Staying current on tax developments happening in Washington, D.C. is a full-time job, and there is significant uncertainty about what Congress will do on the tax front this coming year. Yet, northern Nevada small business owners need to be informed to understand what tax breaks are available to them in order to maximize their tax earnings in the coming year specifically the Small Business Expensing and Bonus Depreciation tax incentives.
The Budget Control Act of 2011 created a Congressional Joint Selection Committee on Deficit Reduction charged with achieving significant reductions in the federal budget deficit. The Budget Control Act directed the Joint Select Committee to present its proposals to Congress before Nov. 23. The Committee, comprised of six Democrats and six Republicans, announced that the committee members could not reach an agreement on deficit reduction proposals. By not reaching an agreement, the fate of the Bush-era tax cuts were left unanswered, as were tax extenders and other expiring provisions, as well as any hope of tax reform being put on a fast track. The Bush-era tax cuts, it appears, will be left for Congress to address after the 2012 election.
While many business tax incentives and tax credits expired with the inability of the Joint Select Committee to come to an agreement, there are two very effective and popular tax incentives still available for small business to take advantage in 2012. These are:
Small business expensing of capital expenditures under Code Section 179 and bonus depreciation.
However, unless Congress acts to extend these provisions, their tax benefits will be severely curtailed in 2013 and after. Small businesses planning to invest in capital expenditures should consider placing them in service prior to Jan. 1, 2013.
Small business expensing (also known as Section 179 expensing, named for the Internal Revenue Code that sanctions it) allows a business to deduct (rather than depreciate over a number of years) the cost of purchasing such assets as equipment, furniture, and off-the-shelf computer software. The deduction applies to both new and used tangible personal property, which is known as Section 179 property.
The maximum amount a business can deduct in 2012 is $139,000. This is down from the 2010 and 2011 limitation of $500,000. Unless Congress acts in 2012, the Code Section 179 deduction limitation decreases to $25,000 in 2013. In 2010 and 2011, "qualified real property" expenditures were eligible for the Section 179 deduction. For 2012 they no longer qualify. A variety of factors constitute what qualified real property is, so if you wonder if your property meets the criteria, contact your tax advisor.
There is an investment limitation whereby the deduction limitation is reduced dollar for dollar by the cost-qualified property placed in service during the tax year. This limitation for 2012 is $560,000 down from $2,000,000 in 2011. In 2013 this limitation drops even further to $200,000. Under Section 179, a final limitation is that the deduction is limited to small business' taxable income for the year, and as a result, cannot create a net operating loss for the year.
Bonus depreciation is similar to the Section 179 deduction as it allows qualifying property to be written off in an accelerated manner. Bonus depreciation is available to qualified property placed in service after Dec. 31, 2007 and before Jan. 1, 2013. So again, unless Congress acts in 2012, bonus depreciation will not be available in 2013. Bonus depreciation allows 50 percent of the cost of qualifying assets to be deducted in the year they are placed in service, with the other 50 percent of the cost depreciated over the useful life of the asset.
The Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 increased the bonus percentage from 50 percent to 100 percent for assets placed in service after Sept. 8, 2010 and before Jan. 1, 2012. For 2013 the bonus percentage decreases to 50 percent. Bonus depreciation can only be taken on new or original use property, unlike Section 179 property that can be taken on new or previously used property. However, a benefit of bonus depreciation is there are no investment or taxable income limitations that apply to Section 179 property. As a result, bonus depreciation can create a net operating loss that can be carried back two years to obtain a tax refund or carried forward up to 20 years to offset future year taxable income.
Generally, property qualifies as bonus property if it has a useful life of 20 years or less. This includes qualified leasehold improvement property which is defined as an improvement to an interior portion of nonresidential real property that is at least three years old by a lessor or lessee under or pursuant to a lease. Additionally, property used in a rental activity is eligible for bonus depreciation.
So while there is a great deal of uncertainty regarding 2012 tax planning due to the expiration of many tax exemptions and tax credits, small business expensing and bonus depreciation are two valuable depreciation methods that small businesses can still take advantage of in 2012. If your small business is considering purchasing tangible personal property, whether it is upgrading your computer system, buying new furniture, or new equipment, or maybe remodeling your existing office space, you will want to seriously consider doing it prior to 2013 when these deductions either go away or are substantially reduced.
Mike Klaich is a partner, CPA and certified financial planner with Muckel Anderson CPAs in Reno. Contact him at 775-686-3200 or mklaich@muckelanderson.com.
