The American Recovery and Reinvestment Act of 2009: Information Center

 Article source: http://www.irs.gov/newsroom/article

Information for Individuals

Some of the provisions of the law primarily affect individuals.

• Making Work Pay Tax Credit. This tax credit means more take-home pay for many Americans. To make sure enough tax is withheld from their pay, taxpayers can use the IRS withholding calculator. See Making Work Pay for more.
  
  
• First-Time Homebuyer Credit Expands. Homebuyers who purchased in 2009 can get a credit of up to $8,000 with no payback requirement. November 2009 legislation extends and expands this credit to homes purchased by April 30, 2010. New documentation requirements apply. See the first-time homebuyer page and special information on signatures for more.
  
  
• Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid or other taxes and fees they paid in states with no sales tax.
  
  
• Education benefits. The new American opportunity credit and enhanced benefits for 529 college savings plans help families and students find ways to pay higher education expenses.
  
  
• Enhanced Credits for Tax Years 2009, 2010. Find details on the earned income tax credit and the additional child tax credit.
  
  
• Increased Transportation Subsidy. Employer-provided benefits for transit and parking are up in 2009.
  
  
• Up to $2,400 in Unemployment Benefits Tax Free in 2009. Individuals should check their tax withholding.
  
  
• $250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board.
  
  
• Energy Efficiency and Renewable Energy Incentives. See what individuals can do to reap tax rewards.
  
  
• COBRA. Workers who lose their jobs may qualify for reduced COBRA health insurance premiums for a period of up to 15 months. Visit the U.S. Department of Labor's COBRA Web site, www.dol.gov/cobra, for details on this recently-extended and expanded subsidy.
  
  
• Health Coverage Tax Credit. The credit increases from 65 percent to 80 percent of qualified health insurance premiums, and more people are eligible.

Information for Businesses

Some of the provisions of the law primarily affect businesses.

• Making Work Pay Tax Credit. The 2010 withholding rates, contained in Notice 1036, reflect reduced withholding as directed by the ARRA. An optional withholding procedure is available for pension plan administrators.
  
  
• Work Opportunity tax credit. This newly-expanded credit adds returning veterans and "disconnected youth" to the list of new hires covered by the credit that businesses may claim.
  
  
• COBRA: Health Insurance Continuation Subsidy. The IRS has extensive guidance for employers, including an updated Form 941, as well as information for qualifying individuals.
  
  
• Energy Efficiency and Renewable Energy Incentives. See what businesses can do to reap tax rewards.
  
  
• Net Operating Loss Carryback. Small businesses can offset losses by getting refunds on taxes paid up to five years ago. Information on the carryback, an expanded section 179 deduction and other business-related provisions, is now available.  The Worker, Homeownership And Business Assistance Act Of 2009 (WHBAA) further expands the five-year NOL carryback to most businesses.
  
  
• Municipal Bond Programs. There are new ways to finance school construction, energy and other public projects. 

2008 and 2009 Tax Returns 

The law could affect some 2008 tax returns due in 2009. However, most of the changes in ARRA will affect 2009 individual tax returns due April 15, 2010.

 

A Limited-Time Opportunity for Small Business Stock

Article Source:
By TOM PRIETO, CPA, MBT
DECEMBER 2009
http://www.journalofaccountancy.com

TS Note: Effective 2/17/2009 and before 01/01/2011, under ARRA, the exclusion percentage is increased from 50% (60% for certain empowerment zone business) to 75%.

The American Recovery and Reinvestment Act of 2009 (ARRA) increased the exclusion amount for qualified small business stock (QSBS) from 50% to 75% (IRC § 1202). In addition, QSBS is currently subject to a lower inclusion rate for gains subject to the alternative minimum tax (AMT) under section 57(a)(7). However, these two rate reductions will soon expire.

QSBS can be an attractive part of a tax strategy because you can roll over proceeds from a sale into new QSBS while deferring gain under section 1045. Even so, for years, the tax advantages of QSBS have been offset by their less attractive conditions, such as a five-year holding period for the gain exclusion and 28% tax rate, especially after rates were cut to 15% for most long-term capital gains. But with the higher exclusion rate yielding a low effective tax rate of 7% (28% x 25% of gain), and the prospect for a rise in capital gains tax rates, tax advisers should learn now how QSBS can be a valuable part of a client’s tax strategy.

