Recovery with New Tax Breaks

The new economic stimulus plan and tax breaks for your hearing care business

The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package, includes nearly $300 billion in potential tax savings. Every hearing care professional, as well as their practice, can share in more than $75 billion in tax benefits for 2009 and 2010.

The provisions of interest to most audiologists and hearing instrument specialists—the business-related tax breaks in the Recovery Act—extend “bonus” depreciation, increase the Section 179 first-year write-off for newly acquired equipment, and add two new groups of workers for whom first-year wages are reduced thanks to the work-opportunity tax credit. There is also a 5-year rather than 2-year carryback of net operating losses (NOLs) that may return taxes paid in earlier years to the coffers of some financially troubled hearing care practices and businesses.

Cash Infusions from Losses

Mark E. Battersby is a tax and financial freelance writer and advisor formerly enrolled to practice before the IRS, and is the author of four books. His office is located in the suburban Philadelphia community of Ardmore, Pa.

A hearing care office’s losses can result from reasons other than the economy. The Net Operating Loss (NOL) carryback provision in the Recovery Act provides the greatest potential savings of all the business tax provisions in the new stimulus package. Under current law, NOLs are carried back to the 2 taxable years before the year that the loss arises. NOLs also may be carried forward to each of the succeeding 20 taxable years, after the year of loss.

The Recovery Act gives hearing health care offices/practices the choice to carry NOLs from the 2008 tax year back 3, 4, or 5 years, generating a refund of taxes paid in those earlier years. Obviously, the extended NOL carryback provision has the potential for providing an immediate cash infusion to many troubled practices and businesses.

Faster, Larger Write-offs Continued; Buying Equipment Made Attractive

To help small businesses quickly recover the cost of newly acquired equipment and certain other capital expenses, the tax rules have long permitted hearing care businesses to write off the cost of these expenses, in lieu of recovering those costs over time through depreciation. The new Recovery Act extends the small business expensing—also known as Section 179—first-year write-off, increased temporarily as part of last fall’s Emergency Economic Stabilization Act (EESA). For 2009, a hearing practice or business can write off up to $250,000 of the cost of newly acquired equipment. The $800,000 ceiling, beyond which the deduction is reduced, has been carried over for 2009.

The maximum amount of new or used equipment costs that qualify as a Section 179 expensing deduction is, generally, reduced dollar-for-dollar by the amount of the Section 179 property placed in service during the year that exceeds that investment ceiling.

Seemingly at odds with helping troubled businesses, the amount expensed in a tax year cannot exceed the taxable income of the business. Of course, any amount not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.

A Write-off Bonus

Bonus depreciation was introduced as a temporary measure to stimulate the economy following the 9/11 terrorist acts. It was enhanced in 2003 and extended several times. Last year, lawmakers allowed dispensing practices and businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting them to immediately write off 50% of the cost of depreciable property, such as equipment, computers, and even wind turbines or solar panels, acquired in 2008.

The new rules extend for another year the 50% bonus depreciation allowed for property with a recovery period of 10 years or longer. Unlike Code Section 179, expensing that is available for new or used property; bonus depreciation is available only for new property or equipment.

Higher Caps on Vehicle Write-offs

Also extended for bonus depreciation purposes is the regular dollar cap placed on vehicle write-offs. The cap for new vehicles placed in service in 2009 is raised once again by $8,000. This increase mirrors the temporary 2008 cap increase resulting in a $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for 2009.

Remember, however, as with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might, for a tax year, consider making an election-out (opt-out) are when the hearing instrument or audiology practice:

1. Has about-to-expire NOLs, or
2. Anticipates being in a higher tax bracket in future years.

Discounted Wage Payments for Some New Workers

The Work Opportunity Tax Credit (WOTC) rewards employers that hire members of “targeted groups,” such as welfare recipients, the disabled, etc. Under current law, a hearing care practice or office can claim a WOTC equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The Recovery Act extends the WOTC to include two new targeted groups:

1. Unemployed veterans and
2. Disconnected youth.

The WOTC can be as much as $2,400 of qualified first-year wages (with different amounts for qualified veterans and summer youth hires). For long-term family aid recipients who begin work after 2006, the credit also includes 50% of qualified second-year wages.

