The American Recovery and Reinvestment Act of 2009 is a nearly $800 billion stimulus package, including nearly $300 billion in potential tax savings. This massive bill provides immediate relief to both individuals and businesses with most of the tax incentives retroactive to Jan. 1, 2009. Most of the $280 billion in tax relief is concentrated within the next two years.
Electrical contractors (ECs) will see the effect of the recovery act in many aspects of their businesses. It will help ease the out-of-pocket cost for new equipment. Two new groups have been added to those whose first-year wages are partially underwritten thanks to the work-opportunity tax credit. Business--related tax breaks include tax-deferred debt forgiveness income. There is a five-year carryback of net-operating losses (NOLs) that may return taxes paid in earlier years to the coffers of many ECs.
While there may be benefits from the boost to the economy for which this bill was designed, there is little question that every electrical contractor and electrical contracting business can share in more than $75 billion in tax benefits for 2009 and 2010.
Cash infusions from losses
The NOL carryback provision provides the greatest potential savings of all the business tax provisions in the new stimulus package. Under current law, NOLs are carried back to the two taxable years before the year the loss arises. NOLs also may be carried forward to each of the succeeding 20 taxable years after the year of loss.
The recovery act gives ECs and other 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 to provide an immediate cash infusion to many troubled businesses.
Faster, larger write-offs with a bonus
To help small businesses quickly recover the cost of newly acquired equipment and other capital expenses, ECs may choose to write off the cost of these expenditures, in lieu of recovering those costs over time through depreciation. The new recovery act extends the small business expensing, aka Section 179, write-off, increased temporarily as part of last fall’s Emergency Economic Stabilitzation Act. For 2009, an electrical contractor 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.
Of course, bonus depreciation was introduced as a temporary measure to stimulate the economy following the Sept. 11, 2001, attacks. It was enhanced in 2003 and extended several times. Businesses can recover the cost of capital expenditures over time according to a depreciation schedule. Last year, lawmakers allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these 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 the 50 percent bonus depreciation allowed for property with a recovery period of 10 years or longer. Unlike Code Section 179 (expensing that is available for new or used property), bonus depreciation is available only for new property or equipment.
Higher caps on vehicle write-offs
Also extended for bonus depreciation purposes is the regular dollar cap placed on vehicles. The cap for new vehicles placed in service in 2009 is, once again, raised 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 consider making an election-out (opt-out) are when the electrical contracting business has about-to-expire NOLs or anticipates being in a higher tax bracket in future years.
Discounted wage payments for some new workers
The Work Opportunity Tax Credit (WOTC) rewards employers that hire members of “targeted groups,” such welfare recipients, disabled people, etc. Under current law, businesses can claim a WOTC equal to 40 percent of the first $6,000 of wages paid to employees from one of nine targeted groups. The recovery act extends the WOTC to include two new groups: unemployed veterans and disconnected youth (someone between the ages of 16–24, lacking basic skills and who is not in school).
Generally, the WOTC is a percentage of first year wages up to $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees). The percentage of qualifying wages is 40 percent of first year wages, for a maximum credit of $2,400 per employee.
Qualified small business stock
Ordinary deduction treatment is available to individual investors on the sale of stock or the bankruptcy of a company. Under the old rules, an individual investor could exclude 50 percent of any gain realized upon the sale or exchange of “qualified small business stock” held for more than five years. That means an incorporated EC could create a unique type/class of stock, called Section 1244 stock, using as an incentive the fact that only part of the eventual gain would be taxed to the investor.
The recovery act makes small business stock more attractive by increasing the amount of gain from the sale of small business stock held for five years or more that may be excluded from 50 percent to 75 percent for stock issued after the date of enactment of this legislation and before 2011.
Temporary small business estimated tax payment relief
This is not exactly a financing incentive, but it will allow small businesses to keep more money in their pockets. The recovery act decreases estimated tax payments for individuals whose incomes primarily come from a small business in 2009. Rather than being required to make quarterly estimated tax payments based on 100 percent of their 2008 returns, the new law allows computations based on 90 percent.
The “Making Work Pay” tax credit included in the recovery act increases the take-home pay of workers and requires employers to use new payroll tax withholding tables. Self-employed electrical contractors, who are not subject to wage withholding, can receive the credit in advance by reducing the amount of their estimated tax payments. Remember that it is easy to overshoot the mark and become liable for underpaying estimated tax penalties.
Cancelled debt equals income now deferred
When debt is forgiven, taxable income usually results unless the electrical contracting operation or business is insolvent or in bankruptcy. The new law allows some businesses to choose to recognize taxable income resulting from the cancellation of indebtedness over a five-year period beginning in 2014. Although all the debt discharge income eventually will be recognized, the taxpayer benefits from the deferral of tax to later years.
Some ECs would be allowed to recognize so-called “cancelation of debt income” (CODI) over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after Dec. 31, 2008, and before Jan. 1, 2011.
The built-in gains of S corporations
The stimulus bill temporarily shortens the holding period from 10 to seven years for assets subject to the built-in gains tax imposed after a regular C corporation elects to become an S corporation. This reduction applies to regular corporations that convert to S corporation in tax years beginning in 2009 and 2010.
The built-in gains tax prevents an incorporated electrical contracting business from avoiding corporate level tax on the disposition of appreciated assets it acquired while a regular corporation by first converting to S status. However, it also discourages S conversions in situations in which the business may not otherwise survive under regular corporation rules. The new law will give shareholders more flexibility during the current economic crisis.
Energized investment credits
Under the tax rules, businesses can claim a 30 percent energy tax credit for expenditures made to enable the business to use alternative energy sources. The tax credit applies for the cost of energy property that includes fuel cell property, solar property and geothermal heat pump property.
Last fall’s bailout bill made wind energy property eligible for the tax credit. This is property that uses a qualifying small wind turbine (with a nameplate capacity of not more than 100 kilowatts) to generate electricity. The recovery act eliminates the former $4,000 cap on the tax credit for qualified small wind energy property.
Something for us, as well
The recovery act includes an alternative minimum tax (AMT) patch for 2009. The patch was designed to insulate approximately 26 million middle-income taxpayers from the reach of the AMT. The AMT patch will save taxpayers approximately $70 billion.
The 2009 AMT patch raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are $70,950 for joint filers and surviving spouses (up from $69,950 in 2008), and $46,700 for singles and heads of households (up from $46,200).
While the overall size of the new law is massive, a number of provisions have either been pared back or eliminated during the course of the political debate that raged. For the owner or manager of any electrical contracting business, professional advice is almost a necessity to ensure the operation will profit from the new recovery act.
BATTERSBY is a freelance writer based in Ardmore, Pa. For more than 25 years, his tax and financial features have appeared in ELECTRICAL CONTRACTOR and other leading trade publications.