Businesses should consider asset purchases before 2009 tax incentives end

As the economic downturn took a toll on businesses, small and large, Congress reacted with legislation aimed at stimulating business investment. The Economic Stimulus Act of 2008, Emergency Economic Stabilization Act of 2008, and American Recovery and Reinvestment Act of 2009 all provide tax incentives for businesses, including additional 50 percent bonus depreciation, higher limits for first-year expensing, and shorter recovery periods for asset depreciation.

With many of these tax provisions set to expire at the end of 2009, business taxpayers with the cash and the credit score considering purchases of business equipment may want to maximize their potential tax savings before the end of the year. Taking advantage of these tax benefits can reduce current taxable income and increase cash flow.

Bonus depreciation

Bonus depreciation and Code Sec. 179 expensing are the primary business incentives set to expire at the end of 2009. Congress extended 50 percent additional first-year bonus depreciation through December 31, 2009 in the 2009 Recovery Act. You deduct 50 percent of the property’s cost basis in the first year, before reducing the basis for normal depreciation computed over the property’s recovery period (formerly called its useful life), including the first year. However, you can irrevocably “elect out” of bonus depreciation.

Bonus depreciation is available for property with a depreciation (recovery) period of 20 years or less, water utility property, off-the-shelf computer software, and qualified leasehold property (farming equipment also qualifies for bonus deprecation, as well as first-year expensing). The property must be new, and therefore begin with the taxpayer. It must be purchased and “placed in service” before December 31, 2009.

Vehicle depreciation

Through 2009, Congress raised the limits on depreciation of “luxury” automobiles for 2009. The first-year depreciation limit, which is ordinarily $3,060 for vehicles purchased in 2009, has been raised to $11,060 (an $8,000 increase) through the end of the year for property that would otherwise qualify for bonus depreciation. The both limits are higher for vans and trucks. To qualify, the vehicle must be used more than 50 percent for business. For the additional $8,000 deduction, the vehicle must be new. Used vehicles first used in a taxpayer’s business still qualify for a deduction, but only up to the $3,060 limit.

First-year expensing

In lieu of bonus depreciation, you can elect to write off part, or all, of the cost of one or more assets, up to the limit on “Code Section 179 expensing.” The limit is $250,000 through 2009. Unlike bonus depreciation, first-year expensing applies to tax years beginning in 2009. Therefore, a fiscal-year taxpayer is not faced with a December 31, 2009 deadline for acquiring property and placing it into service. Additionally, expensing can be claimed on used as well as new property, unlike bonus depreciation.

Note. If you expense property that is also eligible for bonus depreciation, you should deduct the expensed amount from the property’s basis before claiming deprecation. First-year expensing is limited to your taxable income for the year, and cannot be used to generate or increase a net operating loss for the current year. Thus, if you are operating at a loss you should not claim expensing.

The amount that you can expense must be reduced dollar-for-dollar by the amount of the Code Section 179 property placed in service during the year exceeds a specified threshold. The threshold for 2009 is $800,000. The benefit does not fully phase out until investment reaches $1.05 million.

Shortened recovery period

Congress reduced the recovery period from 39 years to 15 years for leasehold improvements, restaurant property and retail improvement property placed in service by December 31, 2009. Leasehold improvements also qualify for bonus depreciation as well.

Investing in assets for your business is not just about taxes. You need to consider whether buying business assets makes financial sense this year. However, if you are contemplating investing in your business this year, act before the end of 2009 to take advantage of these incentives.

If you have questions about these and other tax incentives for investing in your business, please call our office. In customizing a plan to your special business needs, we also will be ready to revisit any year-end strategy should Congress decide to extend, with or without modification, any of the depreciation and expensing tax benefits now available.

Your company’s business plan: Roadmap to success

It’s a common misconception that a company needs a business plan only if it is looking for investors or trying to secure a loan. For any small business owner, a well-thought out business plan can be a valuable tool for growth and the roadmap to success.

Like most small business owners, you probably don’t have the time to develop a detailed, 25-page business plan. However, you should be able to find the time to put together a 3-5-page plan that will provide a strategic roadmap for you to follow in your everyday operations. In fact, operating without a coherent plan can be hazardous to the health of your growing business.

Once you have determined that a business plan would be useful for your company, following these four steps will help you get the most out of the process and should result in a usable plan of action:

Plan.

Before you sit down to the task of writing your business plan, you should consider how you want your plan to look, and what purpose you need it to serve (e.g., is it for internal and/or external use?). In addition, there are a few important decisions you will need to make upfront, such as:

• Timeline.

What length of time will your plan cover? A good rule of thumb is to take your plan out 3-5 years. Start-ups with little or no established revenue history or in new markets (such as the Internet) should lean more towards a 3-year timeline while older, more experienced companies in an established line of business should plan out 5 or more years.

