Legal Q&A: Get on top of new tax tools for 2010

Many of the tax tools grain and feed facilities have employed over the past few years expire in 2010, which could lead to challenging times ahead for facility managers and their accounting and legal teams. In this issue, FEED & GRAIN visits with Adam Thimmesch of Faegre & Benson LLP to help us bid adieu to the old rules and say hello to new opportunities for those seeking tax relief in 2010 and beyond.

Feed & Grain: With the uneven economy of the last few years, certain programs were enacted which allowed individuals and businesses to save money via tax relief. It appears some of these programs have run its course and won’t be available in 2010. What is the most significant program that expires in 2010?

Adam Thimmesch: One of the provisions intended to help businesses in this economy was a bonus-depreciation provision that has been in effect in recent years. This provision allowed taxpayers to deduct 50% of the cost of certain equipment and other fixed assets in the first year in which they were placed in service. Absent this provision, such costs would have been required to be depreciated over a period of years. By allowing taxpayers an immediate deduction for 50% of the costs of such assets, this provision helped to reduce the cost of acquiring assets for use in a business.

Unfortunately, the current bonus-depreciation provision only applies to purchases made before January 1, 2010. Under current law, purchases made after that date will not be allowed the 50% deduction. This will implicitly increase the costs to businesses of expansion in 2010, and, depending on the cost of the asset, could have a material impact on the financial projections for projects starting next year. There may be some good news, however. Despite the scheduled sunset of the bonus-depreciation provision, there are several bills currently pending in Congress that would extend this bonus depreciation allowance into 2010. While no one knows for certain what will happen, the level of activity in Congress on this provision is encouraging. Congress recognizes the impact that this provision has on businesses and has extended it in the past.

F&G: Has last years’ American Recovery and Reinvestment Act (i.e. the “stimulus bill”) offered any tax relief?

Thimmesch: The stimulus bill included a wide variety of tax provisions intended to assist individuals and businesses. Many of these benefits were focused on renewable or alternative energy production and energy conservation. However, several of the benefits were aimed at general business tax issues as well. These provisions were intended to help spur the economy by making it less costly for taxpayers to purchase property for use in their businesses. The bonus-depreciation provision discussed above was one such benefit contained in the stimulus bill. Prior to that legislation, the bonus-depreciation provision applied only to purchases made before December 31, 2008.

The stimulus bill also contained rules that eased the restrictions on the use of net operating losses incurred in 2008 by certain “small businesses.” Generally, losses of a company can be used to offset taxable income of the company in the prior two years and, to the extent not so used, in the next 20 years. For example, if a taxpayer paid income tax in 2006 and 2007, but incurred a loss in 2008, it could generally “carry back” that loss to its 2006 and 2007 income tax returns and receive a refund of some or all of the taxes that it paid. With a downturn in the economy, many taxpayers were finding that they could not use of their losses immediately (i.e., they did not have taxable income in the last two years). The stimulus bill allowed certain taxpayers with less than $15 million in annual gross receipts to carry back their 2008 losses a total of five years. The extra three-year period allowed many taxpayers to recover taxes paid in those prior years. This was a welcomed provision to many taxpayers, but was unfortunately limited in scope.