By Roger S. Stinnett CPA, CFP®, CIMA®
Manager, Tax & Financial Planning
City National Bank

On Feb 17, President Barack Obama signed into law the “American Recovery and Reinvestment Act of 2009.” The package is intended to provide much needed stimulus to our ailing economy and modest tax relief for many individuals and their businesses.

We have outlined several of the key tax relief provisions coupled with some planning tips to help ensure you take advantage of these opportunities.

Business Incentives

Bonus Depreciation Extended. Last year, businesses were allowed a special depreciation allowance for property acquired in 2008 (i.e., an immediate deduction of 50 percent of the cost of depreciable property). The Act extends this temporary benefit for depreciable property acquired in 2009. The temporary increase to the first-year luxury passenger auto limitation ($8,000) that was approved in 2008 was also extended through 2009.

Planning tip:  If you plan on acquiring equipment, computers, automobiles (i.e., depreciable assets) for your business in the near future, acquiring them before the end of 2009 ensures a higher depreciation deduction. This deduction would lower the taxable income to your business (and likely you) easing the cost of the asset acquisition in the initial year.

Increased Section 179 Deduction Extended. In 2008, the amount that  businesses could write-off for capital expenditures was temporarily increased from $125,000 to $250,000. The Act extends this temporary increase for capital expenditures incurred in 2009.

Planning tip:  This provision provides added incentive for those business owners considering a more substantial investment in their company’s depreciable assets during 2009. A business that invests up to $800,000 in depreciable assets this year may be able to write off as much as $250,000 of these costs on their 2009 tax return. By allowing a larger immediate tax deduction for these expenditures, a business’ taxable income can be lowered significantly, thus helping to fund or finance those purchases.

Qualified Small Business Stock Gain Exclusion. Previously, individuals could exclude from gross income as much as 50 percent of the gain from the sale of certain qualified small business stock. This stock must have been held for at least five years. The Act now allows a 75 percent exclusion for individuals on the gain from the sale of certain small business stock.

Planning tip:  If you are contemplating starting a new business between now and January 1, 2011, you will want to carefully consider the requirements of this provision before actually forming your business. Following these provisions may allow you to exclude significant gain on the eventual sale of that business. Few provisions in the tax code allow an individual this type of opportunity.

Individual Incentives

Sales Tax Deduction for New Vehicle Purchases. Taxpayers can deduct state and local sales and excise taxes paid on the 2009 purchase of new cars, light truck, recreational vehicles, and motorcycles. This deduction is subject to a phase-out for single taxpayers with adjusted gross income (“AGI”) in excess of $125,000 ($250,000 for married taxpayers filing a joint return).

Planning tip: Taxpayers expecting a deduction for these taxes should undertake some income tax planning.  This may help to avoid the phase out limitation if one can defer or avoid recognizing income that would otherwise increase your AGI. Additionally, if you are in AMT, any benefit of the sales tax deduction will be eliminated.

Computers are Qualified Expenses for 529 Plans. For 2009 and 2010, expenditures for computers and computer technology are qualified education expenses eligible to be paid for by Section 529 Education Plans.

Planning tip: Parents and students should plan now for computer technology purchases over the next two years to ensure they take advantage of this temporary provision that will help families pay for student computers.

Conclusion

Looking forward, there will likely be additional tax legislation in the near term that will affect you and your finances. Many expect additional legislation later this year that addresses our current estate tax structure. We will keep you posted on all the latest developments.

 Please don’t hesitate to contact your team of experts at City National Bank if you have questions.

City National Bank, as a matter of policy, does not give tax, accounting, regulatory or legal advice .The effectiveness of the strategies presented here  will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.