Fifty-five federal tax breaks are scheduled to expire at the end of the year. Usually, many of these expiring tax provisions are extended at the last minute, but this year is shaping up to be different.
The pressure for additional revenue, combined with political gridlock, has greatly increased the likelihood that many of the most advantageous provisions will not be extended or will be reduced significantly. This challenges business owners to make difficult decisions before the year ends without knowing what rules will be in effect in 2014.
We’ve sifted through all the expiring tax provisions and narrowed the list down to the four most important expiring breaks that every small business should consider taking advantage of before the end of the year.
Use Sec. 179 expensing/bonus depreciation opportunities
Current law enables firms to deduct the cost of purchasing assets like equipment, furniture, and computer software now instead of over a set period of years. The 2013 expensing limit is $500,000, and it is scheduled to drop significantly to $25,000 in 2014. The deduction begins to phase out when total qualified purchases for the year exceeds $2 million. If you have equipment needs, consider purchasing them in 2013.
This provision applies to new and used property. Keep in mind that the assets need to be placed in service by the end of the year, and you must have taxable income to take advantage of this benefit. Also, traditionally, only tangible personal property was eligible for the Section 179 deduction; however, for 2013 taxpayers are allowed an immediate deduction of up to $250,000 of qualified leasehold, restaurant and retail improvement property.
For businesses without taxable income, they can still take advantage of the bonus depreciation provision that allows taxpayers to immediately write off 50 percent of qualified asset purchases. The original use of the property must begin with the taxpayer claiming the deduction, i.e., it must be new property. This too expires at the end of the year.
Explore R&D credit opportunities
The R&D tax incentive, which is set to expire completely, enables business to claim a credit for developing or improving manufacturing processes. These improvements can be related to new products or experimentation efforts to improve the quality and efficiency of an existing process.
The incentive can benefit a myriad of industries and business types, including job/machine shops, food manufacturers, and government contractors. A large number of small and mid-sized companies are able to take advantage of the credit.
The benefits of taking advantage of this credit can have a significant impact on a company’s bottom line. Proper documentation is vital as the IRS continues to consider the R&D tax credit a significant issue.
Claim energy tax incentives
Businesses that build or renovate their real estate holdings may qualify for special tax benefits if they “go green” by taking advantage of the 179D tax deduction. Even if a building only added green features such as lighting, a deduction could be claimed. Excellent candidates for this incentive include warehouses, distribution centers, hotels and motels and large office buildings.
If you installed what you believe may be qualifying property in previous years and did not claim the 179D deduction on your tax return, it is not too late. However, the 179D deduction will not be available on property placed in service after 2013.
Establish a formal capitalization policy
New regulations that go into effect in 2014 allow businesses to write off small asset purchases without the fear that the IRS could come in and disallow the immediate deduction. While this provision won’t benefit you in 2013, you need to take action by the end of the year if you want to apply this provision in 2014.
The amount that can be written off is up to $5,000 per item or invoice if you have an audited financial statement, or $500 per item or invoice if you don’t. This de minimis safe harbor also applies to materials and supplies.
To take advantage of this provision in 2014, you must have a formal capitalization policy in place as of the first day of the year and you must follow that policy for financial statement purposes. So act now to establish your written policy for writing off small asset purchases.
Bonus tip: Review your business structure
One of the most significant tax changes from the American Taxpayer Relief Act of 2012 (ATRA) increased the highest income tax bracket for individuals from 35 percent in 2012 to 39.6 percent in 2013. And the effective rate can be as high as 43.4 percent for taxpayers subject to the new 3.8 percent Medicare surtax.
Most businesses are pass-through entities — LLCs, partnerships and S corporations — and thus their owners are taxed at their individual marginal tax rates. This makes business and personal tax planning imperative.
Remember, it’s not too late to make tax moves that can significantly reduce your company’s tax obligations for 2013. The sooner you act, the more opportunities you will likely uncover.
Bill Smith is the managing director in the National Tax Office for CBIZ MHM in Bethesda, Maryland. CBIZ MHM is the country’s seventh-largest accounting and professional services provider.