Accounting and Tax Planning Sections

Disappearing Acts

There Are a Host of Vanishing Tax Provisions for Small Businesses

Jana Bacon

Jana Bacon

It has been difficult to miss all the hoopla over vanishing tax provisions. This article addresses the more common provisions affecting small businesses, including the fixed-asset expensing provisions, bonus depreciation, depreciation of specialized real-estate assets, the research credit, the new-markets tax credit, and the Work Opportunity Tax Credit (WOTC).

Section 179 and Bonus Depreciation

Since 1997, Internal Revenue Code Section 179 has allowed for the deduction of certain qualified expenditures that normally would be required to be capitalized and depreciated. Section 179 property is defined generally as tangible personal property acquired and placed in service in connection with the active conduct of a trade or business. Over the years, the maximum allowable deduction amount has varied.

For 2011, the maximum allowable deduction was $500,000 and was reduced dollar-for-dollar as qualified expenditures exceeded $2 million. For 2012, the maximum allowable deduction is $139,000 with reduction as expenditures exceed $560,000. For 2013, the maximum amount is currently scheduled to decrease to $25,000 with the phase-out beginning at $200,000.

Bonus depreciation is another tax benefit scheduled to disappear after this year. In 2011, 100% first-year bonus depreciation applied to qualified tangible personal property additions with no limit. In 2012, that was reduced to 50% first-year bonus depreciation.

Although there has been considerable discussion about the fate of these provisions — because we have no idea whether they will be reinstated by Congress or, if so, at what levels — businesses may wish to take advantage of the higher Section 179 amount and/or bonus depreciation for this year by acquiring and placing in service qualified tangible personal property purchases prior to Dec. 31, 2012.

 

Cost Recovery for Specified

Real Property

Qualified leasehold improvements and qualified restaurant property placed in service between Oct. 22, 2004 and Dec. 31, 2011, and qualified retail-improvement property placed in service between Jan. 1, 2009 and Dec. 31, 2011, were subject to straight-line depreciation over a 15-year period. For such property placed in service after 2011, however, straight-line depreciation over a 39-year period is required.

Also, because these assets were previously considered 15-year property, they had qualified for Section 179 expensing and bonus depreciation. Effective Jan. 1, 2012, they no longer qualify for either.

 

Research and Experimentation Credit

The tax credit for research and experimentation expenses (R&E credit) was originally enacted in 1981, and applied to amounts paid or incurred on or before Dec. 31, 1985. The credit had been extended 14 times since then but expired on Dec. 31, 2011. The R&E credit had been allowed to expire only once before from July 1, 1995 through June 30, 1996. The traditional R&E credit provision had allowed a taxpayer to claim a credit equal to 20% of the amount by which the taxpayer’s qualified research expenditures exceeded a base amount.

The base amount reflects past research expenditures that were incurred over a fixed period of time, so the credit was really a credit on incremental increases in research costs. The credit was generally available on both in-house and contract research costs. Also available was an alternative simplified credit, which was only partially incremental and utilized a rolling three-year base period and a 14% credit rate.

 

New Markets Tax Credit

Originally enacted in 2000 for investments made after Dec. 31, 2000, the new markets tax credit provided a credit on qualified investments to promote economic and community development in low-income communities. The credit was taken over a seven-year period and totaled 39% of qualified equity investments made in a qualified community-development entity (CDE).

CDEs were required to invest in qualified low-income community business, and applications were required by CDEs to obtain an allocation of a portion of the credit authorized for the year. The last amount authorized was $3.5 billion for 2011.

 

Work Opportunity Tax Credit

Enacted in 1997, the work opportunity tax credit (WOTC) provided a credit to employers on wages paid to eligible employees who began work for the employer before Jan. 1, 2012. The amount of the credit ranged from $2,400 to $9,000 per each eligible employee, depending upon the type of eligible employee. Eligible employees included qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, qualified veterans, qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified members of families in the Supplemental Nutritional Assistance Program (SNAP), qualified Supplemental Security Income recipients, or long-term family-assistance recipients.

To qualify for the credit, the employee had to complete at least 120 hours of service for the employer. The credit has been extended for wages paid through Dec. 31, 2012 only for qualified veterans.

The uncertainty of whether Congress will reinstate or extend these tax benefits makes planning extremely difficult.  Pay close attention after this year’s elections to see if any new or extending tax legislation is enacted that may affect your business.

Please note that this article contains only a general discussion, so you should consult your tax advisor for additional information or assistance.

 

Jana Bacon is a member of the firm at Wolf & Company, P.C. and focuses on tax compliance and planning services; (413) 747-9042.

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