Year-End Tax Planning for Small Business Owners
For 2009, there are plenty of year-end tax planning opportunities available to the small business owner. Some new provisions help businesses that have been dramatically affected by the recession while others help businesses that have had very a profitable year. Below is a general overview of several of the more important planning opportunities.
Many companies used the bonus depreciation provision in 2008; however, due to the current economic conditions, business owners are much more restrained with regard to capital expenditures than in prior years. Nick Parsons, one of the partners at our firm, recommends concentrating on capital purchases that are needed and will help generate more profit for the business rather than just purchasing for the sake of tax savings. He also recommends looking at purchases that will need to be made in the next five to six months and accelerating those purchases if possible before year-end. Even if the business had a poor year, bonus depreciation could produce a tax loss and actual tax refunds with the new net operating loss carryback rules (see below).
Bonus Depreciation details:
- Only available for NEW property, 20 year class life or less
- Provision is scheduled to expire after 2009
- Must be placed in service before year-end
Code Section 179 Depreciation:
Businesses with net taxable income are taking advantage of the new limits on 179 depreciation ($250k), which allow you to write-off the entire cost of the fixed asset within the year of purchase. However, many businesses are looking at losses this year, so the bonus depreciation can be a better option. Regardless, using the right mix of bonus and 179 depreciation can create a net operating loss that can be carried back five years under the new rules (see below).
One minor detail to keep in mind – unlike bonus depreciation, the property does not have to be new to qualify for 179 depreciation.
If a business is looking to buy a new vehicle in the next six months, accelerating the purchase before year-end could be very beneficial. The luxury auto depreciation limits have been increased from $2,960 to $10,960 through 2009 thanks to bonus depreciation rules. There are different rules for trucks, vans, and SUVs, but for a typical passenger car used more than 50% in business – this provides great tax savings.
Five Year Carryback of Net Operating Losses:
Many businesses affected by the recession have been able to make use of the expanded net operating loss carryback rules for the 2008 tax year, and many received substantial cash refunds that helped them with current cash flow problems. Now the carryback rules have been extended for 2009 tax losses, which should bring some more immediate help. However, the rules are a little more complicated this time around:
- For 2008, the expanded carryback was only applicable to businesses with gross receipts under $15 million. The net operating loss could be carried back up to five years and there were no further complications.
- For 2009, the rule is expanded for all businesses, however, there are complications:
- For businesses under the $15 million gross receipts limit, the 2009 NOL can be carried back up to 5 years even if the 2008 NOL was carried back under the prior rule. The only difference is that for 2009, you can only use ½ of the taxable income in the fifth year.
- For businesses over $15 million in gross receipts, they can use the extended NOL carryback for 2008 OR 2009, but not both years. Also, like with small businesses, they can only use ½ of the taxable income in the fifth year.
Solo 401k Contributions / Profit – Sharing:
For small business owners that had a good year and are looking for tax deductions while putting away for retirement, the solo 401k is an excellent vehicle that many ignore because of the extra reporting requirements. Small, family-owned businesses often use the SIMPLE IRA plan to put away up to $11,500 ($14,000 age 50 & older) under the 2009 limits. However, given sufficient self-employment income, the same small business owner can put away up to $49,000 ($54,500 age 50 & older) using a solo 401k plan and also make the same contribution for the business owner’s spouse if they are involved in the business. The are special requirements for the solo 401k, so it is definitely something you need to speak with a professional about before opening an account. However, even if the solo 401k is not an option for you, there are other 401k plans that would still save you much more than with a SIMPLE IRA plan.