As summer ends and 2012 winds down, so does the time to take advantage of potentially expiring tax deductions. We asked these San Diego accounting firm executives if there are any significant deductions that are going to expire this year that business owners should be aware of and act on soon.
Keith Troutman is a partner in the CPA firm Squar, Milner, Peterson, Miranda & Wiliamson, LLP.
There are a couple of significant federal tax deductions affecting businesses that are set to expire Dec. 31, 2012, including the bonus depreciation deduction and the expanded Section 179 deduction. (Note: the Senate Committee on Finance issued a draft of the "Family and Business Tax Cut Certainty Act of 2012" on Aug. 2, which would extend a number of the existing provisions including Section 179, as modified.) There are also federal tax rate changes that are scheduled to take place at the end of 2012 that could affect shareholders of certain corporations.
Expiring federal deductions
Bonus Depreciation: During 2012, business taxpayers may deduct (or "expense") 50 percent — and in some cases up to 100 percent — of the cost of qualified property. The property must be of original use and placed into service during the tax year. Unlike Section 179 (see below), there is no taxable income or investment limitation on the bonus allowance. The bonus depreciation expense for taxpayers will expire Dec. 31, 2012. However, certain longer-lived and transportation property will still fall under the bonus depreciation rules through Dec. 31, 2013.
Section 179 Expense Election: The election to expense the cost of qualified property under Section 179 is limited to $139,000 for 2012, and a taxpayer is limited to asset purchases of $560,000. The deduction begins to phase out dollar for dollar after $560,000 is spent by a given business. This deduction is truly for small- and medium-sized businesses. When applying this deduction, the taxpayer will need to be profitable in order to take advantage of this deduction. At the end of 2012, the Section 179 deduction is scheduled to fall all the way to $25,000. However, the Senate Finance Committee proposal referenced above increases the eligible deduction to $250,000.
Federal Rate Changes: The long-term capital gains rate is currently 15 percent for corporate shareholders. So, for example, if a shareholder/business owner of a corporation were to sell his shares to a third party during 2012 resulting in a capital gain, the shareholder would pay tax on any gain at a maximum rate of 15 percent. After Dec. 31, 2012, the rate related to long-term gains from the sale of stock is increasing to 20 percent. Gains after 2012 may also be subject to an additional 3.8 percent excise tax, depending on the level of the taxpayer's income.
The tax rate on qualified dividends paid by businesses to corporate shareholders is currently 15 percent. Beginning in 2013, these same dividends will be taxed at ordinary rates. So, depending on the tax bracket of the recipient, the tax rate could be as high as 39.5 percent and may also be subject to the 3.8 percent excise tax levied on investment income. The business profits that S-corporation shareholders receive from their businesses are currently taxed at a maximum individual tax rate of 35 percent. In 2013, those same profits are scheduled to be taxed at a maximum individual rate of 39.5 percent.
Bruce D. Larsen
Bruce D. Larsen is a partner in tax services with Ernst & Young LLP
As business owners approach year end, it is prudent to consider actions which can be taken to reduce business taxes. While there are many year-end tax planning opportunities for businesses, I will highlight just a couple for consideration.
Take advantage of accelerated depreciation deductions for certain capital expenditures.
Under current law, businesses are entitled to recover (or deduct) the cost of capital expenditures via depreciation. The amount of depreciation which can be claimed by a taxpayer is governed by IRS schedules, which allow for either faster recovery or slower recovery at the election of the taxpayer. As an incentive to encourage business to increase capital expenditures, Congress has allowed businesses to take an additional depreciation deduction equal to 50 percent of the cost of certain property purchased and placed into service during 2012. For certain assets placed in service during 2011, this bonus depreciation deduction was equal to 100 percent, and Congress is currently considering increasing the bonus depreciation amount to 100 percent again for 2012. Regardless, the existing bonus depreciation incentive is set to expire for most assets on Jan. 1, 2013.
Don’t forget to claim California New Jobs Credit.
California has an often-overlooked state income tax credit called the California New Jobs Credit. The credit was passed in the middle of the economic turmoil of late 2008-early 2009. The program became effective for tax years commencing on or after Jan. 1, 2009.
This credit generates up to $3,000 for each additional full-time employee hired. It is available to businesses that had less than 20 employees in the prior tax year. The credit must be claimed on a timely filed original income tax return, on or before a cut-off date specified by the Franchise Tax Board. This includes returns filed with an extension.
The cut-off date is the last day of the calendar quarter within which FTB (the California Franchise Tax Board) estimates it will have received timely filed original returns claiming the credit that cumulatively total $400 million. As of June 30, 2012, only $120 million of the allocation has been claimed. This leaves $280 million in potential credit available for California taxpayers.
