Law Offers Special Tax Breaks for Small Business; Act Now and Save, IRS Says

Small Business Week was May 17 to 23, and the Internal Revenue Service urges small businesses to act now and take advantage of tax-saving opportunities included in the recovery law.

The American Recovery and Reinvestment Act (ARRA), enacted in February, created, extended or expanded a variety of business tax deductions and credits. Because some of these changes—the bonus depreciation and increased section 179 deduction, for example—are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a quick rundown of some of the key provisions.

Faster Write-Offs for Certain Capital Expenditures

Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.

The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service.

The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

Bonus depreciation and the section 179 deduction are claimed on Form 4562. Further details are in the instructions for this form.

Expanded Net Operating Loss Carryback

Many small businesses that had expenses exceeding their incomes for 2008 can choose to carry those losses back for up to five years, instead of the usual two. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period.

This option is still available for most eligible taxpayers, but only for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.

Eligible individuals should file a claim using Form 1045, and corporations should use Form 1139. Details can be found in the instructions for each of these forms, and answers to frequently-asked questions are posted on IRS.gov.

Exclusion of Gain on the Sale of Certain Small Business Stock

The new law provides an extra incentive for individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.

Estimated Tax Requirement Modified

Many individual small business taxpayers may be able to defer, until the end of the year, paying a larger part of their 2009 tax obligations. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small businesses in 2008 and meet other requirements. For details, see Publication 505.

COBRA Credit

Employers that provide the 65 percent COBRA premium subsidy under ARRA to eligible former employees claim credit for this subsidy on their quarterly or annual employment tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their employment tax deposits by the amount of the credit. For details, see Form 941. Answers to frequently-asked questions are posted on IRS.gov.

Other ARRA business provisions relate to discharges of certain business indebtedness, the holding period for S corporation built-in gains and acceleration of certain business credits for corporations. Also see Fact Sheet FS-2009-11.

Tax Deductions for Charitable Donations

Many people contribute to charities throughout the year, but the holiday season seems to be time of increased attention toward the less fortunate. It’s always good to give any unused household items or other things that you can part with to charities so they can be used by others. Even though you can be motivated by altruism in this activity, remember you can also claim tax deductions for most donations, whether they be for money, clothing, vehicles, or other items.

In order to claim deductions for charitable donations, the IRS requires that you keep adequate records of your gifts. And this year, taxpayers will be required to back up their donations with more comprehensive recordkeeping than before. That means you’ll need to make sure you are asking for receipts and storing them in Shoeboxed so you can get your full deductions.

According to the IRS, you must have a bank record or written communication (a.k.a. a receipt). These acceptable documents include canceled checks, bank statements that include the name of the charity, the amount of contribution, and the date.

The IRS now requires these records for all deductions, regardless of the amount of contribution. For donations of more than $250, you must have a written acknowledgement specifically from the charitable organization. For donations of more than $500, you must complete a Form 8283, Noncash Charitable Contributions.

Also new to the deductions rules are regulations regarding vehicle donations. In the past, you could claim an automatic $5000 deduction for a vehicle, but now you can only claim what the charity sells the vehicle for at an auction. If the charity is going to keep it for itself, you can only deduct whatever the “fair market value” is of the vehicle.

As you are getting ready to file your taxes this year, we hope you have kept your receipts so you can maximize your deductions!

Shoeboxed and TaxACT Partner to Make Filing Taxes and Organizing Receipts Easier

We are happy to announce that Shoeboxed and TaxACT, a leading online tax preparation service, have partnered to bring you complementary services. Here at Shoeboxed, we hope this will help make Tax Season 2009 easier and less stressful for you.

When used together, TaxACT and Shoeboxed provide consumers with an easy way to complete tax returns on time, protect themselves from IRS audits and maximize their deductions. Shoeboxed helps consumers organize their receipts, including many tax-related documents, without having to do any scanning, data entry or organization themselves. By just putting receipts into an envelope, they can have receipts archived in a format that can be easily referenced when filing their federal tax return. Additionally, Shoeboxed scanned receipts are an accepted IRS format for proof of purchase. TaxACT allows users to file their tax forms online, streamlining the process to save time and frustration.

Read the full press release here: Shoeboxed and TaxACT Partner