Several little known but fantastic tax incentives have been in place all year but there are only a few days left to take advantage of these breaks.
First and foremost on the list of big bucks benefits with a short expiration date is the Bonus Depreciation tax allowance, a.k.a. the “100% Special Depreciation Allowance.” This tax benefit applies to qualifying property, plant and equipment placed in service in 2011.
“Basically, the government is offering an interest-free cash advance, in their hopes to spur the economy,” said Andrew Schrage, co-founder of the Money Crashers personal finance blog.
Bonus Depreciation a “two-fer” tax break
“With the Bonus Depreciation tax allowance, you can write off 100 percent of qualified IT investments on 2011 taxes instead of spreading the deduction over the standard five-year term,” Schrage explained. “In 2012, the allowance will begin to phase out, falling to around 50 percent of the qualified investment, so take advantage of it while you can.”
The Bonus Depreciation tax sprang from the Small Business Jobs & Credit Act but that doesn’t mean that only SMBs qualify.
“That’s a common misperception,” said Greg Baker, CFO of Logicalis. “There are two different tax depreciation benefits included in this bill” and that is the source of the confusion. Bonus depreciation is available to all businesses regardless of size and has no caps. “It was included in this above-titled bill for legislative convenience, but that’s unfortunately confused many people that stand to benefit from it.”
The other tax depreciation benefit in the bill, and one that is adding to all this confusion, is the Section 179 deduction that does focus primarily on small business and has caps.
“The Section 179 provision has been around for a long time and this year allows companies to immediately expense up to $500,000 of qualifying investments, which is 20x higher than historical levels, with the deduction phasing out for businesses that invest over $2M per year,” Baker explained. “This benefit gets chopped in half to $125K in 2012 and after that, its scheduled to revert to ‘normal limits’ of just $25K each year. All these limits have phase-out provisions based on how much a company invests, so this really channels the benefit just to smaller businesses.”
It is important to note that only new assets qualify for the Bonus Depreciation tax benefit but the purchase of “used” equipment does qualify for Section 179.
“This is a subtle difference but with the bonus depreciation benefit, Congress really wanted to spur new asset manufacturing and purchasing across the U.S., as part of stimulus efforts,” Baker said.
There is an extra bonus for small businesses in the 2011 tax code that often escapes notice. But this break can make starting a new business this month a far more profitable enterprise.
“If you meet the definition of a Qualified Small Business Corporation, stock that is issued this year qualifies for a 100 percent federal exclusion break,” explained Schrage. “This would result in a zero percent federal income tax rate on future profits from selling these shares in the future.”
You’ll need to hold the shares for more than five years to qualify, however, but that isn’t an obstacle for most start-ups. “The qualifications for the QSBC are strict, though,” said Schrage. “This exclusion break is scheduled to drop to 50 percent for 2012.”
R&D tax break gets political
Placing a close second on our list of expiring tax breaks is the federal R&D credit which faces an uncertain and highly politicized future.
“The failure of the super committee casts new doubts on the viability of any tax-extenders legislation,” said Jeff Malo, WTP Advisors, a global tax and advisory consultancy based in New York. “Maybe we see a late December bill on extenders, but WTP Advisors bets the issue gets rolled into presidential campaign politics, meaning no extenders until December of next year, and then only maybe will they be retroactive to January 1, 2012.”
“From a year end planning stand point, companies should push R&D efforts as hard as they can between now and year end to maximize QRE in a period where the credit is certain,” he advised.
A prolific and versatile writer, Pam Baker’s published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers. She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making. She is a member of the National Press Club (NPC), Society of Professional Journalists (SPJ), and the Internet Press Guild (IPG).