As we approach the end of 2011, businesses should consider taking a fresh look at some of the tax incentives that are currently available but may expire at the end of the year, or may be modified if they survive.
Congress has been relatively silent in 2011, as it relates to new tax legislation. The last major piece of tax legislation was passed in December 2010, which extended the “Bush Tax Cuts” until 2012. Congress has been primarily focused on budget deficits and the country’s debt ceiling.
There is much anticipation centered on President Obama’s new jobs bill that is supposed to be announced after the Labor Day holiday. It is unknown if this bill will include any tax breaks for businesses.
In the mean time, there are a number of tax provisions, particularly those that aid specific groups and industries that may diminish for an indefinite period. Some businesses are considering accelerating expenditures, placed-in-service dates, or hiring, in order to qualify for expiring tax breaks. In other cases, businesses are considering the affect of lost tax breaks and making necessary adjustments.
Below are a few key tax credits and deductions that will sunset after December 31, 2011:
The research credit, which is applicable for amounts paid or accrued before January 1, 2012, equals the sum of:
- 20% excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected the alternative simplified research credit)
- The university basic research credit
- 20% of the taxpayer’s expenditures on qualified energy research
Work Opportunity Tax Credit
Employers who hire members of a certain targeted groups receive a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees). This credit is currently set to expire on December 31, 2011.
100% Bonus Depreciation
Qualified property acquired and placed in service after September 8, 2010 and before January 1, 2012 can be deducted as 100% bonus depreciation. For property acquired and placed in service between December 31, 2011 and before January 1, 2013, a 50% bonus depreciation allowance will apply.
The maximum amount that may be expensed under Code Section 179 in 2011 is $500,000. For tax years beginning in 2012, the maximum amount will be $125,000. Also, in 2011, the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of property placed in service in excess of the $2,000,000 investment ceiling. In 2012, the investment ceiling will be lowered to $500,000.
In addition, if placed in service in 2011, up to $250,000 per year of qualified real property is eligible for expensing. To qualify as real property, it must be:
- Qualified leasehold improvement property
- Qualified restaurant property
- Qualified retail improvement property
15-Year Write Off For Specialized Realty Assets
Qualified real property (see what is defined as real above) placed in service after December 31, 2011 will no longer be eligible for a 15-year depreciation write-off. Instead, such property will have to be depreciated over 39 years.
Lower Shareholder Basis Adjustments For Charitable Contributions By S Corporations
Generally, an S corporation’s charitable donation of appreciated assets provides its shareholders with a fair market value deduction. In association with the charitable gift, shareholders have to reduce their basis of shares in the corporation by the same amount.
However, for 2011, shareholders reduce their basis in the stock of the S corporation by their pro-rata share of the adjusted tax basis of the contributed property, rather than by the FMV. The shareholder benefits by having the reduction determined by the tax basis of the contributed property rather than its FMV, especially if the stock is later sold. This temporary incentive expires at December 31, 2011.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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