The American Recovery and Reinvestment Act of 2009, a nearly $800 billion stimulus package, includes nearly $300 billion in potential tax savings. Every for-profit clinical and diagnostic lab can share in the more than $75 billion in tax benefits for 2009 and 2010.

The Recovery Act extends help to ease the out-of-pocket cost for labs acquiring equipment. So-called “bonus” depreciation is available, while the larger Section 179 first-year write-off for newly acquired equipment is extended for yet another year. Two new groups are added to those whose first-year wages are partially underwritten thanks to the work-opportunity tax credit.

Faster, Larger Write-offs Continued

To help independent labs and other small businesses recover the cost of newly acquired equipment, lab directors, administrators, or managers may choose to write off the cost of these expenses in lieu of recovering those costs over time through depreciation. The new Recovery Act extends the small business expensing, also known as Section 179, write-off. An independent lab, physician’s office lab, or other for-profit facility can write off up to $250,000 of the cost of newly acquired equipment.

This benefits for-profit labs because the amount eligible for “expensing,” as an immediate write-off or deduction for a tax year, cannot exceed the operation’s taxable income. Any amount not allowed as a deduction because of the taxable income limitation is carried forward to later tax years.

The maximum expensing amount is, generally, reduced dollar for dollar by the amount of the Section 179 property placed in service during the year that exceeds that investment ceiling. The $800,000 ceiling, beyond which the deduction is reduced, is also carried over for 2009.

A Write-off Bonus

Bonus depreciation was introduced as a temporary measure to stimulate the economy following the 9/11 terrorist acts. Last year, lawmakers allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow with an immediate write-off equal to 50% of the cost of depreciable property, such as equipment, computers, vehicles, wind turbines, and solar panels acquired in 2008.

The new rules extend for another year the 50% bonus depreciation allowed for property with a recovery period of 10 years or longer. However, unlike Code Section 179, expensing that is available for new or used property, bonus depreciation is available only for new property or equipment.

As with any accelerated depreciation write-off, a large current depreciation deduction will result in smaller future deductions. Two situations in which a taxpayer might consider making an election-out (opt-out) are when the lab or business (a) has about-to-expire net operating losses (NOLs) or (b) anticipates being in a higher tax bracket in future years.

Critics of both bonus depreciation and the extended Section 179 expensing contend that these tax breaks will benefit only those businesses that already planned to buy equipment. For those labs and businesses that can buy equipment, these tax provisions, effectively, provide an up-front discount.

Last year, lawmakers temporarily allowed businesses to accelerate the recognition of a portion of their historic alternative minimum tax (AMT) or research and development (R&D) credits in lieu of claiming bonus depreciation. The amount that taxpayers may accelerate is calculated based on the amount that each taxpayer invests in property that would otherwise qualify for bonus depreciation. This amount is capped at 6% of historic AMT and R&D credits or $30 million, whichever is less. The Recovery Act extends this temporary benefit through 2009.

Discounted Wage Payments for Some New Workers

The Work Opportunity Tax Credit (WOTC) rewards employers who hire member of “targeted groups,” such as welfare recipients and the disabled. Under current law, an independent lab can claim a WOTC equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The Act extends the WOTC to include two new groups: (1) unemployed veterans and (2) disconnected youth.

The WOTC can be as much as $2,400 of qualified first-year wages (with different amounts for qualified veterans and summer youth hires). For long-term family aid recipients who begin work after 2006, the credit also includes 50% of qualified second-year wages.

Cash Infusions from Losses

With increasing numbers of independent labs suffering financial setbacks, it is the Recovery Act’s NOL carryback provision that may provide the greatest potential for savings. Under current law, NOLs are carried back to the 2 taxable years before the year that the loss arises. NOLs may also be carried forward to each of the succeeding 20 taxable years after the year of loss.

The Recovery Act gives independent labs and businesses the choice to carry NOLs from the 2008 tax year back 3, 4, or 5 years, generating a refund of taxes paid in those earlier years. Obviously, the extended NOL carryback period has the potential to provide an immediate cash infusion to many troubled labs and businesses.

