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1. Make the most of your net operating loss deduction. Recent tax legislation opens up opportunities for taxpayers of all sizes to choose an extended carryback period for net operating losses (NOLs). This provision allows contractors who have NOLs to choose a five-, four- or three-year carryback period (increased from the normal two-year rule) for NOLs incurred in a tax year beginning or ending in 2008 or 2009. Keep in mind, however, that only a single year can qualify for this enhanced carryback period. Taxpayers with NOLs in two or three qualifying years need additional analysis to maximize their cash refunds.
2. Take a hard look at bonus depreciation deductions. As an incentive for investment in equipment, taxpayers are allowed to deduct half of the cost of 2009 qualifying property in the first year of use, and then depreciate the remaining half of the asset over its normal useful life. For five-year equipment (the most common tax life for construction equipment), this allows a deduction of 60 percent of the asset’s cost in the first year of its life. For contractors in a tax-loss position, this deduction increases NOL carryback opportunities. However, pass-through entities such as S corporations or LLCs should be aware that significant individual income tax increases are possible, which may make depreciation deductions worth more in the future. Careful planning is required to make sure this deduction is right for you.
3. Consider future capital gains and dividend tax rate increases. Under current law, capital gains and qualified dividends are taxed at a favorable 15 percent federal income tax rate. This preferential treatment is scheduled to expire at the end of 2010 and individuals (absent a law change) will face higher taxes on these items in 2011. Taxpayers with significant capital gains transactions should work with tax advisers to analyze whether accelerating capital gains and dividends into 2010 is a prudent tax move.
4. Take full advantage of capital asset expensing deductions. Rules originally intended for small businesses were expanded significantly to allow contractors to expense up to $250,000 of 2009 fixed asset costs, provided less than $800,000 of assets were placed in service throughout the year. Unlike bonus depreciation, this applies to new or used assets. However, this deduction cannot be taken if a contractor is already in a tax-loss position.
5. Consider not deferring income. The traditional wisdom of deferring income for tax purposes deserves another look. With many government entities looking for increased tax revenues, new tax policies and rate increases are very possible. At the current time, individual taxpayers are a target. With tax increases scheduled for 2011, taxpayers would be well-advised to consider whether deferring taxable income is still the most cash-efficient option.
“To learn how these tax tips may apply to your contracting business, please contact your tax advisor,” said Todd Taggart, Tax partner and practice leader of Grant Thornton LLP’s Construction practice.
Grant Thornton LLP’s Construction, Real Estate and Hospitality group has developed 10 tax tips for contractors. To read all of the tax tips, go to www.GrantThornton.com/CRHtaxtips or email CRH@gt.
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