With many tax provisions expiring at the end of 2012 and Congress undecided on renewing some of them, it is crucial for your business to prepare for its year-end tax planning accordingly in order to take advantage of deductions that may be lost in 2013.
Just like in 2011, there are quite a few credits, deductions, and tax breaks on the verge of expiring if Congress does not extend them. Some of the more impactful provisions anticipated to expire at the end of 2012 are the expensing allowance, bonus depreciation allowance, and the Bush-era tax cuts. Congress could choose to extend any of these, but whether they will is still uncertain.
With uncertainty comes challenge and with the year-end rising upon us, it is time for businesses to take action to secure a low tax rate for their shareholders, take advantage of expiring credits, and get the most out of their depreciation and expense deductions.
If you are in any of these situations or would like more information, please feel free to contact us and we can discuss your questions.
The following are 5 year-end corporate tax planning tips:
1. Stock Redemption
Closely held corporations should consider a stock redemption before the end of 2012 if it serves business purposes. Depending on the factors at hand, when a corporation purchases its own stock, it can result in dividends or long-term capital gains for its shareholders. Currently in 2012, 15 percent is the maximum tax rate applicable to both dividends and capital gains. If the Bush-era tax cuts expire and are not extended at the end of 2012, long-term gains will be taxed at 20 percent and dividends will be taxed as ordinary income which means the rate could increase up to 39.6 percent. Also, with the new 3.8 percent Medicare tax, taxpayers with an adjusted gross income over specific limits who have gains and unearned income (including dividends and interest) will be subject to this 3.8 percent surtax.
2. Work Opportunity Tax Credit (WOTC)
To qualify for this credit businesses will need to hire qualifying veterans before year-end as this credit is one of many set to expire. If your business is looking into hiring new employees, hiring a qualified veteran before the end of 2012 could create a credit from $2,400- $9,600 depending on a range of factors. Some factors include if the veteran has a service-connected disability and the length of unemployment.
3. Bonus Depreciation
Currently, bonus depreciation (allowance) allows a business to take 50 percent first-year depreciation allowance as long as the qualified property was acquired and placed in service during the 2012 calendar year. Therefore, if a business is planning on purchasing and placing in service new machinery and equipment, they may want to consider making these purchases before the year-end. As of now, Congress is undecided on whether to extend the bonus depreciation allowance. If they do not extend it, the bonus would not be available in 2013.
For example: If a calendar-year business buys and places in service $500,000 of property that qualifies for the 50 percent first-year bonus depreciation allowance by the end of 2012, it will be able to claim a 50 percent first-year depreciation allowance of $300,000 ($250,000 bonus depreciation and $50,000 regular depreciation in the first year). That is 50 percent first-year bonus depreciation ($500,000*0.50=$250,000) plus the regular first-year depreciation ($500,000-$250,000*0.20=$50,000). If the same company waits until 2013 and Congress does not extend the bonus depreciation, they would only receive $100,000 of first-year depreciation allowance ($500,000*0.20=$100,000).
Businesses that are planning on purchasing machinery and equipment should consider making those purchases before the year-end. Currently in 2012, the maximum a business can expense is $139,000 of the cost of a qualifying property that was placed in service during 2012. Keep in mind that the $139,000 amount is reduced by the amount by which the cost of qualifying property that was placed in service during 2012 exceeds the investment ceiling of $560,000. However in 2013, assuming Congress does not extend this, the expensing limit will decrease to $25,000 with an investment ceiling of $200,000. You can make purchases and place in service qualifying property up to the last days of 2012. Purchases do not need to be made throughout the year as long as they are made and placed in service by the end of 2012.
For example: A calendar-year business bought and placed in service $100,000 of expensing-eligible property. The company plans to buy an additional $64,000 of expensing-eligible property in 2013. The company should consider purchasing and placing in service $39,000 of the $64,000 in 2012 rather than 2013. This will allow the company to expense all of its purchases for 2012 ($139,000) and 2013 ($25,000) without exceeding the investment ceiling.
5. Business Vehicles
If a business intends to buy a new automobile, light truck, or van for trade or business use, the business should consider making the purchase and placing the vehicle in service before year-end. Currently, the 2012 first-year dollar depreciation is $11,160 for automobiles and $11,360 for vans and light trucks that qualify for the bonus depreciation allowance. Included in these amounts is an $8,000 additional first-year depreciation allowance that will expire at the end of 2012.
However, heavy sport utility vehicles (built on truck chassis and are greater than 6,000 pounds) are exempt from the depreciation caps list above. A taxpayer is allowed to deduct up to $25,000 of the cost of a new SUV as a business expense as long as it was placed in service before the year-end. Also, the remaining cost of the new SUV is eligible for 50 percent first-year depreciation in 2012. Therefore if the law is not extended, in 2013, the business would not be able to take the 50 percent first-year depreciation allowance.