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.
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.
F&G: What other tools are out there that our readers should know about in 2010?
Thimmesch: 2010 will be an interesting year. The tax provisions discussed above are largely a result of a weak economy and taxpayer difficulties. It looks like many of those tools have a realistic chance of being extended into 2010, but the performance of the economy into the new year may dictate what happens from there. Taxpayers interested in expanding their businesses should keep their eyes on the bonus-depreciation provision and the 179 Expense Deduction. The other area where Congress is providing many tax benefits these days is in renewable and alternative energy. There are many tax-credit programs that have recently been enacted or extended in this area. Taxpayers who have the opportunity to expand in those areas may find some great tax tools to help lower the costs of such an endeavor. On an individual side, taxpayers should watch Congress to see what happens to the 2001 tax cuts, which are set to expire after this year.
Disclaimer: The information provided herein is general in nature, is not complete, and may not apply to a taxpayer’s specific situation. Taxpayers should consult with their tax advisers regarding their tax needs.
