You may feel that you have heard more than you care to about the American Recovery and Reinvestment Act of 2009. That is the formal name of the one thousand plus page, $789 billion economic stimulus package passed by Congress this past February. While many in Congress have decried that amount of spending, over one- third of that “spending” is in the form of tax reductions. Isn’t that simply giving us back some of our own money?

In any event, we are most concerned about the benefits of the stimulus package for HVACR businesses. We have spent the last several weeks investigating how owners of HVACR contracting businesses can use aspects of the stimulus package to help their businesses survive, and perhaps prosper, during this recession. Here are some provisions of the law from which you can benefit.

Tax Deductions and Tax Credits

Throughout this article, we will refer to tax deductions and tax credits. A tax deduction is subtracted from your taxable income. Since you will have less taxable income, you will pay less taxes. The amount of taxes that you save depends upon your tax bracket. The tax credit is a reduction in the amount of taxes you owe. Thus, for every dollar of tax credit that you received, you’ll pay a dollar less taxes. As you can see, tax credits are more valuable than tax deductions.

Bonus Depreciation and Section 179 Expensing

In 2008, as part of the Economic Stimulus Act of 2008, Congress introduced the concept of “bonus depreciation.” This allowed a business to take extra depreciation in 2008 equal to 50% of the cost of a piece of new equipment in addition to the regular depreciation. This benefit has been extended through 2009. Additionally, the first year depreciation cap for luxury cars placed in service in 2009 is increased by $8,000.

Some businesses will find it more attractive to forego bonus depreciation and take an expense deduction for new equipment under Section 179 of the Internal Revenue Code. Under Section 179, a business can generally purchased during the year. However, the deduction may only be taken to the extent of taxable income. It is not possible to take a loss on your tax return by taking a large Section 179 deduction.

Choosing between bonus depreciation and a Section 179 deduction requires some planning. Let’s assume you need to purchase a piece of equipment for your business for $50,000 and the equipment is depreciable over five years (normally a $10,000 deduction per year). You plan on borrowing the purchase price. Let’s assume further that your taxable business profit for the year is $20,000. Using bonus depreciation, you can take a depreciation deduction of $35,000 in the first year, creating a $15,000 tax loss. Under Section 179, you are limited to a $20,000 deduction. Since the tax losses can be carried forward to reduce taxes in future years, your tax advisor may recommend taking bonus depreciation instead of a Section 179 deduction.

On the other hand, your tax advisor may suggest that you are better off with the Section 179 expense so that you preserve the extra deductions for future years when the business may have more taxable income and be in a higher tax bracket.

Residential Energy Tax Credit

The credit for non-business energy property (CNEP) is not a tax credit for your business but rather a tax credit for your customers. In 2009 and 2010, a taxpayer can get a 30% credit (up to $1,500) for making qualified energyefficient improvements to his or her principal residence. The full credit is available, even if a customer used the $500 energy credit that existed in the past. This time, the residential credit is limited to HVAC and building envelope items (windows, doors, etc.) and excludes lighting. The type of HVAC equipment that is eligible for the credit includes air conditioners, furnaces and boilers. However, the equipment must meet the January 1, 2009 building code standards, which are quite high, in order to qualify for the credit. Here are some of the criteria:

• a qualified natural gas, propane or oil furnace or hot water boiler that achieves an annual fuel utilization efficiency rate of at least 95.
• an advanced main air circulating fan (certain furnace fans).
• electric heat pump water heaters yielding an energy factor of at least 2.0 in the standard Department of Energy test procedure.
• electric heat pumps with a heating seasonal performance factor (HSPF) of at least 9, a seasonal energy efficiency ratio (SEER) of at least 15, and an energy efficiency ratio (EER) of at least 13.
• central air conditioners that achieve the highest efficiency tier established by the Consortium for Energy Efficiency (CEE) in effect on January 1, 2006.
• natural gas, propane or oil water heaters with an energy factor of at least 0.80 or a thermal efficiency of at least 90 percent.
• beginning in 2009, stoves using biomass fuel to heat U.S. residential dwelling units or heat water for use in the units, and that have a thermal efficiency rating of at least 75 percent.

The 30% credit means that a taxpayer gets a credit equal to 30% of the cost of the improvement up to $1,500. Thus, a taxpayer would have to spend $5,000 on energy-efficient equipment to get the full $1,500 credit.

The existence of this credit gives you a great marketing tool. Since the credit is a dollar for dollar tax savings, the credit acts like a 30% discount on higher- priced equipment. You may want to promote the energy credit in your advertising, as well as in your sales presentations and leave-behinds.

Under current law, this credit will only be available in 2009 and 2010.

Residential Alternative Energy Credit

Under Section 25D of the Internal Revenue Code, individual taxpayers have been eligible for a personal tax credit equal to 30% of the cost of eligible types of alternative energy-producing equipment, including geothermal heat pumps installed in a residence. The credit has been capped at various limits depending upon the type of equipment. For example, there has been a $2,000 cap on the credit for geothermal heat pumps. For tax years 2009 through 2016, these caps are eliminated, so the credit is unlimited. This credit is available for equipment installed not only at a taxpayer’s principal residence but also at vacation property.

