3-year carry back  extended to 5; also,  more depreciation OK

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NORTH BAY – With tax season upon us, it is time to think about this year's filings as well as how to take advantage of opportunities for 2011, tax experts say.

If your business has suffered a net operating loss, for instance, there is more flexibility in carrying the loss back to a prior year to get a refund of taxes, said Bob Bernard, CPA with Brush Bernard Mitchell CPAs in Healdsburg.

“Under current law, businesses can elect to carry the loss back three, four or five years, whichever provides the most tax benefit, or use the old two-year carry back,” he said.

This is one of the most important things small businesses can use, said Chris Paris, senior manager at Moss Adams in Santa Rosa.

“The biggest item is by far the expanded NOL (net operating loss) provisions,” he said.

The small business limitation on NOL carry backs (revenues less than $15 million) has been removed, and virtually all taxpayers are now eligible for the extended loss carry back period of 5 years.

“This provision is great news for many cash-strapped taxpayers,” Mr. Paris said.

However, given that the extended carry back election is generally only available for one tax year (either 2008 or 2009), the determination of which NOL to carry back should be carefully considered, he said. There are also limitations if you choose to carry back to the fifth prior taxable year.

Another way for businesses to make use of tax benefits is with bonus depreciation.

The availability to immediately expense 50 percent of capital expenditures for new items was extended and is available for 2009 purchases.

Normally, businesses recover these capital investments through annual depreciation deductions spread over several years.

The section 179 election to expense capital purchases remains at $250,000 for 2009. This is currently reduced to $135,000 for 2010 and is scheduled to be reduced to $25,000 in 2011.

But, said Mr. Bernard, “Keep an eye on this as it could change. It may be a reason to accelerate some planned 2011 purchases into 2010.”

Meanwhile, the Work Opportunity Tax Credit has been expanded to include unemployed veterans and disconnected youth for 2009 and 2010. If you hired an unemployed veteran (active duty over 180 days and discharged within a 5-year period ending on the hiring date) or a disconnected youth (aged 16 to 25, not in school, not regularly employed for six months plus other limitations) a business can claim a tax credit of up to 40 percent of the first $6,000 in wages.

For individuals, there are a number of things to be aware of.

The first $2,400 of unemployment benefits are excluded from federal taxes (not taxable for CA purposes).

Up to $1,000 of real property tax and the sales tax on a new vehicle (up to a purchase price of $49,500) can be deducted even if the taxpayers do not itemize.

Non-business energy credits—a dollar-for-dollar reduction in your tax bill—for residential energy expenditures are now 30 percent of the cost up to a limit of $1,500 for 2009. In prior years, there was a lifetime limit of $500. The full $1,500 is available even if the old limit of $500 had been reached.

There are no income limitations in 2010 for converting your traditional IRA to a Roth IRA.

Income tax on the conversion can be spread over two years (2010 and 2011) but there are no penalties.

Once in a Roth IRA for five years, the account will never be taxed. There are both benefits and pitfalls to making this conversion.

Traditional IRA contributions are not taxed. Distributions are taxed, and the holder of the account must start to take distributions at 70 1/2 whether they need or want to.

So a benefit for converting to a Roth IRA is distributions are tax-free and are not required after the account holder reaches 70 1/2. But the tax must be paid upfront.

The tax rates in the next 10 to 15 years will change. The idea is to pay the tax in what many believe is a period of lower tax rates.