Big Tax Breaks for Small Businesses

Big Tax Breaks for Small Businesses

by C. Yoder, February 2010

Many small businesses experienced a boom during the years before the financial collapse of this recession. Those healthy profits produced big tax bills. Now, with a lean economy, reclaiming some of the taxes paid in the good years is not only possible, it's easy.

Tax Breaks for Small Business

The Kauffman Foundation reported that although 70% of small business owners had no plans to increase employment in 2010, 85% believe the United States is a great place to start a small business. So while optimism is increasing that the economy is bottoming out, there are real benefits available right now that some struggling entrepreneurs may have overlooked. 

A case in point: your business income tax refund. You might not have deserved a refund during the boom years. But special economic recovery laws now allow you to reach back to those good years, recalculate those tax bills to reflect current losses, and walk away with an instant refund.

It's not too good to be true – but like other direct taxpayer benefits, such as the gas-for-clunkers program, it may be too good to last too much longer.

A Check from Uncle Sam

“Congress hit the nail on the head here,” said Don Schippa, of Tax Research Services, of Detroit. “Business owners are getting their own money back. It's literally a check from the government. It can be very timely for people who are pinched a bit right now.”

The American Recovery and Reinvestment Act of 2009 allows businesses to chose to “carry back” 2008 operating losses for up to five years, and Congress recently extended the tax break for the tax year 2009.  Before the legislation, the limit was 2 years. The longer carry-back period gives small businesses the ability to obtain “immediate refunds” of earlier taxes, which the U.S. Small Business Administration estimates will amount to $3.4 billion this year.

Tax Math 101

The calculation is simpler than it sounds. First, figure out your business income and expenses. Subtract your business expenses from your business income and the result is the net profit (or net loss) from your business. If your deductions exceed your income, you may have experienced a net operating loss. This is the amount deductible from the profits reported in the five preceding years.

“So many businesses are hurting right now that any additional burden hurts, and any additional remedy really helps,” said Dillon Taylor, assistant chief counsel to the Office of Advocacy of the Small Business Administration. “There are businesses that are struggling right now that could be helped.”

For typical small businesses, sales have declined by almost 4% in 2009, sales per worker dropped by $5,000 and gross profit margins slipped 3% from 2007, according to a November study by Sageworks, Inc.

Income Averaging in a Slow Economy

“It's an excellent vehicle right now that was limited in the past to two years. Now they've extended to five years, and the intent is to catch those businesses that were successful in the past,” said Schippa. “This allows you to income average—spread the high and lows of the economic downturn.”

Private estimates of the overall savings of the tax break run as high as $33 billion. The break can mean significant refunds right now, along with the prospect of reduced refunds in later years.

Typical losses that business owners can use are those incurred in trade or business, or losses due to theft or disasters, losses on rental property, among others, according to

Claim Your Refund

If you have more than one business, you must figure your net profit or loss for each business on a separate Schedule C form.

To claim the benefits of the carry-back, business owners need to either file a revised 1040X, or a Form 1045, designed just for the net loss carry-backs. Generally, using the 1045 requires the IRS to respond more quickly, often within 90 days.


For more information please visit:

KBKG Inc., Cost Segregation and Tax Credit Specialists

United States Small Business Administration (SBA)