Qualified Small Business Stock

When it comes to raising money to finance an independent lab, ordinary deduction treatment is available to individual investors on the sale of stock or the bankruptcy of a company. Under the old rules, an individual investor could exclude 50% of any gain realized upon the sale or exchange of “qualified small business stock” held for more than 5 years.

That means an incorporated, independent diagnostic lab could create a unique type/class of stock, called Section 1244 stock, using as an incentive the fact that an investor would be taxed on only part of any eventual gain that resulted. The Recovery Act makes this unique, small business stock even more attractive. The Act increases the amount of gain from the sale of small business stock held for 5 years or more, the portion that may be excluded, from 50% to 75% for stock issued after the date of enactment of this legislation and before 2011.

Temporary Small Business Estimated Tax Payment Relief

This is not exactly a financing incentive, but it will allow clinical lab operators to keep more money in their pockets. The Recovery Act decreases estimated tax payments for individuals whose income primarily comes from a small business in 2009. Rather than being required to make quarterly estimated tax payments based on 100% of their 2008 returns, the new law allows computations based on 90%.

As every lab professional is by now aware, the “Making Work Pay” tax credit included in the Recovery Act increased workers’ take-home pay and required employers to use new payroll tax withholding tables. Self-employed lab professionals who are not subject to wage withholding can receive the credit in advance by reducing the amount of their estimated tax payments. Remember, however, that it is easy to overshoot the mark and become liable for underpaying estimated tax penalties.

Cancelled Debt = Income Now Deferred

Many labs have had debt forgiven, or themselves forgiven debts owed to them. When debt is forgiven, taxable income usually results unless the lab or business is insolvent or in bankruptcy. The new law allows some labs and businesses to choose to recognize taxable income resulting from the cancellation of indebtedness over a 5-year period beginning in 2014.

Under the new rules, a for-profit laboratory can now recognize socalled “cancellation of debt income” (CODI) over 10 years (defer tax on CODI for the first 4 or 5 years and recognize this income ratably over the following 5 taxable years) for specified types of business debt after December 31, 2008, and before January 1, 2011.

Although all the debt discharge income will eventually be recognized—and taxed—the taxpayer benefits from the deferral of tax to later years.

Energized Investment Credits

Under the tax rules, labs and businesses can claim a 30% energy tax credit for expenditures made to enable them to utilize alternative energy sources. The tax credit applies for the cost of energy property that includes fuel cell property, solar property, and geothermal heat pump property.

Last fall’s “bailout” bill added wind energy property to expenditures eligible for the tax credit. This is property that uses a qualifying small wind turbine (with a nameplate capacity of not more than 100 kilowatts) to generate electricity. The Recovery Act eliminates the former $4,000 cap on the tax credit for qualified small wind energy property.

Alternative Minimum Tax “Patch”

The Recovery Act includes an AMT “patch” for 2009. The patch will insulate approximately 26 million middle-income taxpayers from the reach of the AMT.

Saving taxpayers approximately $70 billion, the 2009 AMT patch raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are: $70,950 for joint filers and surviving spouses (up from $69,950 in 2008) and $46,700 for singles and heads of households (up from $46,200).

This massive stimulus bill, the American Recovery and Reinvestment Act of 2009, provides immediate relief to both individuals and businesses with most of the tax incentives retroactive to January 1, 2009. Most of the $280 billion in tax relief is concentrated within the next 2 years.

While the overall size of the new law may be massive, many of its original provisions were actually pared back or eliminated after the political debate that raged. For the director, administrator, pathologist, or manager of any independent lab or business, professional advice is almost a necessity to ensure the operation will profit from the new Recovery Act.

Mark E. Battersby is a tax and financial writer with offices in the suburban Philadelphia community of Ardmore, Pa. For more than 25 years, Mr. Battersby’s features, columns, and reports have appeared in leading business and trade journals.