New law creates refund opportunities for business owners
The Small Business Jobs Act of 2010, signed into law by President Obama September 27, 2010, had a little-reported change regarding general business tax credits that can have a big impact on the cash flow of some small businesses.
The new law allows an eligible small business to carry back general business credits five years. Previously, the credits could only be carried back one year. The five-year carryback period is available only for credits carried forward to the tax year 2010 and/or earned in the tax year 2010.
What does all this mean to you? If you are a small business owner, and have general business credit or general business credit carryovers, then you might be entitled to a refund if your credit can be carried back.
There are many examples of a general business tax credit:
- Work Opportunity Credit
- Alcohol and Cellulosic Biofuel Fuels Credit
- Credit for Increasing Research Activities
- Low-Income Housing Credit
- Disabled Access Credit
- Qualified Plug-in Electric and Electric Vehicle Credit
- Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
- Biodiesel and Renewable Diesel Fuels Credit
- New Markets Credit
- Credit for Small Employer Pension Plan Startup Costs
- Credit for Employer-Provided Childcare Facilities and Services
- Distilled Spirits Credit
- Alternative Motor Vehicle Credit
This is just a partial list for some of the general business credits that are currently available to small businesses. For the complete list visit: http://www.irs.gov/businesses/small/article/0,,id=99839,00.html
Let’s examine a real-life example. During 2010, Al’s Popcorn Company did research and development on a new product—sweet potato popcorn. However, Al was unable to use the full amount of the “Credit for Increasing Research Activities” due to income tax limitations. Prior to this law change, Al could only carry back the credit one year; then, he would have to carry forward the rest of the credit. Who knows when Al’s Popcorn Company would have been able to take advantage of that credit? Now, due to the change in this law, Al can carry back his credit up to 5 years and apply for a refund of taxes paid previously. This means more money back for Al’s Popcorn Company now, not at some unknown point in the future when it can use the credit.
Tax credits can mean a dollar for dollar deduction rather than a percentage at your marginal tax rate. So, if you think you might be eligible for one of the small business tax credits listed above, or have unused business credit carryovers and you may be entitle to a credit carryback, please contact us.