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Good News! Get a Cash Bailout from the IRS!

Good News: Get a “Cash Bailout” from the IRS

While most taxpayers find discussion of federal taxes to be a painful and frightening experience,

there is actually some very good news about a tax break that provides taxpayers the opportunity

for a one-time “Cash Bailout” from the Internal Revenue Service. This “Cash Bailout” is

particularly attractive to owners of commercial real estate who utilize a Cost Segregation Study

in combination with the new, and temporary, Loss Carry-Back provisions. However, to obtain

this “Cash Bailout,” individual taxpayers who qualify must act quickly since the absolute

deadline is October 15, 2010. After that date, the opportunity under existing law will expire.

Background

Following the controversial Troubled Asset Relief Program (TARP) “Bailout” of huge

investment houses and banks in the fall of 2008, pressure built on Congress to provide some

form of “Bailout” to assist small businesses. As a result, when the American Recovery and

Reinvestment Act (ARRA) was signed into law by President Obama on February 17, 2009, it

included a very big opportunity for small businesses who were experiencing a 2008 Net

Operating Loss (NOL) to carry-back the loss for a period of 3, 4 or 5 years. Normally, a NOL

can only be carried-back two years. A small business was defined as one with annual revenues

under $15 million. This ARRA election could only be made for losses in the tax year 2008, plus

the election was irrevocable.

While some taxpayers became aware of this provision and managed to get back sizable tax

refunds from prior year taxes paid, the vast majority of taxpayers either didn’t learn of the

provision, or didn’t act to take advantage of it.

A Second, and Bigger, Bite of the Apple

During 2009, businesses with revenues greater than $15 million complained that they too needed

a “cash bailout” and they needed it even more than small business. Once again, pressure built on

Congress to extend and expand the previous “one-time” Loss Carry-Back provisions contained

within ARRA. Not surprisingly, Congress responded. As a result, on November 6, 2009,

President Obama signed into law the Worker, Homeownership, and Business Assistance Act of

2009 (WHBAA). This law contained the very big news that the original Loss Carry-Back

provisions in the ARRA had been not only extended, but enhanced. Now all U.S. Businesses

and taxpayers can carry-back a 2008 or 2009 NOL up to five years. The old $15 million annual

revenue limitation was waved. Eligible taxpayers include individuals, trusts, partnerships, sole

proprietorships, ‘S’ corporations, and ‘C’ corporations. The only taxpayers who cannot utilize

this “one-time” five year Net Operating Loss Carry-Back provision are the companies that took

TARP money, federal mortgage agencies, companies in which the federal government owns

stock, or an affiliate of any excluded entity.

Key Date on Election to Utilize the Loss Carry-Back provision

Under the law, taxpayers have until the filing date of their 2009 return, including all extensions,

to make the election to utilize this “one-time” Loss Carry-Back provision. However, taxpayers

who filed their 2009 taxes on time, e.g. April 15, 2010 for individuals, can still make the election

if they file an amended return within six months of the original due date and include an election

statement that reads, “Filed pursuant to Section 301.9100-2.” Thus, for all practical purposes,

the absolute deadline for individual taxpayers to avail themselves of this great tax refund

opportunity is October 15, 2010. For corporations, trusts and partnerships, the final deadline,

with an extension, is September 15, 2010.

Other important aspects of this new law include:

• The election is available for any tax year ending after December 31, 2007 and prior to

January 1, 2010. As a result, a taxpayer can make the election for tax years beginning

and ending in either 2008 or 2009.

• The Alternative Minimum Tax (AMT) is modified by suspending the 90 percent income

limitation on the use of NOLs for determining the AMT for any carry-back year.

• There is a 50 percent income limit on a NOL Carry-Back used in the fifth preceding year.

However, any remaining NOL can then be used to fully offset taxable income in the other

four carry-back years. Any NOLs which remain after that can be carried forward for up

to 20 years.

