Re: 2009 Year-end Tax Planning - Small Businesses

Dear Client:

The economic slowdown has made 2009 one of the most challenging years in recent memory for many small
businesses. Many employers are struggling to boost profits, retain customers and develop new products in a
sluggish market. The Tax Code can provide some relief. Some year-end tax planning strategies may be able to
reduce your tax burden as 2009 draws to a close.

Income shifting. Businesses, like individuals, can benefit from the classic strategy of shifting taxable income and
accelerating or deferring deductions between 2009 and 2010 by controlling the receipt of income and payment of
expenses. Businesses expecting to be in the same or lower tax bracket in 2010 should consider deferring income
until next year and accelerating deductible expenses in 2009. Alternatively, if a substantial increase in income is
anticipated in 2010 (propelling the business into a higher tax bracket), income should be accelerated in 2010 and
deductions deferred until next year.

Net operating losses (NOLs). Due to recent tax law changes to jumpstart the economy, Congress has made
year-end loss shifting as lucrative in many instances as income shifting has been in the past. Many small businesses
experienced net losses in 2008 and may be preparing themselves for the same bottom line in 2009. The tax law's
use of NOL carrybacks, however, can provide a silver lining that allows those losses to be carried back to
profitable years and generate an instant tax refund. Congress earlier this year allowed 2008 NOLs from eligible
small businesses (those with gross receipts of $15 million or less) to be carried back up to five years to 2003, rather
than the usual two years. Now, under the Worker, Homeownership and Business Assistance Act of 2009, signed
into law on November 6, Congress extended modified NOL relief to all businesses and to either 2008 or 2009
NOLs, at the election of the taxpayer. Although not as generous in its fifth year carryback provision (only 50-
percent of income may be offset), the latest law in effect offers many small businesses the opportunity to double
dip: to claim refunds from 2008 NOLs under the earlier relief provision and to claim another round of refunds from
2009 NOLs under the new law that has just passed. In any case, 2009 NOLs are not set in stone until the end of
the 2009 tax year. Many businesses that anticipate 2009 tax year losses should be taking steps before end year to
accelerate deductions to maximize the size of their 2009 NOLs for a larger carryback refund.

Accounting methods. The accounting method used by a business determines when income must be recognized
and expenses are deductible for tax purposes. Cash based businesses can shift income to next year by delaying
billing notices for services or products so that payment is not received until 2010. Accrual based businesses can
defer income by delaying the shipment of products or provision of services until the 2010 tax year.

Code Sec. 179 expensing. For 2009, a business can immediately deduct up to $250,000 for qualifying equipment
purchases, including computers and software. The property must be used more than 50 percent for business. It can
be used or new property but in all cases must be your business's first use of that property. To take the deduction for
2009, qualified equipment must be placed in use by December 31, 2009. Keep in mind that any unused Code Sec.
179 amount cannot be carried over into the next year. Please contact our office if you are considering an equipment
purchase or other qualifying purchase before year-end. You do not want to miss out on this valuable tax break,
which is scheduled to end in 2010.

Bonus depreciation. A related, and also temporary tax break, is 50 percent first-year bonus depreciation of the
adjusted basis of qualifying property. The property must be (1) eligible for the modified accelerated cost recovery
system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software
(off-the-shelf); or (4) qualified leasehold property. Only new property qualifies. In addition, it must be "placed in
service" before January 1, 2010, with some exceptions for certain transportation property.

Research tax credit. Many small businesses mistakenly think the Code Sec. 41 research and experimentation
credit is only for large businesses. The credit is complex but it rewards businesses for research activity regardless
of size. The credit is generally 20 percent for qualified research and experimentation expenses above a base
amount. There is also an alternative simplified credit of 14 percent. Currently, the research and experimentation
credit is scheduled to expire after December 31, 2009.

Manufacturing deduction. Another valuable deduction that is often overlooked by small businesses is the Code
Sec. 199 deduction for qualifying domestic production activities benefits. For 2009, the deduction equals six percent
of the lesser of (1) qualified production activities income for the tax year, or (2) taxable income that does not take
the deduction into account for the tax year. The deduction cannot exceed 50 percent of W-2 wages allocable to
domestic gross receipts. The deduction applies for both regular and alternative minimum tax (AMT) liability.

Leasehold improvements. Generally, business owners must capitalize the cost of property used in their trade or
business and recover the cost over time through annual deductions for depreciation or amortization. In 2008,
Congress temporarily reduced the recovery period for qualified leasehold improvement property, qualified retail
improvement property and qualified restaurant property to 15 years. If you are considering an improvement to your
business, please contact our office.

Charitable contributions. Businesses, like individuals, may deduct contributions to charitable organizations within
certain limits. Corporations, but not other business entities, enjoy an enhanced deduction for contributions of
computer technology and equipment for educational purposes. This enhanced deduction will expire after December
31, 2009. All businesses regardless of how they are organized can claim an enhanced deduction for donations of
food. However, the deduction for donations of food will expire after December 31, 2009.

Business vehicles. Many small businesses depend on vehicles owned or leased either by the company or by the
proprietor. The standard mileage rate for business use of vehicles is 55 cents per mile for 2009. The IRS is
expected to announce the rate for 2010 before the end of 2009. Because inflation has been low and gas prices
relatively stable, it is unlikely that the rate will increase dramatically as it has in past years; it may even go down.
Alternatively, you may use the actual cost method. Under that method, you may take deductions for depreciation,
lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires and parking fees. If
you have not compared the two methods recently, please contact our office. Regardless of the method you use, if
your vehicle is used for personal as well as business purposes, only expenses or mileage attributable to the
percentage of business use are deductible. There are separate considerations involved in leasing a car for business.

Employee benefits. Establishing employee benefit plans, qualified retirement plans and medical or health
reimbursement plans can provide tax savings to employees and your business. Recently, the Obama administration
and the IRS unveiled a new initiative encourage small businesses to offer retirement savings plans. The initiatives
expand opportunities for automatic enrollment in retirement plans, show how employees can save payments they
would receive for unused vacation or other similar leave in their retirement plan, and help employees and employers
understand their tax-favored rollover and other savings options. Our office can help you choose or refine a
retirement savings plan that best fits your business.

Capital gains taxation. Earlier this year, Congress expanded the 50 percent exclusion from tax for capital gains
realized on the sale of qualified small business stock held for more than five years to 75 percent. The exclusion is
limited to individual investors. The enhanced exclusion will expire after December 31, 2010. The Obama
administration has proposed to increase the exclusion to 100 percent, effective for qualified small business stock
issued after February 17, 2009.

New tax laws from Congress. Part of year-end tax planning for this year should be focused on remaining flexible
and being ready to capitalize on any new opportunity -or pitfall--that may come your way because of last minute tax
law changes. Congress is now considering several changes, including extension of bonus depreciation and enhanced
Code Sec. 179 expensing. If any of these provisions pass, or if other, similar proposals move quickly on Capitol Hill,
taking prompt action before year end could reward you with significant tax benefits.

Please contact our office for more details about these and any other tax incentives. We can help your small
business during this challenging economic time to maximize your tax savings.

Sincerely yours,