Business Tax Incentives
Net Operating Loss Carryback
A net operating loss (NOL) is generally defined as the amount by which a taxpayer’s business deductions exceed gross income in a particular tax year. Typically, an NOL may be carried back two years and carried forward 20 years to offset taxable income in such years.
EXAMPLE:
Sam’s Hardware, Inc. had taxable income of
$5,000 in Year 1 and $15,000 in Year 2. In Year
3, the company suffered a $20,000 net operating
loss. The company may carry back the loss to offset
taxable income recognized in Year 1 and in Year
2 and potentially receive a refund of taxes paid
for those years.
Different rules apply with respect to NOLs arising in certain circumstances. For instance, a five-year carryback applies to qualifying farming losses.
The alternative minimum tax rules provide that a taxpayer’s NOL deduction cannot reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90% of the AMTI.
The 2009 Act allows eligible small business taxpayers to irrevocably elect to increase the carryback period from two years to as many as five years in the case of an NOL for any taxable year ending in 2008 (or, if chosen by the taxpayer, the NOL for any taxable year beginning in 2008). For example, a business incurring a net operating loss in 2008 may elect to carry the loss back to 2004 (i.e., four years), if it so chooses.
In general, for purposes of this provision, an “eligible small business” is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts are $15 million or less.
For NOLs for a taxable year ending before the 2009 Act’s enactment, transitional rules apply. Other special rules apply as well.
Small Business Estimated Tax Payment Relief
Individuals
who own small businesses and do not pay taxes through
income-tax withholding are required to pay estimated
taxes on their income during the course of the
year. In general, the required annual payment of
estimated tax is the lesser of: (1) 90% of the
tax shown on the current year's tax return or
(2) 100% of the tax shown on the individual's previous
year's tax return (110%, if AGI for the preceding
year exceeded $150,000). Failure to pay the required
estimated tax could result in an estimated tax
penalty.
Under the 2009 Act, in the case of any taxable year beginning in 2009, qualified individuals may pay estimated tax of 90% of the tax liability shown on the previous year’s return, thus possibly lowering their estimated tax burden. A qualified individual is a person whose AGI for the preceding taxable year was less than $500,000 ($250,000 for married persons filing separately) and the person certifies that more than 50% of the gross income shown on the previous year’s return was income from a small business. A small business for this purpose is a trade or business with fewer than 500 employees on average during the calendar year ending in or with the previous tax year.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is an incentive given to employers to hire disadvantaged workers in certain targeted groups. The amount of the credit available to an employer is determined by the amount of qualified first-year wages paid by the employer. The WOTC is not available for individuals who begin work for an employer after August 31, 2011.
The 2009 Act expands the WOTC to include two new targeted groups:
- Unemployed veterans, generally defined as those (1) discharged or released from active duty from the Armed Forces during the five-year period ending on the hiring date and (2) receiving unemployment compensation for at least four weeks during the one-year period ending on the hiring date; and
- Disconnected youth, meaning individuals certified as (1) having reached age 16 but not attaining age 25 on the hiring date; (2) not regularly attending any secondary, technical, or post-secondary school during the six months prior to the hiring date; (3) not regularly employed during that six-month period; and (4) not readily employable by reason of lacking a sufficient number of basic skills.
The WOTC is available to employers hiring members of these new targeted groups who begin work during 2009 or 2010.
Qualified Small Business Stock
Noncorporate taxpayers may exclude from income a portion of capital gain realized when they dispose of “qualified small business stock” (QSBS) held more than five years and meeting other requirements. Under pre-2009 Act law, the exclusion generally equaled 50% of up to $10 million (or ten times the taxpayer’s tax basis, if greater) of the gain on the disposition of QSBS. The remainder of the gain is taxable at the lesser of the taxpayer’s ordinary income-tax rate or 28%. The 2009 Act increases the exclusion to 75% for qualifying stock acquired after the date of the new law’s enactment and before 2011.
EXAMPLE:
Hi-Tech, Inc. issues qualified small business stock
in 2010 to its new minority owner, Jim, in exchange
for $200,000. After holding the stock for six years
and meeting all other tax law requirements, Jim
sells the stock for $600,000. Jim can exclude $300,000
(75% of the $400,000 gain) from his income for
tax purposes. The remaining $100,000 of gain is
taxable.
S Corporation Built-in Gains
Where a corporation is formed as a regular C corporation and later elects to become an S corporation (one that, essentially, passes through its income, deductions, losses, and tax credits to its shareholders to be reported directly on the shareholders’ tax returns), the S corporation is taxed on all “built-in” gains on the corporation’s assets if the gains are recognized (for instance, if the assets are sold at gains) within a defined period after the S corporation election is made. The 2009 Act temporarily reduces that “recognition period” from ten years to seven years for tax years that begin in 2009 and 2010.
Withholding on Certain Government Payments for Goods/Services
The 2009 Act would delay for one year the 3% withholding requirement on certain payments to persons who supply goods or services to eligible federal, state, and local governments, which was scheduled to go into effect for payments after December 31, 2010. Now, withholding is required for payments after December 31, 2011.
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