• The election provided under the law is available for NOLs incurred in either 2008 or

2009, but not both years EXCEPT where an eligible small business previously elected

under the 2009 ARRA to carry-back a 2008 NOL. In such cases, the small business may

also make the election for 2009, giving that business the opportunity to carry-back a NOL

for both 2008 and 2009.

Example

A taxpayer has taxable income of $2 million each year from 2004 through 2008. However, for

2009, the taxpayer has a net operating loss of $5 million. The taxpayer can elect to carry-back

the 2009 NOL five years to 2004 and subsequent years. For 2004, he can claim an NOL

deduction of 50 percent of its 2004 taxable income, or $1 million. The NOL balance of $4

million can be used to fully offset his 2005 income of $2 million. The remaining NOL of $2

million can then be applied against 2006 income thus fully utilizing the NOL. At an effective tax

rate of 35%, this would provide the taxpayer with a “one-time” refund “Cash Bailout” of $1.75

million. This would be a very nice cash infusion for this taxpayer and could be used for any

business purpose from operating cash, payroll, equipment purchases or even paying down debt.

It could make the difference of surviving or perishing during these difficult economic conditions.

Maximizing the “Cash Bailout” by utilizing a Cost Segregation Study

Not only have many taxpayers failed to learn about this new and temporary Loss Carry-Back

provision, they also have failed to understand how a Cost Segregation Study can be utilized to

greatly enhance the potential refund.

A Cost Segregation Study is an IRS approved process whereby owners of commercial real estate

can accelerate depreciation and reduce the amount of taxes payable. This is accomplished by

reclassifying certain components of a building from Section 1250 “Real Property” to Section

1245 “Personal Property.”

Even taxpayers without a NOL for 2009 can potentially benefit by creating additional

depreciation in 2009 that may result in a NOL, thus allowing the taxpayer to utilize the Loss

Carry-Back provision. If they already have a 2009 NOL, the Cost Segregation can be utilized to

further increase the amount of the IRS refund “Cash Bailout.”

Example with a Cost Segregation Study

Using our previous example as the starting point, the taxpayer has a Cost Segregation Study

preformed which results in additional depreciation recorded in 2009 of $2 million. This results

in a 2009 NOL of $7 million, (The original $5 million, plus the new $2 million). As before, the

taxpayer can elect to carry-back the 2009 NOL five years to 2004 and subsequent years. For

2004, he can claim an NOL deduction of 50 percent of its 2004 taxable income, or $1 million.

The NOL balance of $6 million can be used to fully offset his 2005 income of $2 million. The

remaining NOL of $4 million can then be applied against 2006 income and then against his 2007

income, thus fully utilizing the NOL. With the same 35% effective tax rate, the total amount of

refund “Cash Bailout” for the taxpayer would now be $2.45 million instead of the prior $1.75

million: A significant increase of $700,000.

Summary

If an owner of commercial real estate has a taxable income for 2009, then the results of a Cost

Segregation Study can be applied to reduce his 2009 taxable income. If he doesn’t have a

current NOL, it may create one and if he has a 2009 NOL, it will greatly increase the NOL. This

will provide an even larger NOL that can be Carried-Back to recover prior year taxes paid and,

thus, maximize this ‘one-time’ tax refund “Cash Bailout” from the IRS.

It is truly a unique opportunity for qualifying taxpayers to recoup significant amounts of cash

from the federal government. The intent of Congress was to find a way to create a cash infusion

for all taxpayers and for those fortunate enough to learn of it and understand how to maximize

the benefits of the law, it can create a one time windfall “Cash Bailout”.

Don’t miss out on this great opportunity! Contact CORE Solutions Group to learn more about

how a Cost Segregation Study can maximize your “Cash Bailout.”

Disclaimer: This article is provided for informational purposes only and is not intended to be

construed as legal, accounting, or other professional advice. For further information, please

consult your attorney or certified public accountant.

Marcus B. Elliott

CORE Solutions Group

melliott@coreadvisors.net

(972) 814-6344