carryback
Take action now to reduce taxes
Tuesday, November 23rd, 2010 | consulting, tax | No Comments
Year-end is the best time to take actions that have an impact on next spring’s tax bill. There’s not much you can do after the year is over. Take time to do financial projections through year-end and calculate your tax bill. Working with your accountant, you can identify actions to take that may reduce your tax or improve your financial position.
Although we are still waiting for Congress to act on several important tax issues, laws were passed earlier this year that change the calculations for many business owners. You still have time to arrange things to take advantage of these new provisions.
The Affordable Care Act introduced a tax credit that takes effect this year for smaller employers who pay at least part of their workers’ health insurance premiums. After determining whether your company is eligible and the amount of the credit, you can calculate how much net income (and taxes) will be offset by the credit.
The HIRE Act offers a payroll tax reduction for hiring new workers, starting with the second quarter of 2010. If you have not been taking advantage of this reduction, amend the prior returns and reduce the amount of your deposits in this final quarter for a holiday cash windfall. Beware, though, that the reduction may also reduce your payroll tax expense deduction and increase your income tax bill. If you keep those new hires on the payroll for a year, you get an income tax credit in 2011.
The Small Business Jobs Act, enacted in September, contains about a dozen and a half provisions that may affect your business’s tax situation this year and next. They include:
- Several adjustments to depreciation deduction limits for first-year write-offs and bonus depreciation for various types of property and vehicles.
- An increase in the up-front deduction for business start-up expenses if the business starts operation in 2010 only.
- An option to carry back business credits five years and recover taxes previously paid.
- Relaxation of the record-keeping rules for deducting cell phones. (Did you know you had to log every business call?)
- A reduction in self-employment tax for self-employed persons who buy health insurance for themselves and their families.
These provisions may affect you starting in 2011:
- Many rental income recipients must begin issuing Forms 1099 to service providers (e.g., plumbers, painters, etc.) to whom they pay $600 or more. (Some exceptions apply.)
- Penalties for failure to file information returns such as Forms 1099 have been increased substantially.
If you work through the projections and consult with your tax professional before year-end, you can make decisions that may save your company taxes and improve your financial position.
Net operating loss carryback deadlines loom
Thursday, July 15th, 2010 | tax | No Comments
If your business suffered a net operating loss (NOL) in 2008 or 2009 (or a 2007 fiscal year), you may elect to carry back that loss up to 5 years and recover taxes previously paid. You must make the election on a timely filed return, including extensions. The deadline for electing the extended net operating loss carryback is September 15, 2010 for calendar-year corporations. It is October 15, 2010 for individuals. If you do not elect to apply the extended carryback, the original two-year carryback rule applies. In either case, any unused loss may be carried forward up to 20 years. Complicated enough yet? It gets worse - and better.
Here’s the better part: The original extended NOL carryback provision, part of the American Reinvestment and Recovery Act (ARRA) of 2009, applied only to an ‘eligible small business’ (under $15 million average gross receipts). The Worker, Home Ownership, and Business Assistance Act (WHOBA) of 2009 allows taxpayers of any size to make the election.
The other better part: The extended carryback election is generally available for only one of the tax years ending after 2007 and beginning before 2010. However, if you already made a timely election under the provisions of the ARRA, you may make an additional election for another year’s NOL under WHOBA. Even if you have already timely filed your 2009 return, you may be able to make the election before the extended deadlines.
The worse part: These rules are extremely complicated, so you need the help of a professional who is familiar with them.
By applying a net operating loss to profitable tax years, you can give your company a cash stimulus through a refund of previously paid taxes.
Tax code as cash flow tool
Thursday, July 1st, 2010 | consulting, tax | No Comments
Has your business suffered a net loss during the recession? A tax refund may give you a needed cash infusion. The federal tax code provides a means to smooth out the business cycle. If your company reports a net operating loss on this year’s tax return, you can recover tax paid in prior (or future) years when the company reported a net profit.
The technique is called a net operating loss carryback. You must elect to carry a loss back on a timely filed return, otherwise the loss may be carried forward to as many as twenty future tax years to reduce taxable income. Normally, the loss may be carried back two years. For either 2008 or 2009 (not both), a loss may be carried back up to five years. If the loss is not used up in the prior years, it may be carried forward.
The IRS provides a method to quickly recover taxes to be refunded because of the loss carryback. By properly filing an Application for Tentative Refund (Form 1139 for corporations, Form 1045 for individuals, estates, and trusts), you can recieve a refund within ninety days of filing. This can provide a relatively quick cash infusion to help pull your company through the rough patch.
If a coroporation expects a loss this year and has not yet filed its return for last year, it can apply on Form 1138 for an extension to pay last year’s tax. When the net loss for this year is calculated, the company will pay last year’s tax (plus interest) after applying the net operating loss.
A corporation that has paid more estimated tax than necessary in light of adjusted income or loss projactions may apply for a quick refund of those payments on Form 4466.
These techniques can return cash to the company for daily operations rather than tying it up until after the year’s tax return is filed. Other types of carrybacks are also available, such as casualty and theft loss, farming loss, foreign tax credit, and loss attributable to a federally declared disaster.
As usual, there are technical details and caveats to the use of these techniques. Some of these details are discussed in this article. You should consult your tax advisor to determine the most appropriate action for your situation. We will be happy to help you with these tools, and to find other ways to improve your cash flow.
IRS gives some solace in a sad story
Friday, June 18th, 2010 | tax | No Comments
About five years ago, a police officer and his wife decided to use their retirement money to build their dream home in the Smokies. They bought a pretty lot and a log home kit, and contracted with a local builder to erect it. From the beginning, the construction process went terribly wrong. Errors compounded so much that they stopped work and had the unfinished house inspected. The inspection revealed that if the house was finished, it would be so unsafe that it would not receive a certificate of occupancy. The only solution would be to tear it down and start over, which the couple could not afford to do. It was a total loss.
They came to us for help. We calculated the casualty loss on the structure and reported it on their tax return, which created a net operating loss for the year. We took their story all the way to the appeals level, where the deduction was allowed. Having won that battle, we carried the net operating loss back to the years prior to the casualty loss. Last week, we received word that the carrybacks were allowed on appeal.
Our clients had to go back to work to make the mortgage payments on their shattered dream, but we were able to recover over $38,000 in taxes to help ease the pain of their experience. For all the horror stories you hear about the IRS, sometimes they do right by the taxpayer.