• Information.

What information will you need to prepare your plan? The more relevant business data you have, the more accurate and useful your plan will be. Past & current business records, industry market analyses, and employee compensation guidelines are all good sources of data that can be integrated into your plan. 

• Assumptions.

What assumptions will you make and what are the sources of those assumptions? Invalid or unrealistic assumptions may result in a business plan that, if followed, may cause you to make unwise decisions that could be detrimental to your business. Be realistic, if not conservative, about your assumptions and make sure the source of the data you use is reliable. 

 Prepare.

Once you have gathered all of the data you will need and have made some of the more critical decisions, it’s time to get down to actually writing your business plan. Keep in mind that if business writing and/or financial forecasting are beyond your abilities, you may want to consider seeking out assistance from qualified professionals in those areas.

Your business plan should include these key elements:

• Executive summary

. The Executive Summary is an overview of the plan and includes a summary of the goals and strategies of the company. 

• Market Analysis & Strategy.

In this section of your business plan, you will need to define your market and the strategies that you need to implement to achieve the revenue projections set forth in the plan. 

• Action plan.

Once the goals & strategies have been identified and the market has been defined, the action plan must be formulated to provide guidance to implement these strategies. The action plan should provide quantitative data regarding the resources, financial and human, that will be needed in order to achieve the goals outlined. 

• Financial projections.

The financial projections pull together the expected results of the actions discussed in the plan, based upon certain assumptions made. 

 Implement.

Once you’ve developed a coherent plan, it’s critical that you don’t simply file it away unused. If, once you have your plan completed, you are unsure how to implement the plan’s actions, do not hesitate to seek assistance from a qualified professional or a trusted advisor familiar with your company’s industry.

Maintain.

Following a business plan with invalid or out-of-date assumptions and data could do your business more harm than good. Revisiting the business strategies and financial projections in your plan on a periodic basis is essential if you want to continue using the plan as a tool for growing your business. At a minimum, your business plan should be reviewed and updated on an annual basis.

Developing an effective business plan can pay long-term dividends and is certainly worth the effort. However, keep in mind that implementation and maintenance are just as important as development in order for your plan to be effective.

If you would like to discuss how your business could benefit from a business plan, please contact the office for a consultation.

Like-kind exchanges: Don’t overlook a valuable business and tax planning tool

If someone told you that you could exchange an apartment house for a store building without recognizing a taxable gain or loss, you might not believe him or her. You might already know about a very valuable business planning and tax tool: a like-kind exchange. In some cases, if you trade business property for other business property of the same asset class, you do not need to recognize a taxable gain or loss.

Not a sale

An exchange is a transfer that is not a sale. Essentially, it is a trade of like property.

In an exchange, property is relinquished and property is received. If the transaction includes money or property that is not of a like kind (referred to as “boot”), the transaction does not automatically become a sale. Any gain realized in the transaction, however, is recognized in that tax year to the extent of boot received.

In a like-kind exchange, the basis in the property received is the same as the basis in the property relinquished, with some adjustments. Any unrecognized gain or loss on the relinquished property is carried over to the replacement property. At a future time, the gain or loss will be recognized. If there is boot in the exchange and the gain is recognized, basis is increased by the amount of recognized gain.

The like-kind rules also require that property must be business or investment property. The taxpayer must hold both the property traded and the property received for productive use in its trade or business or for investment. Additionally, most stocks, bonds and other securities are not eligible.

Example

Jesse owns an office supply company and wants to expand his business. Carmen owns a restaurant and also wants to expand her business. Both individuals own parcels of land for investment that would benefit their respective expansion plans. The adjusted basis of both properties is $250,000. The fair market value of both properties is $400,000. Jesse and Carmen engage in a like-kind exchange. Neither Jesse nor Carmen would report any gain or loss.

More than two properties

Like-kind exchanges can involve more than two properties. While the rules are complicated, the basic approach is to combine properties into groups consisting of the same kind or class. If you are interested in a like-kind exchange involving more than two properties, we can help you.

Timing

The exchange does not have to take place at a given moment. If property is relinquished, the replacement property can be identified and received anytime within a specific period. Replacement property must be identified within 45 days after property is relinquished. The replacement property has to be received within 180 days after the transfer but sooner if the tax return is due before the 180 days are over (although the due date takes into account any extension that is permitted).

Reporting

A like-kind exchange must be reported to the IRS. The report must be made even if no gain is recognized in the transaction.  Again, our office can help you make sure that everything that needs to be reported to the IRS is reported.

This is just a brief overview of like-kind exchanges. The rules are complicated and could trip you up without help from a tax professional. If you think a like-kind exchange is in your future, give our office a call. We’ll sit down, review your plans and make sure your like-kind exchange meets all the complex IRS requirements.