QUALIFIED SMALL BUSINESS STOCK

A qualified small business is a C corporation with assets of $50 million or less. At least 80% of its assets must be used in the active conduct of a trade or business other than certain professional services, athletics, performing arts, banking and financial enterprises, hotels, motels or restaurants and other activities listed in section 1202(e). To qualify for gain exclusion, QSBS must be acquired by original issue and held by the taxpayer (which may not be a corporation) for at least five years. The amount of gain eligible for exclusion is limited under section 1202(b). If purchased between Feb. 18, 2009, and Dec. 31, 2010, it can qualify for the 75% exclusion.

A percentage of the gain excluded under regular tax is an AMT preference item, that is, it is included in AMT income. For QSBS sold before Dec. 31, 2010, the percentage is 7%. For QSBS sold after 2010 that had been purchased since 2000, the percentage increases to 28% and to 42% for stock acquired during or before 2000.

Taxpayers (other than corporations) can also defer the tax on sale of QSBS held for at least six months with an IRC § 1045 election if the stock is replaced within 60 days and all the sale proceeds are reinvested in new QSBS. The tax is due (or partially excluded under section 1202) when the replacement stock is finally sold.

BUSINESS OWNERS AND INVESTORS

The section 1045 election is beneficial for business owners considering selling their company. The business owner can defer any taxable gains by using the sale proceeds to start a new business. Since the business owner controls the timing of the sale and reinvestment, it is more likely the rollover period will be met. Flexibility is a hallmark of QSBS in other ways, as well. For example, investors don’t necessarily have to pay cash for QSBS. They can receive it for services to a company (section 1202(c)(1)(B)(ii)). Retired executives and former entrepreneurs, for example, besides providing capital can provide guidance to the company. Investors can work for the company as a consultant or in management.

INVESTMENT PARTNERSHIPS

Owners of a partnership or other pass-through entity may share in the tax benefits of QSBS as a pass-through item, including proportionate shares of gain exclusion (section 1202(g)). Owners also can make the section 1045 election on their share of QSBS gains. For example, XYZ partnership sells QSBS on March 1, 2010, at a gain. Partner X can defer the gain by purchasing replacement stock on March 31, 2010. If X purchases QSBS that is equal to or greater than his/her share of the sale proceeds, the gain is deferred.

It also works the other way. Assume Investor A has a gain from the sale of QSBS on April 1, 2010. Investor A contributes the sale proceeds to form the ABC partnership. ABC uses all contributed capital to purchase QSBS stock on April 15, 2010. The gain is also deferred because the QSBS was purchased within 60 days and A was a partner at the time of purchase. In addition, an individual can use QSBS of a partnership as replacement stock (Treas. Reg. § 1.1045-1(c)(1)). A partnership is therefore a preferred entity for holding QSBS.

PRACTICE POINTERS

In determining whether to recommend a section 1045 election, consider the following:

*
Screen your client database for taxpayers with occupations such as retired executive, investor or business owner.
*
Red-flag QSBS purchases in the client file for future action.
*
Ask clients about QSBS purchases in a year-end tax questionnaire.

By Tom Prieto, CPA, MBT, (tomprieto@gmail.com) an adjunct professor at American Jewish University in Los Angeles.

Small Business Stock Gains Section 1202

Article Source: By Joshua Kennon, About.com Guide

Individual investors may qualify for a special tax treatment on capital gains earned from small business stocks under section 1202 of the IRS code. Normally, small business stocks are taxed at 28% rates. There are actually several capital gains tax savings provisions that you can take advantage of to help you build wealth.

Here's how it works:

Exclusion of 50% of Capital Gains from the Capital Gains Tax Calculation

* Shares of regular C Corporations that qualify under Section 1202, bought by investors that are not themselves corporations, that have a holding period of five (5) years or longer, can exclude 50% of the capital gain from the calculation of capital gains tax. In other words, if you made a $100,000 profit, you would only pay capital gains taxes on 50%, or $50,000.
* This exclusion on the small business capital gains tax is limited to $10 million or 10 times the cost basis of your shares. If you bought your stock for $100,000 and it went to $2,000,000, for instance, you would have a gain of 20x your investment, exceeding the 10x limit.
* From 2003 through 2011, this benefit is of limited value because the maximum capital gains tax on long-term capital gains profits is 15%.

