Expiring Tax Provisons - Business

by Kenneth Hoffman in

Tax planning this year, particularly for businesses, is complicated by a number of expiring tax provisions. While most are timing issues (an immediate deduction versus depreciation over a number of years) some are significant. Some of these expiring provisions may be extended, but based upon what's going on in Congress that's not very likely at this time. Here are some of the more frequently encountered and important changes.

 Current law allows for 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements placed in service before January 1, 2012. The same improvements done after the end of 2011 will generally have to be depreciated over 39 years.
The additional first-year depreciation for 100 percent of basis of qualified property is expiring. Until the end of the year you can depreciate the full cost of any equipment purchases (e.g., any tangible personal property and some special purpose property, but not real property such as buildings) in the year placed in service. For example, Madison LLC buys a lathe for $25,000. It can depreciate the entire cost in 2011. If placed in service in 2012, assuming a 7-year life, it could deduct only $3,572; then $6,122 in 2013, etc.
The higher expense election under Section 179 decreases from $500,000 to $139,000 in 2012 and the phaseouts based on total qualifying purchases drops from $2,000,000 to $560,000.

Because of the elimination of the additional first-year depreciation, the maximum first-year writeoff for cars and light trucks will drop from about $11,000 to about $3,000.

Some of these benefits overlap, but depending on your tax situation. In any event, to secure the benefits in 2011, the assets must generally be placed in service before January 1, 2012. That means equipment, leasehold improvements, etc. must be available for use. You can't just order the tractor. It must be ready to go to work. If it still has to be assembled, installed, etc. it's generally not placed in service. (That doesn't mean you have to use the equipment.) Thus, there's not much time left for certain equipment or any remodeling. In the case of construction, you might want to split the project so that, say two rooms can be done by the end of 2011; the other four rooms will have to wait till 2012. Working on the whole project simultaneously may mean nothing is placed in service until 2012. In any event, you don't have much time left to order equipment, etc.

Two points. First, as we said above, even the best deduction doesn't make the purchase free. You're still picking up most of the cost. Second, whether or not you can use the accelerated deduction will depend on your situation. The 15-year recovery of leasehold, restaurant, and retail improvements will benefit all businesses who can qualify. But a 100% first-year recovery of equipment won't provide much in tax benefits if you expect to incur losses for the next few years or expect to be in a low tax bracket for some time. And you don't want to drop into a much lower than normal bracket this year only to be in a higher than normal one later because of the accelerated deduction. In the latter cases there's no need to rush to make a year-end purchase.

The bonus depreciation rule can be particularly worthwhile for autos and light trucks. If you were planning to make a purchase soon, consider accelerating it into 2011.

Unless you're always in the top or near the top bracket, work through the numbers to determine which approach is best. And keep in mind that you might be able to generate a net operating loss that can be carried back to recover taxes paid in an earlier year.

Other expiring provisions include:

  • Tax credit for research and experimentation expenses (this one is likely to be renewed),
  • New markets tax credit,
  • Credit for construction of new energy efficient homes,
  • Work opportunity tax credit, and
  • Empowerment zone tax incentives.

Save taxes by taking action now, not after the end of the year. If you fail to plan, the IRS has a plan for you, and the IRS plan will undoubtedly result in
more taxes--not less.