Year-End Tax-Planning Moves for Businesses and Business Owners
Two weeks ago, we dealt with year-end tax-planning ideas for individuals. Business taxpayers too are confronted with uncertainty in year-end tax planning as 2011 ends.
A number of business tax incentives are scheduled to expire after December 31, 2011 unless extended by Congress. These incentives include widely-popular and utilized ones, such as 100 percent bonus depreciation, enhanced small business expensing, real property expensing, and many more. Other provisions, such as the small business health insurance credit and the Code section 199 domestic production activities deduction, while not expiring, appear to be under-utilized.
As 2011 draws to a close, it is a valuable time to review some of these tax incentives and how they may be able to help your business' bottom line.
- • Businesses should consider making expenditures that qualify for the business property expensing option (commonly known as 179 expensing). For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property.
However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won't be available for qualified real property.
The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment.
What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if bought and placed in service this year. This 100% first-year write-off generally won't be available next year unless Congress acts to extend it.
Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won't be available for workers hired after this year. The WOTC generally is 40 percent of the qualified worker's first-year wages up to $6,000 (with higher and lower amounts for certain groups).
• Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.
• According to the IRS, many small businesses are overlooking the small employer health insurance tax credit. Small employers that provide health care coverage to their employees and that meet certain requirements generally are eligible for a tax credit for health insurance premiums they pay for certain employees.
The employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year; average annual wages of its employees for the year must be less than $50,000 per FTE; and the employer must pay the premiums under a qualifying arrangement.
For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer's premium expenses that count towards the credit (25 percent for tax-exempt employers).
If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced until it phases-out.
• Another under-used tax incentive, according to the IRS, is the Code section 199 domestic production activities deduction. The section 199 deduction generally allows taxpayers to receive a deduction based on qualified production activities income (QPAI) resulting from domestic production.
The deduction effectively reduces the income tax rate on domestic production activities.
Qualifying domestic production includes the manufacture of tangible personal property; the production of computer software, sound recordings and certain films; the production of electricity, natural gas, or water; and construction, engineering, and architectural services.
While the deduction doesn't require an extra outlay of cash to receive, the calculation of the section 199 deduction is complex, which contributes to its under-utilization.
• If you are self-employed and haven't done so yet, consider setting up a self-employed retirement plan. Although they generally don't have to be funded until the due date of your tax return, these plans typically have to be established by year-end for the deduction to be taken this year.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012 (since it may be taxable), and disposing of ownership in a passive activity to allow you to deduct any suspended losses you have from the activity.
• If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
These are just some of the year-end steps that can be taken to lower your ultimate tax bill. Taking advantage of the ones that are right for you makes for a happier New Year!
