Recovering With New Tax Breaks

Shortly after last November’s election, Thomas Zaucha, president and CEO of the National Grocers Association (NGA) called upon the President-elect to kindle the economy with a stimulus package that included “tax incentives used by retailers and wholesalers to invest in technology, energy saving equipment and trucks for their businesses.”

President Obama’s reply, The American Recovery and Reinvestment Act of 2009, is a nearly $800 billion stimulus package includes $300 billion in potential tax savings. Every convenience store and petroleum marketing business can share in over $75 billion in tax benefits for 2009 and 2010.

As Zaucha and other industry leaders requested, the Recovery Act helps ease the out-of-pocket cost for new equipment. So-called “bonus” depreciation is available for another year and larger, Section 179 first-year write-off amounts for newly acquired equipment have been given another year.

Cash Infusions From Losses
The net operating losses (NOLs) carryback provision may offer the greatest potential for savings. Under current law, NOLs are carried back to the two taxable years before the year that the loss arises. NOLs may also be carried forward to each of the succeeding 20 taxable years after the year of loss.

The Recovery Act gives convenience store businesses the choice of carrying NOLs from the 2008 tax year back three, four or five years generating a refund of taxes paid in those earlier years. Obviously, the extended NOL carryback provision has the potential for providing an immediate cash infusion to many troubled convenience store businesses.

Faster, Larger Write-Offs Continued
To help small businesses quickly recover the cost of newly acquired equipment and other certain capital expenses convenience store businesses may write-off the cost of these expenses, in lieu of recovering those costs over time through depreciation. The new Recovery Act extends the small business expensing–Section 179–write-off, increased temporarily as part of last fall’s Emergency Economic Stabilization Act of 2008 (EESA). For 2009, a convenience store operation or business can write-off up to $250,000 of the cost of newly acquired equipment. The $800,000 ceiling, beyond which the deduction is reduced, is carried over for 2009.

Higher Caps on Vehicle Write-Offs
NGA also lobbied for tax incentives that would allow “retailers and wholesalers” to invest in trucks for their businesses. Also extended for bonus depreciation purposes, the regular dollar cap for new vehicles placed in service in 2009. This increase mirrors last year’s temporary, $8,000 cap increase that resulted in a $10,960 depreciation cap for autos ($11,160 for light trucks and vans) for both 2008 and 2009.

Remember, however, as with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might, for a tax year, consider making an election-out (opt-out) are when the convenience store business has about-to-expire NOLs or anticipates being in a higher tax bracket in future years.

Alternative Fuel Pump Tax Credit
NACS, the Association for Convenience and Petroleum Retailing, and others have long cited the need for increased tax credits for the installation of alternative refueling infrastructure. Currently, the credit is equal to 30% of the cost of property placed in service at each location during the tax year, limited to $30,000. The new law increases the credit to 50% (capped at $50,000) for property placed in service in 2009 and 2010.

The alternative fuel must either consist of 85% by volume of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas or hydrogen, or any mixture of biodiesel, diesel fuel and/or kerosene or at least 20% by volume of biodiesel without regard to kerosene.

However, according to John Eichberger, Director of Motor Fuel for NACS, the organization’s efforts to reform the Internal Revenue Service’s definition of a refueling station remain unresolved. “In May 2007, the IRS ruled that multipurpose infrastructure [an MPD that sells both E85 and gasoline] is eligible only for a tax credit on the incremental costs associated with the E85 portion of the system.”

Under the tax rules, a 30% energy tax credit is allowed for expenditures made to enable the business to utilize alternative energy sources. The tax credit applies for the cost of energy property that includes fuel cell property, solar property and geothermal heat pump property.

Discounted Wage Payments for Some New Workers
The Work Opportunity Tax Credit (WOTC) rewards employers that hire members of “targeted groups,” such as welfare recipients, the disabled, etc. Under current law, businesses can claim a WOTC equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups.

The Recovery Act extends the WOTC to include two new, targeted groups: unemployed veterans and disconnected youth. State labor department or similar government agencies certify, as well as find and often train, the workers who qualify for the WOTC. The workers must, however, come from the targeted groups.

Generally, the WOTC is a percentage of first year wages up to $6,000 per employee ($12,000 for qualified veterans, and $3,000 for qualified summer youth employees). The percentage of qualifying wages is 40% of first year wages, for a maximum credit of $2,400.

The traditional full-time employee is not the only hiring option available to convenience store businesses. While an employee must have completed 120 hours of service for his or her wages to qualify under the WOTC rules, if that employee fails to perform at least 400 hours of service, the employer is entitled to a credit of only 25%.

Cancelled Debt = Income Now Deferred
When debt is forgiven, taxable income usually results unless the convenience store business is insolvent or in bankruptcy. The new law allows some retailers and distributors to choose to recognize taxable income resulting from the cancellation of indebtedness over a five-year period beginning in 2014. Although all the debt discharge income will eventually be recognized—and taxed—the taxpayer will benefit from the deferral of tax to later years.

Many convenience store businesses will be allowed to recognize this so-called “cancelation of debt income” (CODI) over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years). The Recovery Act permits tax deferral for specified types of business debt repurchased by the business after Dec. 31, 2008 and before Jan. 1, 2011.

This massive stimulus bill, the American Recovery and Reinvestment Act of 2009, provides immediate relief to both individuals and businesses with many of the tax incentives retroactive to Jan. 1, 2009 and most of its benefits concentrated within the next two years.

There are many more tax-related breaks, incentives and deductions in this newly created Recovery Act. Some of the tax breaks proposed originally have been scaled back or eliminated during the political debate that raged. For executives in the convenience store or petroleum marketing industry, professional advice is almost a necessity to ensure the operation will profit from the tax provisions, breaks and incentives in the new Recovery Act. CSD

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