During the last few years, tax laws affecting businesses have changed frequently as rules contained in laws passed nearly a decade ago expired. Many of those laws – passed with the expectation that a permanent set of rules would be adopted before they expired – had subsequently been extended with passage of still more temporary rules. Truly, our government works in mysterious ways.
The most recent of these extension laws is the American Taxpayer Relief Act of 2012 (ATRA), signed into law by President Obama in the early days of 2013 and containing numerous extensions for individual and business tax deductions and credits. I consulted with several fellow tax professionals from Scott and Company’s tax planning and compliance teams in Greenville and Columbia for thoughts on key changes that could impact your business. Here are our thoughts on key rule changes:
Expensing Limits Extended through 2013
Section 179 of the Internal Revenue Code allows for immediate expensing for tax purposes of many new or used assets such as equipment, computers, and furniture that would normally be depreciated over several years. This provision allows businesses to improve cash flow by claiming tax deductions for such purchases generally in the same year as the expenditures.
“For 2010 and 2011, the Sec 179 rules allowed expensing of up to $500,000 of asset purchases as long as the total asset acquisitions by the company for the year were no greater than $2 million. Before ATRA was passed, these limits were scheduled to be reduced dramatically,” noted John Price, Jr., a CPA and member with Scott and Company’s tax group. “Now with passage of ATRA, the 2010-11 limits have been extended all the way through 2013, representing opportunity for smart business owners to plan their asset acquisition strategies to maximize benefits and enhance cash flow.”
Bonus Depreciation Extended
Similar to Sec 179, the “Bonus Depreciation” rules under Internal Revenue Code Section 168(k) allow a business to immediately expense purchases of new capital assets. Unlike Sec 179, bonus depreciation has no dollar limits but allows up to 50% of the acquisition cost of an asset to be immediately deducted for 2012. ATRA also extends the 50% depreciation allowance through the end of 2013.
“It’s also important to note that bonus depreciation and Sec 179 expensing can be used together in many cases, so carefully plan your strategy to make best use of both provisions,” added Scott and Company’s Price.
In addition, be sure to check your state’s tax rules to see if they allow these provisions or not. Many states, including South Carolina, disallow bonus depreciation and require you to adjust your depreciation deductions to conform to standard depreciation methods.
Extension Granted for Leasehold Improvement Depreciation
Another depreciation-related rule designed to help businesses is a reduced recovery period for qualified leasehold improvements, including retail and restaurant improvements, notes Sandy Cooper, a CPA and member with Scott and Company’s tax group. Since capital improvements made to leased space are typically depreciated over the same life as structural components of commercial real estate—39 years – and because many improvements are paid for up front or financed over much shorter terms, the long recovery period can cause cash flow issues.
“Business executives should be aware that ATRA’s extension – through the end of 2013 – allows improvements to most office, retail, and restaurant spaces to be depreciated over just 15 years rather than 39, greatly improving cash flow,” said Cooper. “And for restaurants, the 15 year recovery period can even be used for an entire building, not just interior improvements.”
Cooper also noted that for most improvements, the reduced recovery period makes the costs eligible for Sec 179 expensing of up to $250,000.
Work Opportunity Credits Back with a Bang
Long active in workforce development initiatives, Scott and Company’s Hunter Howard, a CPA of counsel to the firm’s Greenville office, reminds business leaders not to overlook select hiring credits available to some businesses.
“Before ATRA, the Work Opportunity Credit (WOTC) had all but expired in 2011, with only a credit for hiring unemployed veterans remaining in place for 2012. Now, WOTC is back to full strength retroactive to 2012 and extended through the end of 2013,” said Howard. “The WOTC allows businesses to take a credit of up to 40% of the first $6,000 of wages paid to new hires – including ex-felons, veterans, those participating in vocational rehab, and individuals receiving various government assistance benefits. Businesses should check employee rolls carefully to see if anyone hired during 2012 qualifies for the credit, and leverage the credit as appropriate with new hires in 2013.”
Research Tax Credit Resurrected – Again
To CPA and member Bill West, who specializes in tax planning and compliance for middle market and large corporations, the Research Tax Credit has long been overlooked by many organizations.
“The Research tax Credit was extended with ATRA for 2012 and 2013, and is available to businesses that engage in many types of research and development activities in the United States,” said West. “It is designed to encourage innovation, and eligible research activities include developing prototypes, testing new products, improving old products, improving manufacturing processes, and applying for patents. While high-tech companies engage in these activities most often, other companies including architectural firms, food processing companies, manufacturers, and software developers can qualify.”
West’s advice? “Be sure to seek professional guidance from a firm with expertise dealing with this credit, since it is highly technical and requires detailed record-keeping.”
With the American Taxpayer Relief Act extending and enhancing many tax breaks for businesses, take time to consider your business activities and purchases during 2012 and your plans for 2013 and be sure to consult with your tax professional on these opportunities. You might find yourself pleasantly surprised at the impact on your bottom line.
Tony Perricelli, CPA is a Tax and Advisory Services member for Scott and Company LLC working with closely-held businesses and individuals. He serves clients in industries including real estate, hospitality, professional services, health care, and retail. A member of the AICPA and the South Carolina Association of Certified Public Accountants, email him at firstname.lastname@example.org or call 803.753.5244.