The credit is available to all types of California taxpayers including corporations, individuals, S-corporations and limited liability companies. The credit is available to any taxpayer in California as long as they meet the basic requirements of the credit (i.e., have less than 20 employees in the previous tax year).
It is important to note that unlike the California Enterprise Zone credit, there is no geographical limitation associated with claiming this credit. The taxpayer does not need to reside with a particular designated zone. If a taxpayer is within a California Enterprise Zone and eligible for the New Jobs Credit, the taxpayer may not claim a New Jobs Credit and a California Enterprise Zone credit on the same individual. To the extent a taxpayer is located within a California Enterprise Zone, the taxpayer should perform an analysis to determine which credit generates more benefit. In general, a California Enterprise Zone credit will be more beneficial than a California New Jobs Credit. Nevertheless, an analysis should be conducted to validate this conclusion.
Also, unlike the California Enterprise Zone credit, a taxpayer may not claim the credit on an amended return. If a taxpayer misses the opportunity associated with claiming this credit, there is no ability to go back and amend a return to capture the benefit.
The overall lack of awareness of this credit, the weak job market and the inability to amend returns have contributed to the lack of participation in this program. When the law was originally passed, it was hoped that the allocation would be claimed within the first year or two of the program. To date, only slightly less than a third of the allocation has been claimed. This has caught the attention of certain legislators who are attempting to unwind the program or reallocate the funds to other programs, however, to date these efforts have been unsuccessful.
Information about this credit, as well as up-to-date allocation numbers, can be found at the following California FTB website:
Marshall Varano is a partner in accounting and consulting firm J.H. Cohn LLP
With the expiration of the Bush-era tax cuts looming, many significant federal tax deductions have either expired or are set to expire unless congressional action is taken. The list of expired and expiring deductions are too numerous to list, but here are a few of the more significant ones:
*Though not a deduction, the increase in the top tax rate from 36 percent to 39.6 percent, the increase in the long-term capital gain rate from 15 percent to 20 percent; additional 3.8 percent Medicare tax on investment income and .9 percent on earned income over certain levels will be apply to taxpayers with adjusted gross income in excess of $250,000.
*Restoration of the limit on itemized deductions for higher-income taxpayers will reduce the total amount of itemized deductions allowed on Schedule A. A similar limit will apply to personal exemptions allowed as a deduction on page 2 of Form 1040. Applicable after Dec. 31, 2012.
*Reduction in the Alternative Minimum Tax (AMT) exemption from $74,450 to $45,000, subjecting more taxpayers to AMT. Applicable after Dec. 31, 2011.
*State sales-tax deduction in lieu of the state income tax deduction; expired Dec. 31, 2011.
*The above-the-line deduction for qualified expenses, up to $250, incurred by elementary and secondary school teachers, and the $4,000 deduction for qualified post secondary tuition and related expenses; expired Dec. 31, 2011.
*Schedule A deduction for mortgage insurance premiums as qualified mortgage interest; expired Dec. 31, 2011.
*Tax-free distributions of up to $100,000 from IRAs that are used as charitable donation; expired Dec. 31, 2011.
*Exclusion of up to $5,250 of qualified employer provided educational assistance from recipient’s income; expires Dec. 31, 2012.
*One-hundred-percent bonus depreciation deduction for qualified property decreases to 50 percent for 2012, and is set to completely expire after Dec. 31, 2012.
*Fifteen-year depreciable life for qualified leasehold, restaurant and retail property additions goes back up to 39 years after Dec. 31, 2011.
*IRC section 179 expensing allowance for qualified fixed asset additions decreases from $500,000 to $125,000 in 2012 and down to $25,000, post 2012.
*Enhanced charitable donation deduction for corporate contributions of certain qualified equipment and inventory; expired Dec. 31, 2011.
On July 31, 2012, the leaders of the Senate Finance Committee announced they would hold discussions on Aug. 2 of a bill extending a number of the expiring provisions mentioned above to the end of 2012. Whether an actual bill comes from these meetings is unknown.
Some of the individual provisions that would be reinstated include the AMT exemption, the state sales-tax deduction, the above-the-line deduction for teacher’s expenses and qualified higher education expenses, the Schedule A deduction for mortgage insurance premiums, and the provision allowing tax-free distributions of IRAs going to charities.
Some of the business provisions include extension of the 15-year depreciation life for qualified property, increase of the Section 179 deduction limit to $250,000 for 2013, and extension of the 50 percent bonus depreciation benefit for 2013.
You should consult your tax advisor to determine the impact of these changes to you or your business.