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Year-End Corporate Tax Planning: Part 2 of 2

To reiterate our last post, it is difficult to accomplish end-of-year tax planning for corporations for 2012 because many significant tax provisions re going to expire at the end of the year and it is not clear what Congress’s intentions are, at this point.

Important provisions had expired at the end of 2011, which encompassed the business research credit, and now others are expiring at the end of 2012 which includes the era of Bush’s tax cuts, the bonus depreciation allowance, and the expensing allowance.  Congress has the power to retroactively extend the rules that have already expired and even to extend those due to expire at the end of 2012, or we can just try to guess what the outcome may be.

This presents a challenging dilemma for us in terms of tax planning.  Nevertheless, there are strategies that exist, that businesses can avail themselves of before the end of the year to maximize the opportunity to lock in low tax rates for shareholders, take advantage of the work opportunity tax credit, and generous depreciation and expense deductions

Here are three additional, strategic tax tips to consider before year end planning

Bonus depreciation. Companies should consider putting new business equipment and machinery in service before year-end to qualify for the 50 percent first-year depreciation allowance (or bonus depreciation allowance). Under current law, a bonus depreciation allowance generally applies to qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013. Unless Congress extends the bonus depreciation allowance, it generally will not be available for property placed in service after 2012. “This uncertainty creates a real incentive for businesses that intend to make purchases in early 2013 to accelerate the purchases into 2012, if it is feasible to do so,” said Rosenberg.

Expensing. To get a larger expensing deduction, businesses that intend to purchase machinery and equipment either before the end of 2012 or at the beginning of 2013 should try to accelerate their purchases into 2012.

The maximum amount a business can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for that tax year. The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling).

For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000. The time of purchase does not affect the amount of the expensing deduction. A business can purchase property late in the year and still get a full expensing deduction.

Effectively, acquiring property and placing it in service in the last days of 2012, rather than at the beginning of 2013, can result in a full expense deduction for 2012.”

Business vehicles. To maximize first-year deductions, a business that plans to buy a new automobile, light truck, or van for trade or business use should buy the vehicle and place it in service this year. The first-year dollar depreciation cap for 2012 is $11,160 for autos and $11,360 for light trucks or vans (passenger autos built on a truck chassis, including minivans) that qualify for the bonus depreciation allowance. Under current law, these first-year depreciation caps include an $8,000 additional first-year depreciation allowance that expires at the end of 2012. Rosenberg pointed out that “tax saving opportunities could be lost if a business puts off buying an auto until 2013.”

Heavy sport utility vehicles (SUVs)–those that are built on a truck chassis and are rated at more than 6,000 pounds gross vehicle weight-are exempt from the above depreciation caps. Taxpayers can deduct up to $25,000 of the cost of a new SUV as a business expense in the placed-in-service year. In addition, the remaining cost of a new SUV placed-in-service in 2012 is eligible for 50 percent first-year depreciation in 2012. Thereafter, cost is depreciated under rules for five-year depreciation property.

Effectively, the 50 percent first-year depreciation and $25,000 expense allowances allow a business to write off most of the cost of a heavy SUV purchased this year.  However, unless the current tax law is extended, a company that purchases a heavy SUV in 2013 will not receive the 50 percent first-year depreciation allowance.

For assistance with this or other tax or accounting matters please contact us at 201-947-8081 or 646-688-2807, or email us at info@ourcpas.com.

 

 

 

 

 

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