The end of the year may be the busiest time of year for your business for reasons ranging from a crush of customers to a spate of office parties. But youd be wise to spend time also planning for a landslide of new tax-law changes and planning the strategies to get the most of them before tax year 2012 ends.
The National Society of Accountants offers this review of tax changes and strategies for businesses, courtesy of CCH, a Wolters Kluwer accounting-software and services business.
THE FISCAL CLIFF
In 2010, Congress extended many business tax incentives for one or two years which means those incentives have expired at the end of 2012.
As of now, the Bush-era cuts and across-the-board spending cuts are scheduled to take effect in 2013 (the headline-making fiscal cliff). Changes could affect:
Code Section 179 expensing.
Business tax incentives.
Small-employer health insurance credits.
We may never fall of the fiscal cliff, but its still wise to consult with your tax adviser on how these issues could affect your business and plan accordingly.
Be aware of the expiring provisions and consider developing a multiyear tax strategy that takes into account various scenarios for the future of these incentives.
1. PROPERTY EXPENSING
Section 179 of the Internal Revenue Service Code allows businesses to claim a deduction for the cost of qualified property in the year the property is purchased and placed into service, rather than claiming depreciation over a period of years. The dollar limitation for 2012 is $139,000, with a $560,000 investment ceiling.
Businesses should consider making purchases before the end of the year to take advantage of this expensing deduction before it is changed.
Qualified property must be tangible personal property that you actively use in your business and for which a depreciation deduction would be allowed. Qualified property must be newly purchased new or used property, rather than property you previously owned but recently converted to business use. Examples of types of property that would qualify are office and manufacturing equipment, plus off-the-shelf computer software placed in service in tax years beginning before 2013.
If your equipment purchases for the year exceed the expensing dollar limit, you can decide to split your expensing election among the new assets. It may be more valuable to expense assets with the longest depreciation periods. As long as you start using your newly purchased business equipment before the end of the tax year, you get the entire expensing deduction for that year. The amount that can be expensed depends on the date the qualified property is placed in service, not when its purchased or paid for.
2. BONUS DEPRECIATION
The first-year 50 percent bonus depreciation deduction is scheduled to expire after 2012. Unlike the Section 179 expense deduction, the bonus depreciation deduction is not limited to smaller companies or capped at a certain dollar level. Qualified property must be depreciable under modified accelerated cost-recovery system (known as MACRS) and have a recovery period of 20 years or less. The property must be new and placed in service before Jan. 1, 2013.
Businesses also need to keep in mind the relationship between bonus depreciation and the vehicle depreciation dollar limits. Code Section 280F(a) imposes dollar limitations on the depreciation deduction for the year a taxpayer places a passenger automobile in service within a business, and for each succeeding year. Section 168(k)(2)(F)(i) increases the first-year depreciation allowed for vehicles subject to the Section 280F luxury-vehicle limits, unless the taxpayer elects out, by $8,000, to which the additional first-year depreciation deduction applies.
The maximum depreciation limits under Section 280F for passenger automobiles first placed in service by the taxpayer during 2012 are:
$11,160 for the first tax year ($3,160 if bonus depreciation is not taken).
$5,100 for the second tax year.
$3,050 for the third tax year.
$1,875 for each tax year thereafter.
The maximum depreciation limits under Section 280F for trucks and vans first placed in service during 2012 are:
$11,360 for the first tax year ($3,360 if bonus depreciation is not taken).
$5,300 for the second tax year.
$3,150 for the third tax year.
$1,875 for each tax year thereafter.
Sport utility vehicles and pickups with a gross vehicle weight rating exceeding 6,000 pounds are exempt from the luxury vehicle depreciation caps.
3. NEW DE MINIMIS RULE IN REPAIR REGULATIONS
Comprehensive repair and capitalization regulations issued by the IRS in late 2011 may open a tax-planning opportunity.
A new de minimis expensing rule allows a taxpayer to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property if the taxpayer has an applicable financial statement (called an AFS), written accounting procedures for expensing amounts paid or incurred for such property under certain dollar amounts, and treats the amounts as expenses on its AFS in accordance with its written accounting procedures.
An overall ceiling limits the total expenses that a taxpayer may deduct under the de minimis rule, and the expensing rule applies to amounts paid or incurred in tax years beginning on or after Jan. 1, 2012.
Under current law, tax-favorable dividends tax rates are scheduled to expire after 2012. Qualified dividends are eligible for a maximum 15 percent tax rate for taxpayers in the 25 percent and higher brackets, zero percent for taxpayers in the 10 and 15 percent brackets.
In July, the U.S. House voted to extend the current dividend tax treatment through 2013. The Senate, however, voted to extend the current tax favorable rates only for individuals with incomes below $200,000 (and families with incomes below $250,000). For income in excess of $200,000/$250,000, the tax rate on qualified dividends would be 20 percent.
President Obama wants to raise the capital gains rate to 20 percent for higher earners and leave it at 15 percent for other taxpayers but no final decision has been reached. If Congress takes no action, qualified dividends will be taxed at the ordinary income tax rates after 2012 (with the highest rate scheduled to be 39.6 percent not taking into account the 3.8 percent Medicare contribution tax for higher income individuals).
Qualified corporations may want to explore declaring a special dividend to shareholders before Jan. 1, 2013.
5. EXPIRING BUSINESS TAX INCENTIVES
Many temporary incentives expired at the end of 2011. In past years, Congress has routinely extended these incentives, often retroactively, but this year may be different.
Faced with the federal deficit and across-the-board spending cuts scheduled to take effect in 2013, lawmakers may allow some of the incentives to expire permanently. Certain ones have bipartisan support and are likely to be extended, such as the Section 41 research tax credit, the Work Opportunity Tax Credit (WOTC), and the 15-year recovery period for leasehold, restaurant and retail improvement property.
6. SMALL-EMPLOYER HEALTH INSURANCE CREDIT
This potentially valuable incentive, often overlooked by small businesses, means employers with 10 or fewer full-time employees, or FTEs, paying average annual wages of not more than $25,000 may be eligible for a maximum tax credit of 35 percent on health insurance premiums paid for tax years beginning in 2010 through 2013. Tax-exempt employers may be eligible for a maximum tax credit of 25 percent for tax years beginning in 2010 through 2013.
The Section 45R credit is subject to phase-out rules. The credit is reduced by 6.667 percent for each FTE in excess of 10 employees. The credit is also reduced by 4 percent for each $1,000 that average annual compensation paid to the employees exceeds $25,000. This means that the credit completely phases out if an employer has 25 or more FTEs and pays $50,000 or more in average annual wages.
For example, a for-profit employer has 10 FTEs and pays average annual wages of $25,000 in tax year 2012. The employers qualified employee health care costs for tax year 2012 are $70,000. The employers Section 45R credit is $24,500 (or $70,000 x 35 percent).
The credit is scheduled to climb to 50 percent of qualified premium costs paid by for-profit employers (35 percent for tax-exempt employers) for tax years beginning in 2014 and 2015. An employer may claim the tax credit after 2013, however, only if it offers one or more qualified health plans through a state insurance exchange.