How the stimulus package can help your business

Friday, March 20, 2009

Merrill Lynch, http://mlperspectives.com/c.do?&cid=590402&oid=138170&xsl=34/newsletter.xsl

Small-business owners who make smart use of the plan’s tax benefits can help put money back into their companies.

In the ongoing national debate over how best to stimulate the economy, only one point has been certain: No one group will get everything it wants. But the small-business owners who make the best use of the American Recovery and Reinvestment Act of 2009 (ARRA) may find some relief. (The ARRA was signed into law on February 17, 2009.)

“Small businesses can certainly take advantage of the stimulus package's new tax benefits, as well as its extension of existing breaks,” says Vinay Navani, principal at Wilkin & Guttenplan, P.C., a certified public accounting and consulting firm in East Brunswick, N.J. “But small-business owners must employ the most efficient cash management practices to enjoy their maximum impact.” Specifically, companies may find opportunities for enhanced day-to-day cash flow within the plan’s provisions, especially by consulting with their Financial Advisor and tax professional about the changes.

Benefit now from past losses. Losses resulting from last year’s downturn may be claimed for an immediate refund, thanks to one new provision. Small businesses with gross receipts of $15 million or less that recorded losses in 2008 may apply them to tax obligations filed over the past five years (more than doubling the previous two-year limit) (American Recovery and Reinvestment Act of 2009, Public Law 111-5, 111th Cong., 1st sess. (February 17, 2009), § 1241). “By carrying eligible losses back several years, these companies may recoup some or all of their paid taxes—and take a cash refund to use right away,” Navani says.

Raise prospects for raising capital. Another ARRA provision may help small-business owners secure outside funding from long-term backers. The new law makes 75% of the capital gains from the sale of certain small-business stocks tax-exempt if the stock is held for more than five years—a significant increase from the prior 50% exclusion (ARRA § 1211). The provision applies to stock issued after ARRA’s enactment and before 2011 (ARRA § 1241). “With this in place, investors may find closely held stock investments more attractive,” says Navani. “And qualifying start-up companies may have an easier time raising funds.”

Take a quarterly break. By allowing qualified business owners to make lower quarterly estimated tax payments—90% of last year’s tax bill—the new law can potentially free up more cash for immediate use (ARRA § 1212). This applies only if the qualified business supplied more than 50% of the individual taxpayer’s prior-year income, and last year’s adjusted gross income was less than $500,000 (ARRA § 1212). “Business owners need to be careful in this instance,” Navani cautions. “You may lower your estimated tax payment now, but the full tax liability will still be due. It’s important to examine the prior year’s tax obligations and this year’s projected income. Reviewing your cash management with your Financial Advisor can help avoid a shortfall.”

‘Capital’ improvements. The stimulus package also extends two popular small-business tax benefits: the accelerated depreciation write-offs for the cost of new equipment purchased in 2009, and increased limits for write-offs of all capital expenditures, including used equipment (ARRA §§ 1201 & 1202). “It’s always smart to coordinate cash flow needs with respect to capital purchases,” Navani says. “These changes to tax law give business owners extra incentive to do some planning.”

* Consider these questions as you discuss ARRA’s small-business provisions with your Financial Advisor:How can I manage my cash flow to ensure that even while making lower estimated quarterly payments, I am still able to meet my full-year liability on time? How could I shift planned capital expenditures from future years into 2009?
* Am I in a position to hire employees from groups newly included in the work opportunity tax credit?

Staff investment. Investing in human capital also gets a boost under ARRA, with the expansion of the work opportunity tax credit. Now businesses may be able to claim a 40% tax credit for the first $6,000 of wages for several targeted groups, including two new demographics: unemployed veterans (individuals who have been discharged or released from active duty in the armed forces within the past five years and received unemployment compensation for four or more weeks during the year before being hired) and disconnected youths (ages 16 to 24 who have neither been regularly employed nor attended school in the past six months and lack a significant number of basic job skills) (ARRA § 1221). “The addition of the unemployed veteran category may help employers who haven’t been able to take advantage of this credit before, by including workers who may offer more diverse and technical skills,” Navani explains.

Work with a Financial Advisor and tax professional to sort through the cash and tax management strategies that make the most sense for your business. They can help you focus on the options that may achieve the greatest benefits now, so you can stay focused on preparing your business for the recovery to come.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their professional advisors.

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