Small businesses with deductions exceeding their income in 2008 can use a new net operating loss tax provision in the American Recovery and Reinvestment Act (ARRA)to get a refund of taxes paid over the past five years instead of the usual two.

To accommodate the change in tax law, the IRS has updated Publication 536, as well as the instructions for Form 1045 and Form 1139, which small businesses will use to take advantage of the carryback provision.

• Publication 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts
• Form 1045, Instructions
• Form 1139, Instructions

An IRS news release and question-and-answer document, issued March 16, have more information on the net operating loss carryback provision.

Technical information is contained in Revenue Procedure 2009-26.

Section 179 Deduction

A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.

Under ARRA, qualifying businesses can continue to expense up to $250,000 of section 179 property for tax years beginning in 2009. Without ARRA, the 2009 expensing limit for section 179 property would have been $133,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.

More Help for Small Business

The Recovery Act also includes the following business-related provisions:

Reduction of Estimated Tax Payments: Normally, small businesses have to pay 110 percent of their previous year’s taxes in estimated taxes. The Recovery Act permits small businesses to reduce their estimated payments to 90 percent of the previous year’s taxes.

Extension of Bonus Depreciation Deductions Through 2009: Bonus depreciation is extended through 2009, allowing businesses to take a larger tax deduction within the first year of a property’s purchase.

Capital Gains Tax Break for Investment in Small Business: Investors in small business who hold their investments for five years can exclude from taxation 75 percent of their capital gains.

Return to American Recovery and Reinvestment Act of 2009.