Deferred Capital Gains Taxes on Section 1202 Small Business Stocks
You can also defer the gains you earn from small business stocks under a provision in IRC Section 1045. If you have held your shares for at least six (6) months, and you sell them, you won't have to pay the capital gains tax as long as you use the money to buy shares of another qualifying small business.

What Counts as a Qualified Small Business Stock Gain Section 1202 Profit?
According to Startup Company Lawyer, "Qualified small business stock is defined in Section 1202 as any stock in a qualified small business issued to the taxpayer after August 10, 1993 in exchange for money or other property (not including stock), or as compensation for services. A qualified small business is a domestic C Corporation in which the aggregate gross assets of the corporation at all times since August 10, 1993 up to the time of issuance do not exceed $50,000,000. However, stock will not be considered to be qualified small business stock unless during substantially all of the taxpayer’s holding period the corporation meets certain “active business” requirements. Stock issued by an S corporation does not qualify as qualified small business stock (even if the S election is later revoked), although subsequently acquired stock may qualify. In general, gain from stock issued to “flow-through entities” such as partnerships and S corporations should qualify under Section 1202. However, the amount of the qualifying gain is limited to the interest held by the partner or S corporation shareholder on the date the stock is acquired. This limitation may be significant in certain venture fund settings when the general partners’ interests fluctuate over time."

Tax Relief for Debt Forgiveness Income

Please read the brief primer on the COD income rules as well as a general summary of the Act’s relief provision.

http://www.dechert.com/library/Int_Domestic_Tax_SA_02-09_Tax_Relief_for_Debt.pdf

8 Small Business Tax Strategies to Reduce Income Tax

Article Source: By Susan Ward, About.com Guide

Does the amount of income tax you paid last year make you shudder? You can't avoid income tax, but there are tax strategies that you may be able to use to reduce the amount of income tax you pay if you operate a small business in Canada.

Read through this list of small business tax strategies and see how many you're currently applying to reduce your income tax bill - and which ones you can start applying right now to reduce the amount of income tax you're going to owe this year. (Note that some of these small business tax strategies only apply to people who are running sole proprietorships or partnerships, who file their income tax using a T1 form.)

1) Always collect receipts for business-related activities.

I'm amazed by how some business people don't bother to get or keep receipts for "little" things. The parking fee on the way to meet a client, the "few" letters you mailed, the bag of coffee you picked up for the office - all these little things can really add up over the course of a year.

Maximize your income tax deductions by collecting the receipts for all your purchases that are or may be business-related, and recording and filing them appropriately. (See Maximize Your Business Income Tax Deductions for more information on handling receipts and specific business expenses.)

2) Manage your RRSP contribution.

The Registered Retirement Savings Plan (RRSP) is The Best Income Tax Deduction for Small Businesses. But that doesn't mean that you should necessarily just make the maximium RRSP contribution every year. Managing your RRSP contribution is a much better small business tax strategy.

Your allowable RRSP contribution will carry forward if you don't use all of it in a particular year, so estimate what your total income for the year will be and then decide how much of an RRSP contribution you should make that particular tax year, if any, to maximize your RRSP's tax bang for the buck. It doesn't make tax sense for you to make a large RRSP contribution in a low income year.

3) Maximize your non-capital losses.

Similarly, if your business has a non-capital loss (defined as when your expenses exceed your income for the business) in any year, consider when you can best use this loss to decrease your income tax bill before you use it. Non-capital losses can be used to offset other personal income in any given tax year, can be carried back three years, or carried forward for up to seven years. It may make more sense for you to carry your non-capital loss back to recover income tax you've already paid, or to carry it forward to offset a larger tax bill in the future than it does to use it in the tax year the capital loss occurred.

4) Maximize your charitable income tax credits.

Charitable donations to registered Canadian charities or other qualifed donees earn you tax credits. But are you aware that charitable donations that total over $200 provide you with more of a tax credit because they're assessed at a higher rate? To maximize your charitable income tax credits, consider giving more to the registered charities of your choice this year. If you make $30,000 in income and decided to give only 5% of your income, the fortunate charities would get $1500. (Be aware that non-registered Canadian charities, American charities, and political parties don't count.)

