2010 CCH Whole Ball of Tax
Tax Solutions for Taxing Times
(RIVERWOODS, ILL., January 2010) – When times get tough, the tax laws can be part of the solution, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Tax policy can be used to stimulate the economy and provide relief to the victims of large- or small-scale economic misfortune,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA.
Last year’s stimulus legislation, the American Recovery and Reinvestment Act, for example, pumped money into the economy with a Making Work Pay tax credit for working taxpayers and a payment for Social Security beneficiaries. It eased the financial burden for those with higher education expenses with an expanded and partially refundable credit, aided homebuyers with a credit, encouraged car sales with a new deduction and expanded the benefits of the Earned Income Tax Credit.
Help for the Unemployed
The stimulus legislation also provided two-fold relief for the unemployed.
First, it provided an exclusion from gross income of up to $2,400 in unemployment benefits, putting them beyond the reach of the income tax.
“It may not be widely known, but ordinarily, unemployment benefits are taxed the same as wages,” Luscombe observed. “That may seem like kicking someone when they’re down, but even last year’s relief was limited in extent, and it expired at the end of 2009.”
The stimulus bill also used the tax system to provide a 60-percent subsidy for COBRA continuing health insurance coverage for unemployed workers. The subsidy was directly provided by the employers offering COBRA coverage, who were then reimbursed by tax credits against their employment taxes.
“For many of the unemployed, this probably produced a greater dollar savings than the exclusion for unemployment benefits,” Luscombe said. “This relief was only temporary, though. It also expired at the end of last year.”
Earn Less, Pay Less
Of course, the “progressive” character of the income tax means that, in general, your taxes will fall when your income shrinks.
This is helpful in the long run, but those who lose a job should be wary of the assumption that they’re immune to tax woes.
“If someone receives significant severance pay or taps a retirement account, they may find that they won’t have a sufficient amount withheld or set aside to cover their eventual tax obligations,” Luscombe warned.
Benefits for Businesses
Last year’s stimulus legislation also provided help for businesses.
Businesses experiencing net operating losses (NOLs) in tax years beginning or ending in 2008 or 2009 can benefit from provisions that allow them to apply one of the losses to previous years’ income for as many as five years before the year in which the loss takes place, potentially producing a tax refund for the prior year. Normally, NOLs can be “carried back” only to the two previous years. This provision was originally targeted at small businesses in the American Recovery and Reinvestment Act, which became law last February, but was expanded to provide similar treatment to all businesses in the Worker, Homeownership and Business Assistance Act of 2009, which became law last November.
“The ability to apply a NOL to a previously profitable year and get a tax refund can put cash back into a business quickly, and may keep a struggling business from closing its doors,” Luscombe said.
Last year’s stimulus legislation also extended two provisions that encourage businesses to invest in equipment. Bonus depreciation, which allows a business to write off an additional 50 percent of the cost of new equipment in the first year, was extended from 2008 to 2009. Enhanced small business expensing, which allows businesses to totally write off up to $250,000 in new equipment subject to a phaseout when capital expenditures exceed $800,000, was also extended from 2008 to 2009. Thus far, neither provision has been extended for 2010.
“Many people are doubtful that these provisions actually produce any more spending on equipment than would otherwise take place,” Luscombe noted. “They argue that businesses don’t buy equipment just to get a tax break; they buy it because they believe they can increase sales and profits. It also won’t help businesses that are strapped for cash and unable to borrow.”
To encourage purchase of certain small business stock, the law increases the exemption for gain on the stock held for five years or more from 50 percent to 75 percent for stock acquired after February 17, 2009 and before January 1, 2011.
For S corporation conversions, the law temporarily shortened, from 10 to 7 years, the holding period for assets subject to the built-in gains tax imposed after a C corporation elects to become an S corporation. This reduction would apply to C corporations that convert to S corporations in tax years beginning in 2002 and 2003.
“This change provides an incentive for certain existing S corporations to sell built-in gain assets, but it does not reward current conversions to S status,” Luscombe said.
The American Recovery and Reconstruction Act also allowed corporations to defer recognition of “income” that is attributed to them when a creditor cancels or reduces their debt temporarily, extended a temporary provision that allows businesses to take a larger portion of AMT or research and development credits in lieu of bonus .
The stimulus legislation also expanded the existing Work Opportunity Tax Credit, which generally gives businesses up to $2,400 to add people in targeted groups to their payrolls. For employees beginning work in 2009 or 2010, it adds unemployed veterans discharged within five years of the hire date and “disconnected youth” – those between 16 and 25 who haven’t been regularly employed or in school for the last six months to the list of “targeted groups.”
“This may induce employers to take on some people they see as ‘high risk,’ or who need more training than usual,” Luscombe said.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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