Tax Tips

A boost for small business stock

The American Recovery and Reinvestment Act of 2009 (ARRA) provides a big tax incentive for investors in qualified small business (QSB) stock, which generally includes stock in domestic C corporations with gross assets of $50 million or less. Ordinarily, taxpayers who hold QSB stock for at least five years are entitled to exclude 50% of the gain from its sale. ARRA increases the exclusion to 75% for QSB stock issued after Feb. 17, 2009, and before Jan. 1, 2011.

Tax law changes that improve your cash flow

In the current economic climate, maintaining good cash flow is one of the keys to survival. Fortunately, several 2009 tax law changes can give your cash flow a boost:

The 50% first-year depreciation bonus has been extended to qualified assets acquired in 2009.

The increased Section 179 small business expensing limits have been extended through 2009.

The 2009 estimated tax payment requirements for many individuals who derive the majority of their income from a small business have been reduced.

Keep in mind that all of these tax breaks contain various restrictions and limitations. Contact your tax advisor for details.

Checking out the manufacturers’ deduction

The manufacturers’ deduction, also commonly referred to as the domestic production activities deduction or Section 199 deduction, allows a business to deduct up to 6% of its income from “qualified production activities,” increasing to 9% next year. Although most people naturally associate this tax break with large manufacturing firms, it’s available to a variety of businesses, including construction contractors, architects, engineers and software developers.

For sole proprietors and other small businesses, one obstacle to claiming the manufacturers’ deduction is the fact that the deduction is limited to 50% of the company’s W-2 wages attributable to qualified production activities. If you think the wage limitation is the only obstacle to qualifying for the deduction, you may want to consider hiring one or more employees.

Consider generation-skipping trusts

If you leave assets directly to your grandchildren (or others two or more generations below you), the bequest may be taxed twice: The transfer may be subject to both the estate tax and the generation-skipping transfer (GST) tax (at the same rate as the highest estate tax rate, which is 45% in 2009).

But you can transfer assets GST-tax free if you apply your GST tax exemption, which is $3.5 million in 2009. If you don’t want to transfer assets directly to your grandchildren, you can apply your exemption to a generation-skipping trust. You may structure the trust so that it lasts for generations, with each succeeding generation receiving some income and use of the trust principal under certain circumstances, such as for medical emergencies or college tuition.

All future appreciation and accumulated wealth passes estate- and GST-tax free. But if your transfers to the trust exceed the GST tax exemption limit, there will be GST tax consequences. •