Lynchburg Business

Taxes: What to look for as you file this year

Issue: March 2010 by Joshua Dalrymple, Esq. in Inside The Magazine, Legal

Educating yourself on the benefits and consequences of proper tax planning can have a dramatic effect on your business. It is important to understand that the government uses tax revenue not only to pay for expenditures, but also to influence the behavior of individuals and businesses, and 2009 was no exception. By capitalizing on new tax changes designed to influence these behaviors, you may be able to reduce the damage taxes do to your cash flow and bottom line. Even if you didn’t spend time in 2009 planning the tax consequences of your decisions, you may still be able to pick up some relief from some of the changes that were made last year. Let me direct you briefly to just a few of the more interesting changes that will affect your 2009 filing.

There is one change that will be a benefit to all taxpayers filing for 2009: The personal exemption has been increased to $3,650 for each taxpayer and their dependants. This marks a $150 increase over last year. While it doesn’t seem like a lot, every little bit helps.

Also, the standard deduction for taxpayers who don’t itemize has increased. It is now $11,400 for married filing jointly, $5,700 for individuals and $8,350 for heads of household. What is entirely new, interesting and more complicated about the standard deduction for your 2009 filing, is that it can be increased if you paid certain state or local real estate taxes, new motor vehicle taxes or realized a net disaster loss by using Schedule L. This new opportunity to raise your standard deduction is an attempt by the government to fix an ailing economy and help those who suffered in any of the 59 federally declared disasters for 2009.

Even if you didn’t have a loss related to a federally declared disaster, you may find some benefit if you donated to the victims of one. Certain charitable cash contributions to Haiti relief can be deducted on your 2009 taxes, even though you made the contribution after January 11, 2010 but before March 1, 2010.

These small tax incentives should help a significant number of people, but the real story with tax filings this April can be found by looking at what the government is doing to rescue a failing real estate market. The biggest change here is that there is an $8,000 credit available for first time homebuyers and a $6,500 credit for long-time homeowners who purchased a new principle residence in 2009. Both credits are limited by several factors, including the price of the home, and the income of the tax filer.

Here’s the interesting part: A credit is not the same as a deduction. These credits are a dollar-for-dollar reduction in the amount of tax owed, and they are refundable. This means that if someone only owes $2,000 of taxes and he or she qualifies for the $8,000 credit, then he or she will get a check from the government for $6,000. That’s right, someone can get paid by the government simply by buying a home before April 30, 2010. You be the judge as to whether the incentive is working to fix the market.

Another new item for homeowners is based on the government’s energy saving agenda. “Going Green” seemed to be on everyone’s mind in 2009, and the government is no exception. The U.S. Department of Energy highlights the following:

Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs and heating and cooling equipment in existing homes can receive a tax credit for 30 percent of the cost, up to $1,500, for improvements placed in service during 2009. Consumers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and microturbine systems can receive a 30 percent tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies.

Again, it should be noted that this is not a deduction; it is a credit. It is a dollar-for-dollar reduction to the amount of tax the consumer will owe. It is the same as the government paying 30 percent of the bill for your energy saving products. However, unlike the homebuyer credits, this one is not refundable so it will not result in any net gain.

Let’s look at a tax provision that may help your business. For 2009, the Section 179 expensing limits are the highest they have ever been. Typically, a business is required to depreciate items that have a useful life of more than one year over several tax years. However, under Section 179, businesses can deduct the entire expense, up to $250,000 (subject to an investment limit of $800,000), of things such as machinery, equipment, furniture, software and fixtures that have been purchased for business and put into use in 2009.

This provision could result in a huge deduction for businesses that made significant capital expenditures in 2009. Why is this important for this year’s tax filing? Because the limit drops to $135,000 for items put into service in 2010. It seems the government wants to push businesses to “buy it now.” Again, you be the judge as to whether this tax incentive pushed businesses to jumpstart the economy through capital purchases in 2009.

What can we learn from all of this? It seems that the government would like you to help in caring for victims of natural disasters, buy a house, make it energy efficient and invest in equipment and software for your business. If you did any of these things in 2009, and you are not excluded by a host of limitations, then your tax filing this April could be somewhat less painful than it has been in prior years. Whatever the case may be, get ready for changes in 2010, spend some time considering the tax advantages and consequences of your business decisions and seek some competent legal advice.

The preceding is for informational purposes only and not intended to constitute specific legal or tax advice or form an attorney/client relationship.  Please seek the services of a licensed attorney or qualified tax advisor for specific legal or tax advice.