Clock ticking on year-end tax incentives, breaks

November 23, 2011

Legal Affairs

The clock is ticking on a number of year-end tax incentives and breaks. Before companies start singing “Auld Lang Syne,” experts say they better have taken advantage of ways to reduce their tax liability through incentives and asset assessments if they want the new year to be a happy one.

“It’s not too late, but businesses need to be working now on taking advantage of tax incentives that are set to expire Dec. 31,” said David Stevens, CPA, director with HORNE CPAs & Business Advisors.

Stevens added that businesses also need to conduct a year-end review to ensure that they are not carrying an undue tax liability.

A team of tax attorneys with the law firm of Butler, Snow, O’Mara, Stevens & Cannada, PLLC, released a list of the tax incentives that will sunset Dec. 31. Top of their list is bonus depreciation and Section 179 expensing.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended the 50 percent first year bonus appreciation to qualified property placed in service through Jan. 1, 2013. Additionally, it put a 100 percent bonus depreciation for qualified property put in service from Sept. 8, 2010, through Jan. 1, 2012. After Dec. 31, the bonus depreciation is only 50 percent.

But, Mississippi businesses have to be cautious here. Kirk Hines, CPA, a partner at HORNE, said Mississippi businesses might look to Section 179 expensing to guard against additional tax liability.

“Bonus depreciation is different in Mississippi,” Hines said. “The state does not follow federal rules concerning bonus depreciation.”

Section 179 allows for expensing qualified property that would otherwise have to be capitalized and depreciated over time. For 2010 and 2011, the Small Jobs Act of 2010 doubled the amount that could be expensed under Section 179 to $500,000, and increased the phase-out threshold from $800,000 to $2 million.

In addition and for the first time ever, taxpayers are allowed to expense “qualified real property,” up to $250,000.

In a joint statement, the Butler Snow attorneys wrote: “In order to take advantage of the increased 2011 and 2012 Section 179 expensing increases, businesses should carefully plan their purchases. For example, if a business will require $650,000 of Section 179 property, that business should attempt to purchase and place into service property worth $500,000 in 2011, $125,000 in 2012, and $25,000 in 2013, if possible. By deferring purchases in this manner, the business will be able to fully expense such capital expenditures in the year the equipment is acquired.”

With the current economic woes, Stevens said it is important to not only look at tax incentives, but to also review assets and potential increased tax liabilities – he referred to it as a “year-end checkup.” He recommended companies check for “ghost assets.” These are assets that are no longer in use – perhaps no longer in existence – but remain on the books.

Stevens also stressed a harder look at property taxes. Companies can create increased liability by overpaying taxes in the jurisdiction in which their primary operations lie while underpaying in other jurisdictions in which they do business. Stevens gave a couple of recent examples of how this miscalculation has hurt corporations in the state, particularly Milwaukee Tool, which overpaid in Hinds County but underpaid in DeSoto County.

The same is true for Internet/online sales. Companies that are not reporting in other jurisdictions might get a surprise “bill” in the mail.

Stevens added a word of caution. The faltering economy has states looking for more revenue.

“Many states are hiring additional auditors in an effort to increase tax collections,” Stevens said.

That just adds to the tax questions many have going forward. Hines said uncertainty abounds as the new year approaches. The European debt crisis is fueling re-recession fears. Hines said it is difficult to gauge exactly what federal lawmakers might do to stimulate the faltering economy next year.

Taxing list

A team of attorneys with the law firm of Butler, Snow, O’Mara, Stevens & Cannada, PPLC have compiled a list of tax incentives set to expire after Dec. 31:

>> Bonus depreciation — The Tax Relief Act provided for a 10 percent bonus depreciation on qualified property placed in service between Sept. 8, 2010, and Jan. 1, 2012. Taxpayers placing qualified property in service after Dec. 31 and before Jan. 1, 2013, will only be offered a 50 percent bonus depreciation.

>> Section 179 expensing — For 2010 and 2011, the Small Business Jobs Act of 2010 increased the amount eligible to be expensed to $500,000 and the phase-out threshold to $2 million. For tax years beginning in 2012, the Tax Relief Act sets the expensing limit at $125,000 and the phase-out threshold at $500,000.

>> 100 percent exclusion on sale of qualified small business stock — Under the Small Business Jobs Act, 100 percent of the gain from the sale of qualified small business stock acquired between Sept. 27, 2010, and Jan. 1, 2011, and held for more than five years, was excluded from taxation by both taxpayers subject to regular tax and those subject to alternative minimum tax (AMT). This provision only applies to the disposition of qualified stock acquired before 2021; however, the President’s proposed budget would make the exclusion of gain on the sale permanent.

>> Research credit — The Tax Relief Act extended the credit through Dec. 31. It is effective for amounts paid or incurred after Dec. 31, 2009.

>> 15-year straight-line cost recovery — Prior legislation allowed a 15-year straight-line cost recovery period for certain qualified leasehold improvements, restaurant buildings and retail improvements placed in service prior to 2010. The Tax Relief Act extended these provisions to properties placed in service before 2012. After Dec. 31, taxpayers must depreciate such property over 39 years.

>> Work opportunity credit — This made employers eligible for a credit of 40 percent of up to $6,000 in first-year wages paid to new-hires from targeted groups. Set to expire last August, it was extended through Dec. 31, and is effective for individuals who began work after Dec. 17, 2010.

>> Rehabilitation credit — The Tax Relief Act extended the increased rehabilitation credit for buildings located in the Gulf Opportunity Zone (GO Zone) through Dec. 31.

>> GO Zone bonus depreciation — Taxpayers are allowed an additional 50 percent bonus depreciation for Go Zone Extension Property as defined by the Internal Revenue Code. The Tax Relief Act extended the GO Zone bonus depreciation through Dec. 31. The Act requires the property be placed in service by Dec. 31, and for non-residential real property or residential rental property, the costs incurred to manufacture, construct or produce such property before Jan. 1, 2012, will qualify.

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