Since geothermal heat pumps are rather expensive, this credit can be very beneficial. The change to this credit provides another good marketing opportunity.

Work Opportunity Tax Credit

This tax credit has existed for some time. It is intended to provide an incentive for employers to hire individuals who are part of groups with a very high unemployment rate. Generally, the employer gets a tax credit equal to 40% of the first $6,000 of qualified wages paid to the targeted individual. Thus, an employer who hires one such individual and keep that individual employed for over 400 hours during the year can reduce its taxes by $2,400.

In the past, this tax credit was available to employers who hired individuals from one of the following targeted groups:

• Families eligible to receive benefits under the Temporary Assistance for Needy Families Program;
• Qualified military veterans;
• Qualified ex-felons;
• Certified “designated community residents”;
• Certified “locational rehabilitation referrals”;
• Qualified summer youth employees;
• Qualified food stamp recipients;
• Qualified Supplemental Security Income Recipients; and
• Qualified long-term family assistance recipients.

Under the new law, there are two additional groups of potential workers. The first is unemployed veterans who have been discharged from active duty during the last five years and who have received unemployment compensation for at least four weeks during the year prior to being hired by the employer. The second group consists of “disconnected youth.” These are individuals age 16 through 24 who lack basic skills that would make them readily employable. The individuals must not have been regularly employed or attending school during the last six months before they are hired.

Although the pool is not large, many unemployed veterans have acquired technical skills while in the military that can be of tremendous value to an HVACR contractor. This tax credit makes hiring such individuals very attractive. Remember, you can also get the tax credit if one of your current employees who was hired within the last 12 months is from one of these targeted groups.

Estimated Taxes For Small Business Owners

The new law includes a break for small business owners who pay estimated income taxes. For this purpose, a small-business owner is someone who earns less than $500,000 per year and who received more than 50% of his gross income last year from a business that employs less than 500 employees. Generally, in order to avoid penalties, an individual’s estimated tax payments during the calendar year must equal 100% of your prior year’s tax liability (or 110% of the prior year tax liability, if the taxpayer’s adjusted gross income exceeded $150,000). In 2009, the penalties are avoided so long as the taxpayer pays 90% of the prior year’s tax liability.

While this change in the law will not reduce your tax bill, it can improve your cash flow in the short-term. If you already made a larger estimated tax payment than is required, you are permitted to reduce your future estimated payments. So long as you pay 90% of last year’s tax liability, you will not incur any penalties.

2008 Net Operating Loss

Some of the changes in the law are designed specifically to help businesses that are in distress.

Qualified small businesses (businesses with average gross receipts of less than $15 million) have an opportunity to turn a 2008 net operating loss into immediate cash. Under prior law, net operating losses could be carried back two years and carried forward 20 years. This means that a loss incurred in one year could be used to get a tax refund for taxes paid in the prior two years or the next 20 years. This is a great deal if your business was profitable in the two years prior to incurring a loss. Otherwise, it is not much help.

Under the new law, a qualified small business can elect to carry losses back three years, four years, or five years. Thus, if you had a loss in 2008 but profits at any time during the last five years, you can use the 2008 lost recover taxes paid in those years. Immediate refunds are available to businesses that qualify.

Here is an example. Let’s assume that your business had a $20,000 operating loss in 2008, broke even in 2007, 2006, and 2005 but had a $20,000 profit in 2004. By electing the five-year carry-back period, you could apply the $20,000 loss against the $20,000 profit from 2004 and collect a tax refund of at least $3,000.

Cancellation of Indebtedness

Another provision designed to help struggling businesses changes the rules
regarding taxation of discharge of indebtedness income. Generally, if a business renegotiates a loan or makes a settlement with a lender that involves forgiveness of some of the amount owed, the business must treat the amount forgiven as additional income. While there are several exceptions to this rule, the general rule does apply to distressed businesses that continue to be solvent.

Under the new law, eligible businesses will be able to recognize cancellation of certain indebtedness over a five-year period, beginning in 2014. In other words, the new law permits a debtor to spread the recognition of income over five years and to defer any recognition of income until 2014.

This is a very complicated provision because it interacts with a number of other tax provisions. If you are fortunate enough to have some debt discharged, you should sit down with a tax advisor and decide whether you can benefit from this change in the law.

Qualified Small Business Stock

If your business is structured as a subchapter C corporation and if you need to raise capital to expand your business, you may be interested in the new change in the law that applies to qualified small business stock. Under the old law, to encourage investment in small business, individuals could exclude 50% of the gain from the sale of qualified small business stock held for at least five years. Under the new law, the exclusion is increased from 50% to 75% for stock acquired after February 17, 2009 and before January 1, 2011.

Successful businesses that want to raise capital by selling stock should have an easier time during the next several months. Of course, investors only get the benefit of the tax exclusion if your stock increases in value. Thus, potential investors will want to see a business plan that will provide them with the opportunity to cash out at a profit after five years.

A special Thanks to Mike Coyne for helping distill the information for this column.