Year-End Tax Updates for Businesses

Joseph Albero — Tax Services
Anthony Mancini — Tax Services

As the end of the year draws near, it’s time for business owners and managers to brush up on recent tax law changes and take steps to maximize tax deductions. Here are some of the most important tax updates that will affect businesses this tax season.

File Taxes Electronically

As of January 1, 2011, businesses are required to use electronic funds transfers (EFT) to make all federal tax deposits, such as deposits of employment tax, excise tax, and corporate income tax. The forms that were formerly used for these filings (such as 8109 and 8109-B, Federal Tax Deposit Coupon) can no longer be used.

Check Eligibility for Worker Retention Credit

Employers may claim a “retention credit” for retaining certain qualifying new employees (formerly unemployed workers who meet specific requirements) who were hired between February 4, 2010 and December 31, 2010.

The amount of the credit is the lesser of $1,000 or 6.2% of the gross wages paid to the qualified retained employee during a 52 consecutive week period. The qualified employee’s wages for such employment during the last 26 weeks must be equal to at least 80% of the wages earned for the first 26 weeks. The credit may be claimed for a retained worker for the first tax year ending after March 18, 2010 for which the retained worker satisfies the 52 consecutive week requirement.

Maximize the Work Opportunity Tax Credit

Businesses that hire certain qualifying workers (such as certain types of veterans) before the end of 2011 are eligible for the Work Opportunity Tax Credit (WOTC). The credit will not be available for workers hired after December 31, 2011. The amount of the credit is based on the amount of qualified wages earned by the worker, multiplied by 40%. The amount is capped at $2,400 per employee ($4,800 for certain veterans).

Review Code Section 179 Expensing Options

Over the next few years, the type and amounts of property that may be expensed under IRS Code Section 179 will be reduced.

Currently, Section 179 expensing is available on an elective, asset-by-asset basis, for the following types of property (known as “section 179 property”), whether the property is new or used:

• machinery, equipment, and other tangible personal property
• most publicly sold computer software
• some non-building land improvements, and
• some limited types of building improvements and buildings (such as certain leasehold, retail and restaurant improvements, and restaurant buildings).

2010 and 2011. For tax years beginning in 2010 or 2011 (whether calendar or fiscal), the Section 179 expensing election is available for up to $500,000 of section 179 property per year (the “dollar limit”). The dollar limit is reduced, dollar for dollar, to the extent that the taxpayer’s total section 179 property placed in service during the year is more than $2 million (the “phaseout rule”). Expensing of the limited types of building improvements and buildings described above is subject to a $250,000 limit (in addition to counting against the $500,000 per-year limit).

2012. For tax years beginning in 2012 (whether calendar or fiscal), the above benefits are scheduled to be reduced. Thus, the dollar limit is scheduled to be reduced to $125,000 and the beginning-of-phaseout level is scheduled to be $500,000. Additionally, the limited types of building improvements and buildings described above are scheduled to no longer qualify as section 179 property.

2013. Section 179: For tax years beginning in 2013 and later (whether calendar or fiscal), the dollar limit is scheduled to further fall to $25,000 and the beginning-of-phaseout level to $200,000. Also, the computer software described above will no longer qualify as section 179 property.

Maximize Bonus Depreciation

You may be entitled to 100% bonus depreciation for certain assets placed in service before December 31, 2011, or 50% bonus depreciation for assets placed before December 31, 2012.

The following types of new (not used) property (known as “qualified property”) are eligible for bonus depreciation, subject to an election-out on a depreciation-class-by-depreciation-class basis:

• tangible property with a depreciation period of not more than 20 years (such as machinery, equipment, and other tangible personal property and non-building land improvements)
• most computer software, and
• certain leasehold building improvements.

Under 100% bonus depreciation, a complete writeoff in the placed-in-service year is available for the cost of qualified property acquired after, or with a beginning construction date after, September 8, 2010. However, 100% bonus depreciation is not available for property placed in service after December 31, 2011 with one exception: for certain property with a long production period and aircraft, the placed-in-service deadline is December 31, 2012.

Where 100% bonus depreciation isn’t available—either because construction or acquisition began before September 8, 2010 or because the property was placed in service after December 31, 2011 (or 2012, as the case may be)—50% bonus depreciation applies. This allows a deduction of 50% of the cost of an item of qualified property in the placed-in-service year and depreciation, under the regular depreciation rules, for the remaining cost of the item over the item’s assigned depreciation period (beginning with the placed-in-service year). However, 50% bonus depreciation will not be available for property placed in service after December 31, 2012 (except that the placed-in-service deadline is December 31, 2013 for long-production-period property and aircraft, as described above).

For more information about these issues, or if you have any questions about year-end tax planning, please contact Joe Albero ([email protected]) or Tony Mancini ([email protected]) at Frank, Rimerman + Co. LLP.