existing homeowners who acquire a different principal residence. Also, there are a number of new restrictive changes to the eligibility rules.

Partnership and S Corporation Late Filing Penalty
Presently, a partnership or S corporation that files a late return is assessed a penalty of $89 per owner per month. The penalty is capped after 12 months of delinquency. Accordingly, a partnership or S corporation return that is more than 12 months late produces a maximum penalty of $1,068 per owner.

Next year, the penalty increases to $195 per owner per month, again capped after 12 months. Accordingly, the penalty maximum will increase to $2,340 per owner for a return that is delinquent by 12 months or more.

Other tax law problems and considerations you may want to discuss with your tax advisor are:

LIFO Income or Expense
Inventory levels are significantly lower for the 2009 year-end due to the sales generated during the Car Allowance Rebate System (CARS). To avoid tax surprises, dealers should prepare projections on current inventory levels to assess whether they’ll recognize LIFO income for 2009 or LIFO expense. If recognizing income, the additional cash requirements to pay the income tax due on the LIFO recapture could be significant.

Loaner Vehicles Subject to Depreciation Under New IRS Interpretation
Most dealerships have loaner vehicles available for customers to use while their vehicles are being serviced, and several luxury manufacturers require franchised dealerships to maintain loaner vehicles on site for this purpose. If the IRS applies section 280F of the IRC code to loaner vehicles, the depreciation deduction is significantly limited on vehicles with costs above the “luxury” vehicle cutoff. Recent tax depreciation incentives, such as the expanded expensing election under IRC Section 179 and bonus depreciation under IRC Section 168(k), would also be severely restricted and in some cases eliminated.

The IRC code generally defines a luxury vehicle as any car having a purchase price of $14,800 or any truck or SUV having a purchase price of $15,800. Based on this definition, a substantial number of loaner vehicles and dealerships could be affected.

Excessive Home Mortgage Interest
The IRS is in the middle of an audit initiative where they are able to easily identify taxpayers deducting interest on home mortgage indebtedness over $1 million (assuming a 6.5 percent interest rate) or individual taxpayers deducting more than $65,000 of home mortgage interest. 

Capital Gains Tax Rate
There is a good chance the capital gains rate will increase by five percent in 2011, and the individual top tax rate may increase by 4.6 percent. With this in mind, it may make sense to either accelerate installment sale proceeds if possible to tax years 2009 and 2010 or negotiate expected sales and receive the proceeds by the end of 2010 rather than deferring the gain to 2011 and beyond under the higher tax rates.

Cost Segregation
Any building acquisition, construction project or renovation greater than $500,000 can usually defer tax liability and provide a cash flow benefit through some form of cost segregation study. These studies segregate the various costs of the structures and land improvements into different depreciation methods and useful life categories, which can accelerate your tax deduction for depreciation in excess of your book depreciation methods used for your financial statements.

Conversion of Traditional IRAs to ROTH IRAs
The Internal Revenue Code provides a significant tax planning opportunity for many people beginning in 2010 concerning conversions of traditional IRA's to ROTH IRA's. The $100,000 income limit is eliminated starting January 1, 2010 and you will be able to defer the income tax from a 2010 conversion to 2011 and 2012.

Unicap (IRC Sec. 263A)
The IRS is currently reviewing how dealerships should capitalize certain costs attributable to carrying inventory under IRC Sec. 263A. A field directive also instructs field examiners to essentially stand down on raising 263A on new audits beginning September 15, 2009, and concluding December 31, 2010, to allow time for auto dealers to comply with the IRS's positions outlined in TAM 200736026. The position the IRS takes on this issue can significantly impact the deductibility of various expenses on the tax return and increase taxable income.

Please consult your tax advisor to discuss any of the above items you believe may affect your business.

P.S. Many thanks to my partners and associates at LarsonAllen for the recaps of the above tax law changes and other considerations that can affect your business. They spend a great deal of time reviewing and analyzing tax law changes and other considerations which may affect our clients.

Vol. 7, Issue 1