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Many small businesses that posted losses in 2008 now have a way to carry those losses back as many as five years to generate cash to inject back into their operations this year.

That provision is one of several enacted in February through the American Recovery and Reinvestment Act of 2009 (ARRA), which accounting experts say could generate more than $300 billion in tax breaks for small business owners this year.

At the same time, however, tax advisers are looking ahead warily to fiscal 2011 budget bill proposals that could cause many small businesses to consider changing their ownership structures to avoid big tax hits.

Useful provisions

The extension of the loss carryback has already provided a significant boost for a number of small business owners in Iowa, said Ron Hintz, a partner with Clifton Gunderson LLP in West Des Moines.

Under a provision of ARRA, taxpayers can elect to carry back net operating losses on their businesses for three, four or five years, rather than just two years.

“So if you had a tough year and you incurred losses, you can take that back and get a refund of income tax paid in prior years,” Hintz said. “We’ve had some clients who have taken advantage of that and it provided substantial refunds. That’s helped them recoup some of the tax dollars they paid and helped them to fund their 2009 operations.”

Many small business advocacy groups were disappointed, he noted, that the final version of the stimulus bill limited the businesses that can take the extended loss carryback to those with $15 million or less in revenues. Larger companies will be restricted to the existing two-year carryback.

Hintz said another helpful provision for small business owners allows them to make smaller estimated tax payments this year, which can free up additional cash flow for their business. In most instances, taxpayers with adjusted gross incomes of less than $500,000 who receive more than half their income from a small business can make quarterly 2009 estimated tax payments equal to 90 percent of their 2008 tax liability. Business owners with more than $150,000 of adjusted gross income normally pay 110 percent of what they paid in the previous year.

Another benefit for small businesses is an extension of a bonus depreciation provision enacted last year. This year, businesses will again be able to deduct 50 percent of the cost of purchasing qualifying property such as furniture, fixtures or equipment. “That’s a real advantage to small business, being able to immediately deduct 50 percent, and the balance of the property you can depreciate over the normal useful life,” Hintz said.

Planning is the real key to business owners ensuring as low a tax bill as possible, he said.

“We want to make sure that they have an idea where they’re headed in 2009: what their business income looks like, what their personal income looks like, what the applicable tax rates are, what business structures would help them minimize their tax,” he said.

Rethinking structure

Though these and other provisions of the federal stimulus package aim to help small businesses, another accounting firm is keeping a close eye on the government’s fiscal 2011 budget blueprint, which many experts believe is likely to raise tax rates for small business owners.

“The reality of it is, it’s largely an extension of Bush’s tax cuts from ’01 to ’03, with the exception of taxpayers with adjusted gross incomes above $125,000,” said Dustin Petersen, managing director of tax services with RSM McGladrey Inc.

The majority of businesses that McGladrey works with are established as either S corporations or partnerships, entities in which income passes through the business directly to the owners, Petersen said. “So there is going to be a direct and immediate impact on those types of folks and their tax situation with this budget.”

Consequently, McGladrey is advising many of its small business clients to consider changing their business structure from an S corporation or partnership to a C corporation. Under subchapter C of the Internal Revenue Code, the profits of so-called C corporations are taxed separately from their owners, while S corporations’ profits are passed through to shareholders and taxed on their personal returns.

Though C corporation profits are subject to double taxation, it may be worthwhile depending in part upon the owner’s income and how profitable the business is, Petersen said. Other variables include the business’s life-cycle stage.

“Businesses that are growing and are attempting to retain all the capital they possibly can are going to lean toward going the C corporation route,” he said. “If you’re more in the life cycle where you’re fairly stagnant and the concept is to return as much of the cash and the growth of the company to the owner, you’re probably going to want to remain an S corporation. And there’s going to be a second-layer tax cost in being a C corporation, so if you have regular history of making distributions, it’s highly likely you’ll remain an S corporation or a partnership.”

Also, if the corporate tax rate is reduced while the individual rate goes up, “we see that the decision criteria for many businesses will become a little easier for moving back to C corporations,” he said.