SYRACUSE — As the year draws to a close, business owners have one last chance to take advantage of some expiring tax breaks before they are gone. There are two major opportunities expiring at the end of 2013 that businesses may want to examine, says Michael Reilly, partner in charge of the tax department at […]
SYRACUSE — As the year draws to a close, business owners have one last chance to take advantage of some expiring tax breaks before they are gone.
There are two major opportunities expiring at the end of 2013 that businesses may want to examine, says Michael Reilly, partner in charge of the tax department at Dannible & McKee, LLP in Syracuse.
The first is a section 179 deduction that allows businesses to deduct up to $500,000 of qualified equipment purchases made this year, Reilly says. This is a great option for a business that has invested in equipment because it allows the business to expense the first $500,000 in one year instead of the more traditional five-year depreciation plan. This deduction is good for both used and new equipment purchases, but is only available for purchases of less than $2 million, Reilly notes.
The section 179 deduction is set to expire at the end of this year. So going forward, the benefit will drop down to a $25,000 one-year deduction.
“Look at your purchases and what you might want to buy and think about it this year,” Reilly advises.
Tied in with the section 179 deduction is a bonus tax break that provides up to a $250,000 deduction for real property improvements. Typically such improvements are deducted over a 39-year span, so this is a great opportunity for businesses to really speed up that process, Reilly says. If a business takes advantage of this depreciation, it does count toward the $500,000 section 179 limit, Reilly notes.
That’s a real opportunity, especially for a tenant that’s going to do some leasehold improvements,” he says.
The second major break expiring this year is a bonus depreciation that allows businesses to write off 50 percent of the cost of new equipment purchases this year and can be used in conjunction with the section 179 deduction.
As an example, Reilly says, if a business purchases $700,000 in qualified equipment, it can write off $500,000 under section 179 and then write off another $100,000 of the balance under the bonus depreciation. The business would then depreciate the balance over the next five years.
Both of these breaks can provide some real tax savings to businesses, Reilly says. While there is a possibility one or both may be extended after this year, there is no guarantee and businesses should plan accordingly.
While those two breaks are major ones, businesses should also take note of a number of other expiring tax credits, Reilly adds.
A work-opportunity credit gives businesses a tax break for hiring veterans and economically disadvantaged people while another credit provides anywhere from 14 to 20 percent credit for the costs associated with research and development.
“These are credits and a credit is a dollar-for-dollar reduction in your taxes,” Reilly says.
Businesses should also be aware of new changes to comprehensive repair and capitalization expenses that go into effect Jan. 1 that regulate when taxpayers must capitalize and when they can deduct expenses concerning purchasing, maintaining, repairing, and replacing tangible property.
A key provision is the ability for a business to expense up to $500,000 per item, however the business must have a written policy stating its intent to do so in place by Jan. 1, Reilly says. “If they don’t have it in place, they’re effectively not entitled to this,” he adds.
One final issue Reilly says business owners should be aware of is actually a new “Obamacare” tax that applies to all taxpayers with net investment income, however it’s important for many business owners, especially S corporation businesses, to be aware of because there are steps they can take to mitigate the impact.
“That’s going to be a hidden tax that’s going to affect a lot of higher earners who aren’t paying attention,” he says.
The 3.8 percent additional tax applies to single taxpayers who earn more than $200,000 and married couples earning more than $250,000. Those falling into those categories may want to look for opportunities through tax breaks such as the expiring section 179 deduction, Reilly says.
Reilly’s final year-end advice for business owners is to meet with their tax professionals now and not just at tax time. Those professionals can help businesses identify tax-saving strategies now as well as help business owners get a good handle on their tax situation, so there won’t be any surprises come April.
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