Business Owners: Call in the experts
Stimulus is confusing and, for business owners, there are important items to understand
So what will $298 billion in tax relief mean to you?
Confusion that’s what! It’s time to talk to your insurance agent, CPA and financial planner NOW! Here is a partial list of items that may impact your business, the backbone of our economy:
Nine-month COBRA extension and subsidy: Employees involuntarily terminated between September 1, 2008 and December 31, 2009 are eligible to receive a 65 percent government subsidy on their COBRA premiums for up to nine months. The subsidy does not include individual filers with incomes of more than $125,000 and joint filers making more than $250,000. Remember, COBRA applies to employers who had 20 or more full time or full-time-equivalent employees in two of the past four quarters. These dollars will be paid by employers and reimbursed by the federal government.
Retirement Accounts: Most people realize that 2008 was a horrible year for the stock market. It was, in fact, the worst year’s performance for the Dow Jones Industrial Average in more than 75 years. The downturn had broad implications for everything from college endowment funds to community and non-profit foundations, but one of the biggest impacts was on retirement accounts.
Retirement accounts created a vexing tax inequality last year. Accounts including IRAs, 403(b)s and 401(k)s (if the accountholder is no longer working) must take a required minimum distribution or face penalties. The account holder must take the RMD in the year they turn 70.5, although they have until April 1 of the following year to actually take it. After that first year, they must take the RMD by December 31 of each year. If they fail to take the RMD, the amount not taken will be taxed at 50 percent.
One problem is the time frame given for valuing the account for the purposes of calculating the RMD. For any given year, the RMD is determined by dividing the prior year’s retirement account balances as of December 31 by a life expectancy factor. For example, a single, 75-year-old taxpayer would find on the IRS’s Uniform Lifetime Table a life expectancy factor of 22.9. If the taxpayer had $100,000 in a retirement account as of December 31, 2007, the 2008 RMD would be $4,367 ($100,000 / 22.9 = $4,367). The problem with the RMD rules stems from the fact that required distributions in 2008 are based on plan balances from December 31, 2007, while the stock market saw large declines in October and November of 2008. In other words, since the stock market declined so much in 2008, retirees would be forced to take a higher RMD on a balance that had declined substantially.
However, the reality is that many retirees in their 70s have the majority of their IRA account in CDs, fixed account products paying a stated interest rate and bonds. So, in most cases, the decline in the stock market did not significantly alter their overall account value and, as a result, their RMD was not significantly altered.
In addition, the actual provision of the law was signed by President George Bush on December 12, 2008, so the late-year change in the law added to the potential confusion. Since the change did not pertain to 2008 withdrawals, but rather to 2009, there is ongoing confusion for many retirees about what they have to do and in what year. The confusion is also being amplified as people focus on their 2008 tax return, due April 15. Yet the relief for the RMD is for 2009, not 2008.
Now is the time to determine the best course of action. It is possible that some retirees will be confused about whether they needed to take a RMD in 2008 versus 2009 and risk the possibility of receiving a substantial excise tax for not taking their RMD by the end of 2008.
Five-year net operating loss carry-back extension: Small businesses (defined as businesses with less than $15 million in annual receipts) that experienced net operating losses in 2008 may apply their losses to the past five tax years (2003-2007). Under current law, businesses are allowed to carry back their losses for the past two years (2006-2007). Small businesses can use their NOLs to offset future taxes or as a refund of taxes paid from 2003-2007.
One-year extension of bonus depreciation: Businesses may continue to write off 50 percent of depreciable property (e.g. business equipment and computers) purchased in 2009 for use in the United States.
One-year extension of enhanced small business expensing: Small businesses may continue to write-off up to $250,000 of capital expenditures incurred in 2009 subject to a phase out once capital expenditures reach $800,000.
S-corporation changes: The S corporation built-in gains holding period was reduced by three years (from 10 to seven years) for 2009 and 2010. Currently, when a taxable corporation converts into an S corporation, the S corporation must hold its assets for 10 years to avoid a tax on gains that existed at the time of the conversion.
These are just some of the provisions in the stimulus bill that may impact you directly. Consult with your financial and business advisors in all areas to be aware of any other changes.
Angela Potts-Bopp, CPCU, AAI, CPIW.Angela specializes in business insurance and employee benefits and cares about you! If you’ve got questions, Angela has solutions.