There are more small business tax strategies to help you maximize your business income tax deduction and reduce your income tax on the next page, including income splitting and tax strategies for maximizing your Capital Cost Allowance.

What other small business tax strategies can you put into effect to reduce the amount of income tax you pay? Try one or more of these.

5) Maximize your Capital Cost Allowance (CCA) income tax claim.

Most Canadian small business owners know that instead of just deducting the cost of whatever depreciable property they've acquired to use in their business in a particular year, they need to deduct the cost of the depreciable property over a period of years, through a Capital Cost Allowance claim.

But many small business owners are not aware that they don't have to claim Capital Cost Allowance in the year that it occurs - a tax strategy that you can use to reduce your income tax. The CCA is not a mandatory tax deduction so you can use as much or as little of your CCA claim in a particular tax year as you wish; you can carry any unused portion forward to help offset a larger income tax bill in the future. It doesn't make sense for you to take your full Capital Cost Allowance claim deduction in a year that you have little or no taxable income.

Another aspect of mazimizing your Capital Cost Allowance claim is to buy (and sell) your assets at the right time. You want to buy new assets before the end of your fiscal year and sell old assets after the current fiscal year.

Be aware, too, of the 50% rule; in the year that you acquire an asset, you usually can only claim 50% of the Capital Cost Allowance that you would normally be able to claim (and in some cases, the "available for use" rule means that you can't claim Capital Cost Allowance until the second tax year after you acquired an asset).

6) Split your income.

The income splitting tax strategy lets you take full advantage of the marginal tax rate disparities. The higher your income, the higher your marginal tax rate. By transferring a portion of your income to a spouse or child, a person with a lower income, you can reduce the marginal tax rate on your income.

This is an especially powerful tax strategy for small business owners with children of post-secondary school age. Suppose that you employed your 19-year-old daughter in your business, paying her a salary totalling $10,000. Because of the basic personal income tax exemption, she would pay very little income tax, and would have a nice nest-egg to help pay for her education. (If you paid her an income equalling the personal income tax exemption, she would pay no tax at all!) And meanwhile, you've "lopped" $10,000 off your income for the year, decreasing the amount of income tax you personally owe. See Decrease Your Income Tax Bite With Income Splitting to learn more about this tax strategy.

7) Take full advantage of the income tax deductions available to home-based businesses.

Do you operate your business out of your home? If not, what's stopping you? While not every business is suitable for a home-based business, home-based businesses do have advantages when it comes to income tax. Besides the Business Use-Of-Home Deduction, home-based business owners can deduct a portion of many home-related expenses, such as heat, electricity, home maintenance, cleaning materials and home insurance. If you own your home, you can also deduct portions of your property tax and mortgage interest. Home Business Tax Deductions will give you more information about these potential income tax deductions.

8) Incorporate your business?

One reason many sole proprietors and partners incorporate their businesses is because of the tax advantages of incorporation. The best known of these tax advantages is the Small Business Tax Deduction, whereby the income of qualifying Canadian-held corporations is taxed at a special "reduced" rate. For Canadian-controlled private corporations claiming the the small business deduction, the corporate net tax rate is 11% as of January 1, 2008. For other types of corporations, the corporate net tax rate is 19.5% as of January 1, 2008.

However, incorporating your business as a tax strategy will only be effective if your business has grown enough for incorporation to be worthwhile. You not only have to have a significant income already to offset the costs of incorporation, but need to be prepared to leave enough of your business earnings in the corporation to benefit from corporate tax deferral.

For instance, if you operate an incorporated business and the corporation's profits in a given year are $60,000, but you take $60,000 from the corporation in salary, your $60,000 is then taxed just as your personal (T1) income would be now, making incorporation for this reason pointless. Should You Incorporate Your Small Business? gives more information about the general advantages and disadvantages of incorporation.

Start Reducing Your Income Tax Today

While not all of these tax strategies will work for every small business, hopefully this list has gotten you thinking about tax planning. The amount of income tax you pay is not an absolute written in stone. There are legal, sometimes simple things you can do to decrease your income tax bill - small business tax strategies that you can start applying today.

