As the deadline for filing tax returns fast approaches, every spa business owner should be aware of the many recent changes to tax laws, changes that will affect the tax bill for 2008 and for many years to come.
Naturally, not all of last year’s tax law changes apply to spa facilities and businesses. Last summer’s passage of the Housing and Economic Recovery Act of 2008, for example, was notable for the absence of significant business-related tax incentives, as the bill’s First-Time Homebuyer Tax Credit, the Reduced Home Sale Exclusion and other consumer-oriented provisions virtually hid the acceleration of large-corporation estimated tax payments.
Stimulating the economy
Earlier in the year, however, the Economic Stimulus Act of 2008 was signed into law, complete with rebates and business incentives. Most noticeable for the recovery rebates, reaching as high as $600 for individuals and $1,200 for married couples, the new law also included $44.8 billion in business incentives.
Although few spa businesses acquire large amounts of equipment, every owner and manager should be aware that the new law almost doubled Section 179, an immediate write-off for newly acquired equipment, to $250,000—but only for 2008. Thus, up to $250,000 of the cost of equipment acquired and placed in service in 2008 can be treated as a business expense and fully deducted on the tax returns for the 2008 tax year. Should newly acquired equipment costs total more than $800,000 for 2008 though, the $250,000-Section 179 write-off must be reduced, dollar-for-dollar, for the excess above the $800,000 ceiling.
Another provision in the stimulus package allowed small businesses, like many spas, to claim a 50% bonus depreciation allowance for newly acquired equipment. To qualify, the equipment must be eligible for depreciation and have a useful life longer than 20 years. Off-the-shelf computer software and improvements made to leased business property also qualify for bonus depreciation. Best of all, the 50% bonus depreciation applies in both the 2008 and 2009 tax years.
Last fall, Congress passed and former U. S. President George W. Bush signed into law a historic financial markets rescue bill, the Emergency Economic Stabilization Act of 2008. Although the new law’s primary purpose was to solve the credit crunch in the financial markets, it also served as one of the largest tax bills in recent years. (See A Primer to Taxes and the Emergency Economic Stabilization Act of 2008.)
Included as part of the bill were almost 300 changes to tax laws—tax breaks expected to save taxpayers a whopping $150 billion. Designed specifically for small businesses, business owners and professionals who are, according to lawmakers, the ones with large amounts of deposits at risk, the bailout bill raised the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000. Remember, however, the increased levels are only temporary, expiring after year-end 2009.
Fewer need dread the AMT
The bill also boosted the Alternative Minimum Tax (AMT) exemption amounts for individuals for 2008, and allowed, at least for 2008, personal nonrefundable credits to offset AMT and regular tax. The bill increased the income threshold where people begin to feel the effects of the AMT.
Although originally designed to prevent the wealthy from avoiding paying taxes because it was not indexed for inflation, the AMT has affected an increasing number of middle-class taxpayers. Each year, Congress has passed a series of patches to boost the threshold, and the patch included in the new law raised the AMT exemption amounts for 2008 to $69,950 for married couples filing jointly and $46,200 for single taxpayers. Total savings to taxpayers will be almost $62 billion.
Earlier tax law changes shortened the cost recovery period for improvements made to leased business property from 39 to 15 years. The new law not only extends the faster write-offs for those leasehold improvements until the end of 2009, but it also allows retail businesses to benefit from the shortened recovery period.
That means leased retail spas and skin care businesses can share in the tax savings estimated to reach $8.7 billion in 10 years. However, the shorter, 15-year write-off period for more permanent types of improvements to retail locations is good only for the 2009 tax year. On the other hand, the write-offs apply to owner-occupied businesses, as well as leased establishments.
Taxes on energy savings
Last fall’s tax law changes extended a number of energy tax incentives, many of which apply to spas, and quite a few of those extensions go beyond the one- or two-year periods authorized by lawmakers for non-energy extenders.
Among the provisions extended were several energy efficiency and energy property tax incentives. For example, an eight-year extension of investment credits for solar energy was extended, as were breaks for wind, geothermal and other alternative energy sources. In addition to tax credits for utilizing alternative energy in spas, there is also a unique tax deduction available to anyone making a commercial building more energy efficient.
Tax deductions for energy-efficient buildings have been extended through Dec. 31, 2013, and are expected to generate tax savings in excess of $890 million over a ten-year period. Rather than a deduction for the cost of equipment or improvements to make a commercial building more energy efficient, the amount deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50% energy savings target. A lesser, flat-rate deduction is available for achieving smaller energy savings.
Under the tax rules, to qualify, energy savings must be accomplished through energy and power cost reductions for the building’s heating, cooling, ventilation, hot water and interior lighting systems. This opens the door to a number of possibilities, particularly for spas. However, as is the case with all of the Emergency Economic Stabilization Act’s provisions, professional guidance is strongly recommended.
The New Markets Tax Credit
The New Markets Tax Credit is one of the few incentives in U.S. tax law to encourage taxpayers to invest in or make loans to small businesses in economically distressed areas. Created to increase investment in low-income communities, the total credit equals 39% of the investment over seven years. And previously set to expire at the end of 2008, the New Markets Tax Credit has been extended through December 2009, generating an expected tax savings of $1.3 billion over 10 years.
Other tax provisions contained in last fall’s Emergency Economic Stabilization Act also might be of limited benefit to a spa business. They include:
- Enhanced charitable deductions for qualified computer contributions to schools.
- Investments in recycling. Businesses can claim accelerated depreciation for purchases of equipment used to collect, distribute or recycle a variety of commodities.
- Bicycle commuters. Employers are allowed to provide employees who commute to work by bicycle limited fringe benefits to offset the costs of this type of commuting, such as storage.
On the downside of upside tax savings
Although these tax breaks passed with only minimal offsets or revenue-enhancers, there are a few provisions designed to offset the loss to the U.S. Treasury. Approximately $44 billion in offsets mean tax increases for some taxpayers. The Federal Unemployment Tax Act, or FUTA, surtax is one such area.
The FUTA imposes a 6.2% gross tax rate on the first $7,000 paid annually by employers. In 1976, Congress passed a temporary surtax of 0.2% of taxable wages to be added to the permanent FUTA tax rate, and the temporary surtax has subsequently been extended through 2008. This bill extends the surtax for one year only—at an estimated cost to employers of $1.47 billion over 10 years.
Although the primary purpose of the Emergency Economic Stabilization Act of 2008 was to solve the credit crunch in the financial markets, it was one of the largest tax bills in recent history. Under Congressional rules, however, tax savings were computed over a 10-year period, so the lion’s share of that expected outlay occurs in the 2008 and 2009 tax years.
Obviously, not all of the tax breaks that were a part of the 2008 law changes will affect all spa businesses and their owners. In fact, many of the provisions contained in tax laws, both new and existing, might be better ignored.
A spa business might, for example, have acquired an expensive new point-of-sale computer system in 2008. The expenditure for that computer system would qualify as a Section 179-expensing deduction, small enough not to trigger the ceiling. However, with little in the way of profits, a depreciation write-off over a number of years when profits will, hopefully, be greater and the tax bracket more onerous might be more advantageous.
Consequently, professional advice takes on a special urgency for every spa business, as well as every owner, manager and skin care professional. It is not too late to take full advantage of the new—and in many cases, temporary—tax breaks. Nor is it too late to develop a strategy that will reduce taxes for the 2008 tax year, and for many years to come.