2012 Year-End Tax Planning - Businesses & Rentals

Year-end tax planning for businesses has been complicated by uncertainty over availability of many tax incentives. In 2010, Congress extended many business incentives for one or two years. These incentives are about to expire. In addition, many of the “Bush-era” tax cuts are scheduled to expire at year end. It is unclear if Congress will provide further extensions as they debate government spending cuts scheduled to take effect in 2013.

Currently, a 50% first-year bonus depreciation allowance is allowed for qualified property. This allowance is scheduled to expire at the end of 2012. The equipment eligible for bonus depreciation must be placed in service and not merely purchased before the end of the year to be eligible for 2012. Also, special rules apply for business automobiles.

In addition to bonus depreciation, there is Code Sec. 179 expensing. For 2012, the dollar limitation is $139,000 with a $560,000 investment ceiling on the purchase of all otherwise qualifying property. These limitations drop to $25,000 and $200,000, respectively in 2013.

More provisions that expired at the end of 2011 that may or may not be resurrected by Congress include:

  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Work opportunity tax credit
  • Charitable deduction for food inventory contributions
  • Increased deduction for contributions of book inventory to public schools
  • Increased deduction for contributions of computer equipment to schools
  • Basis adjustments for S-Corp charitable contributions of property
  • Reduced S-Corp recognition period for built-in gains tax
  • The Sec. 41 research and development credit
  • The credit for plug-in electric vehicles
  • The plug-in electric vehicle conversion credit
  • The new energy-efficient homes credit

  

“Bush-era” tax Cuts

The “Bush-era” tax cuts is the collective term for the tax measures enacted during 2001 – 2003 that made over 30 major changes to the Tax Code which are scheduled to expire at the end of 2012. The following are the major changes for business and investment that will occur next year as the result of the expiration of the Bush tax cuts.

  • Reduced maximum capital gains rate expires. Increase from 15% to 20%.
  • Lower capital gain tax rates for qualified five-year gain will be revived
  • Taxation of qualified dividends at capital gain rates will no longer apply; dividends will again be taxed at ordinary income rates.

Health Care

On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act (PPAC). As part of its primary purpose to facilitate health care reform, the PPAC includes key tax provisions that affect businesses. Although it was optional in 2011, Form W-2 reporting of employer sponsored health coverage is mandatory for 2012 and thereafter. However, the IRS has issued a moratorium for small businesses (those issuing few than 250 Form W-2s) until at least 2013.

The new 3.8% Medicare tax on investment income under the PPAC also comes into effect in 2013 along with the 0.9% on wages and self-employment income. Both of these only affect those with income over $200K (single) or $250K (married filing joint).

Many other changes brought about by the PPAC will not impact businesses until 2014. We will keep you up-to-date on these changes throughout the next year.

 Planning

At this point it is uncertain if Congress will extend all or some of the provisions expiring in 2012. This uncertainty makes year-end planning difficult and solid recommendations hard to make. Here are a few suggestions that may be beneficial. However, before you act on any of these suggestions, we urge you contact us so we can take a look at your specific situation to see if they work for you and your business.

  • Defer expenses. With higher tax rates possible next year, it may be best if you hold off on deductions until next year. For example, if possible, put off supply orders etc until after year end.
  • Accelerate income. For cash basis taxpayers, collect all revenue you can before year end. For accrual basis taxpayers, get jobs finished before 1/1/13 so you can recognize the income in 2012.
  • Major Purchases. Even though you may want to defer expenses until next year, with the possible expiration of 50% bonus depreciation and the reduction in Section 179 expense maximum, you may not be able to write-off large portions of your capital expenditures next year. Thus you may want to make major purchases before year end.
  • Recognize capital gains in 2012. If you have any capital assets that you are looking to sell, you may want to sell them in 2012 while capital gain rates are still at 15%. In 2013, the rates on capital gains could be as much as 8.3% higher (5% additional tax due to rate changes plus 3.8% for the new Medicare tax on investment income).

As the end of 2012 approaches, we wanted to make sure you were aware of the possible tax changes that may affect your 2012 return (and future taxes as well). If you have any questions or would like us to take a look at your specific tax situation and discuss possible tax savings opportunities with you, please give us a call. This year we are offering our year-end tax planning at 10% off of our normal rates. This special applies through 12/15/12.


Dirk Jutten | 11/28/2012



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