Qualified Small Business Stock

Professional practices permitted to offer stock will find it easier to attract investors thanks to an expanded tax incentive for investors. Under the old rules, an individual investor could exclude 50% of any gain realized upon the sale or exchange of “qualified small business stock” that had been held for more than 5 years. That means an incorporated hearing instrument or audiology practice could create a unique type/class of stock, called Section 1244 stock, using as an incentive the fact that only part of the eventual gain would be taxed to the investor.

The Recovery Act makes small business stock more attractive by increasing the amount of gain from the sale of small business stock held for 5 years or more that may be excluded from 50% to 75% for stock issued after the date of enactment of this legislation and before 2011.

Cancelled Debt = Income Now Deferred

If another person (or business) pays a debt owed by the hearing care professional or their practice, the amount paid becomes taxable income. Similarly, if a creditor cancels a debt, or allows it to be paid off for less than the full amount owed, the amount forgiven is generally taxable income unless, of course, the hearing care practice is insolvent or in bankruptcy.

Thanks to the Recovery Act, financially troubled audiologists, hearing instrument specialists, and their practices can postpone the tax bill resulting from so-called “cancelation of debt income” (CODI) for 10 years. In other words, CODI is deferred for the first 4 or 5 years and recognized as taxes paid on this income ratably over the following 5 taxable years.

The Built-in Gains of S Corporations

The stimulus bill temporarily shortens, from 10 to 7 years, the holding period for assets subject to the built-in gains tax imposed after a regular “C” corporation elects to become an S corporation. This reduction applies to regular corporations that convert to S corporation in tax years beginning in 2009 and 2010.

The built-in gains tax prevents an incorporated hearing care business from avoiding corporate level tax on the disposition of appreciated assets it acquired while a regular corporation by first converting to S status. However, it also discourages S conversions in situations in which the practice or business may not otherwise survive under regular corporation rules. The new law will give shareholders more flexibility during the current economic crises.

More, Cheaper Alternative Energy

Under the tax rules, a hearing care practice can claim a unique tax credit for the cost of installing a variety of alternative energy sources. A practice is allowed to claim a 30% business energy tax credit for certain energy property placed in service, including fuel cell property, solar property, small wind energy property, and geothermal heat pump property.

The credit for qualified small wind energy property applies to periods after October 3, 2008. This is property that uses a qualifying small wind turbine (with a nameplate capacity of not more than 100 kilowatts) to generate electricity. The Recovery Act eliminates the $4,000 credit cap that formerly applied to qualified small wind energy property.

Something for Us as Well

The Recovery Act also includes an alternative minimum tax (AMT) patch for 2009. The patch was designed to insulate approximately 26 million middle-income taxpayers from the reach of the AMT. The AMT patch will save taxpayers approximately $70 billion.

The 2009 AMT patch raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are: $70,950 for joint filers and surviving spouses (up from $69,950 in 2008), and $46,700 for singles and heads of households (up from $46,200).

This massive stimulus bill, the American Recovery and Reinvestment Act of 2009, provides immediate relief, with most of the business-related tax incentives retroactive to January 1, 2009. Most of the $280 billion in tax relief is concentrated within the next 2 years.

While the overall size of the new law is massive, some provisions were either pared back or eliminated during the course of the political debate that raged. For an audiologist, hearing instrument specialist, or other hearing care professional—and their practice—professional advice is almost a necessity to ensure the operation will profit from the new Recovery Act.

Editor’s Note: As with any tax advice, be sure to check with a tax accountant or attorney to verify that the tax breaks discussed here pertain to your own particular business situation before initiating a project.

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