Small Business Year-End Tax Planning | Smith, Kunz & Associates

Small Business Year-End Tax Planning

December 17, 2014

Tax Planning is Critical for your Business This Year

Year-End Tax Planning Part I: Businesses

Smith, Kunz likes to take advantage of this time of year, after the tax extension deadlines and before the holiday season, to do some year-end tax planning. Both individuals and businesses can take actions to reduce their taxes. As always, don’t let the tax tail wag the business dog. Any tax planning action must make economic sense.

Current Tax Environment

There seems to be a louder call for tax reform than in previous years. Much of this has to do with the U.S. budget crisis. Last year’s Simpson-Bowles Deficit Commission recommended tax reform as a way to reduce the deficit. President Obama has proposed changes to the tax code. A trio of Republican congressman has come up with another tax reform plan. Everyone has heard of presidential candidate Herman Cain’s 9-9-9 plan. The congressional “Super Committee” that’s been charged with finding $1.2 trillion in savings over the next 10 years by around Thanksgiving is also considering tax law changes. No one is satisfied with the current law. Tax reform is a great possibility.

Although the long-term tax situation remains in flux after 2012, there is some degree of certainty for the next 14 months. We currently don’t expect major revisions to the tax code at the eleventh hour for 2011 and 2012. As always, tax planning is a moving target, but the following recommendations could suit your specific situation. Please contact us with any questions.

Businesses

Some important business tax benefits are slated to expire (or drop in value) after 2011. For businesses, the two most important benefits are 100% bonus depreciation and Code Sec. 179 expensing, whose thresholds and limits are changed by Congress every year.

Bonus Depreciation

Bonus depreciation is a way of reducing the initial cost of new property by recognizing 100% of the cost of the property as a deduction on your taxes. It’s also a way of accelerating deductions, which is usually a great tax strategy.

The status of bonus depreciation is uncertain. President Obama has proposed to extend 100% bonus depreciation through 2012. However, while this proposal would normally get broad support, the president has proposed to pay for the extension with other tax increases, which the Republicans are likely to oppose.

100% bonus depreciation is scheduled to drop to 50% for 2012 and terminate after 2012. The deadlines are extended one year for property with a longer production period and certain transportation property.

To qualify for bonus depreciation, the property acquired must be new and must satisfy placed-in-service and acquisition date requirements. The acquisition date rules are different for the 100% and 50% rates. For 100% bonus depreciation (the 2011 rate), property is acquired when the taxpayer pays or incurs its cost. For 50% bonus depreciation (the 2012 rate), property is acquired when the taxpayer takes physical possession or control of the property.

Code Sec. 179 Expensing

Code Sec. 179 Expensing is another way of reducing the initial cost of new or used property by recognizing up to 100% of the cost of the property as a deduction on your taxes.

For businesses considering an investment in depreciable property, the payoff is definitely greater for a 2011 investment. Expensing (or the deduction on your return) is capped at a high level of $500,000 for 2011. For 2012, that limit is projected to be $139,000. The cap (or the amount of property you can acquire before expensing is reduced) is $2 million for 2011. For 2012, the investment limit is projected to drop to $560,000, and $200,000 for years after 2012. The 2011 expensing limit and investment cap are the highest ever for this benefit.

Taxpayers taking advantage of expensing should apply it to assets that would otherwise have the longest recovery periods. This accelerates deductions.

A unique wrinkle of Sec.179 Expensing for 2011 is the ability to expense real property, which is typically excluded from this type of treatment. A taxpayer can elect to expense up to $250,000 (of the $500,000 deduction limit) for qualified real property for 2011. This category includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Subsequent legislation did not extend this treatment into 2012.

Other 2011 Benefits

Other important benefits are scheduled to expire or decrease after 2011. A major benefit for many businesses is the 20% research tax credit. The credit has been extended from year to year, although Congress sometimes renews the credit late in the new year and makes it retroactive. The credit has never been permanent, but President Obama has now proposed that it be permanent.

Another significant benefit is the 100% exclusion for small business stock, which applies to stock acquired through 2011. The normal exclusion is 50%, although Congress has also adopted a 75% rate in recent years. The stock must be acquired in 2011, be held for at least five years, and satisfy other requirements to benefit from the 100% exclusion when it is eventually sold. This is a useful planning tool for closely held businesses.

Special charitable deduction provisions for contributions of food, books, and computer equipment to schools apply through 2011 only. Other tax breaks that are also scheduled to terminate at the end of 2011 are:

  • Work opportunity tax credit
  • Brownfields remediation deduction
  • Indian employment credit
  • 15-year recovery period for certain qualified improvements to real estate.

Conclusion

With the U.S. budget crisis defining most political debates and many different parties proposing tax reform, year-end tax planning has become more complex. Many significant credits and deductions are scheduled to expire at the end of 2011. Actions taken in 2011, while there is still a degree of certainty regarding the tax law, take on added importance. Please give us a call at (208) 356-8500 so we can discuss options available to you.