F&G: Explain how the Code Section 179 Expense Deduction has changed.
Thimmesch: The Section 179 Expense Deduction is another tax provision aimed at helping taxpayers to acquire equipment and machinery for use in their businesses. Like the bonus-depreciation allowance, this provision allows taxpayers an immediate deduction for the cost of such assets. The 179 Deduction can be more beneficial than the bonus-depreciation allowance, however, because it allows a 100% recovery in the first year. The downside is that it is limited in amount, and that limit is adjusted for taxpayers who make substantial purchases of assets that would qualify for the deduction.
In 2009, a taxpayer could elect to expense up to $250,000 under Section 179. This amount was reduced for taxpayers who purchased more than $800,000 of such assets during the year. These limits are set to fall to $125,000 and $500,000, respectively, in 2010. Like the bonus-depreciation provision, however, there are currently several bills in Congress that would impact the 179 Expense Deduction. These proposals vary, but each would at least retain the 2009 levels for taxpayers making purchases in 2010. We are hopeful that one of these beneficial provisions will be enacted soon.
F&G: If my business operated in the red this year, what is available for deducting operating losses?
Thimmesch: As mentioned above, Congress started granting taxpayers some relief from losses in the stimulus bill. Unfortunately, the provision in that bill was limited to 2008 losses and was limited to taxpayers with less than $15 million in annual gross receipts. On November 6, a new provision was signed into law that allows all taxpayers (without regard to their size) to carry back 2008 or 2009 net operating losses a total of five years. If a taxpayer has experienced losses in 2008 or 2009, and those losses exceeded its income in the prior two years, this new law could be of great assistance. Such a taxpayer may be able to obtain a refund from the IRS for taxes previously paid.
F&G: Explain how a “reacquisition of debt” tool works and when it would make sense to employ it.
Thimmesch: One of the consequences of the weakened economy is that many businesses have found themselves overextended and unable to pay off all of their debt. Many taxpayers have worked with their lenders to either modify or discharge their debt for less than what is owed. In many cases, the IRS considers such actions to create taxable income to the taxpayer equal to the amount of debt that has been discharged. The tax on that deemed income must be paid with their current-year tax returns, which obviously creates an uncomfortable situation for taxpayers who are already strapped for cash.
Congress granted some relief from this rule in the stimulus bill. Under that legislation, if income from a discharge of indebtedness is deemed to be from a “reacquisition of a debt instrument,” the taxpayer can elect to include the income on their tax returns over a five-year period starting in 2014, rather than in the current year. This rule currently applies only to reacquisitions of debt that occur in 2009 and 2010.
A “reacquisition of debt” includes many actions that taxpayers may not anticipate. In addition to the taxpayer (or a related party) acquiring the debt instrument for cash, it includes exchanges of the debt instrument for another debt instrument, certain modifications of the current instrument, exchanges of the debt instrument for corporate stock or a partnership interest, and the complete forgiveness of the debt. This new provision thus creates an opportunity for struggling taxpayers to defer for several years the sting of the deemed income that can occur when debt is discharged.