6 Year End Small Business Tax Tips

Article Source:By Susan Ward, About.com Guide

As the fiscal and tax year draws to a close, it’s important to review your business tax situation to see what you can do yet to minimize the income tax you’ll have to pay. Use these six year end small business tax tips to implement tax-saving strategies before the New Year.

Small Business Tax Tip # 1: Maximize your Capital Cost Allowance claim.

Purchase necessary equipment and technology now rather than waiting for the new tax year to start. Although you’ll only be able to claim 50 percent of the normally allowable Capital Cost Allowance on your new assets, you’ll still be increasing your Capital Cost Allowance for this tax year – and setting yourself up for an increased CCA claim in the following tax year. For more on maximizing your Capital Cost Allowance claim, see 8 Tax Strategies to Maximize Your Business Income Tax Deductions.

(And don't forget about the new temporary Computer Income Tax Deduction that provides a 100 percent Capital Cost Allowance writeoff.)

Small Business Tax Tip # 2: Delay disposing of depreciable assets.

If you’re planning to dispose of depreciable assets, such as manufacturing equipment or computer equipment, don’t dispose of them until the new year. Otherwise, you’ll be reducing your Capital Cost Allowance Claim for this tax year.

Small Business Tax Tip # 3: Delay or defer income.

Any income your business receives in January rather than December will reduce your business income for this year – thereby reducing the tax on your income. Delaying or deferring income makes especially sound tax sense when your business income is higher than usual, or when the tax rates in the coming year are going to be lower.

Small Business Tax Tip # 4: Increase business expenses.

Another way of “managing” your income for the year is to increase your business expenses. Think about your upcoming needs for products or services and fill them now. Review the categories of potential business expenses, and see if your expenses are “low” in any one area. It’s certainly never too late, for instance, to do some more advertising or promotion for your business.

Small Business Tax Tip # 5: Make your maximum RRSP contribution.

This is the best available tax deduction for any business set up as a sole proprietorship or partnership. In any given year, you can contribute up to 18 percent of your earned income, and your RRSP contribution is deducted directly from your income. If you don’t have an RRSP, there’s no time like the present to set one up. For more on the RRSP as a tax deduction, see RRSPs: The Best Income Tax Deduction for Small Businesses.

Small Business Tax Tip # 6: Maintain your calendar year reserve.

Thinking of winding down your business operations? Rather than closing down your business before the end of this year, wait until next year, so the remaining portion of your calendar year won’t be taxed until the following year. That’s right; staying in operation for a few more weeks will defer this income inclusion for a year.

If you're an American citizen paying taxes in the United States, have a look at our About.com Business Finance Guide's Year End Tax Tips.

We can't avoid taxes, but it's wise business practice to minimize the income tax payable. Putting these six tax tips into effect during the waning weeks of the tax year will help you reduce your income taxes and get a jump on next year's tax planning.

Delay of Certain Cancellation of Debt

Article Source: http://www.irs.gov/formspubs

Certain businesses can make an irrevocable election to delay recognition income from the cancellation of business debt arising from the reacquisition of certain types of business debt repurchased in 2009 or 2010. If you make this election, you cannot exclude, for the taxable year of the election or any subsequent taxable year, the income from the cancellation of such indebtedness based on a title 11 bankruptcy case, insolvency, qualified farm indebtedness, or qualified real property business indebtedness.

Income is deferred until the 5th year after the reacquisition (4th year for reacquisitions in 2010), then the income is included ratably over the following 5 years.

The debtor must include an election statement with the tax return in the year the debt is reacquired. The statement must clearly identify the debt instrument and the amount of income deferred.

If elected, certain exclusions for cancellation of debt income would not apply to the income from the discharge of such debt for the year of the election or any later year.

For more details, including how to make the election, see section 108(i).

The Following is quoted from: About.com Guide By Lahle Wolfe,

Individuals, partnerships, corporations, and other entities must report income from debt cancellation on their tax returns, however, according to the IRS, income from cancellation of debt is not taxed if any of the following conditions apply:

* "The cancellation is intended as a gift.
* The debt is qualified farm debt (see chapter 3 of Publication 225, Farmer's Tax Guide).
* The debt is qualified real property business debt (see chapter 5 of Publication 334, Tax Guide for Small Business).
* You are insolvent or bankrupt (see Publication 908).
* The debt is qualified principal residence indebtedness."

File IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion.