Favorable Taxes and Depreciation for Biz

During the holidays, there was a great deal of legislative wrangling about extending the federal payroll tax cut for workers, but there are plenty of tax and depreciation rules that small businesses can take advantage of in advance of the April 15 tax-filing deadline. While some of them are longstanding parts of the U.S. tax code, small business people often fail to take full advantage of them.

Two area experts helped IB sift through the code: Mike Resch, partner with Smith & Gesteland, and Joshua Ganshert, senior manager at Baker Tilly Virchow Krause.


Tax liability

Normally, tax planning dictates that businesses defer income to the future, or accelerate deductions into the applicable tax year, but with a lower tax bracket it's better to accelerate income into 2011 and be taxed at a lower rate. The Bush tax rates expire at the end of 2012, but their fate depends on the outcome of next year's elections. "We're advising clients to proceed as if the Bush tax cuts expire at the end of 2012," Ganshert said, "but you must be ready to adjust your planning if different legislation is enacted."

The next thing tax planners want to do is make sure their clients take advantage of tax credits and permanent deductions, which include the following:

  • The Research & Development tax credit. This is a 20% credit based on qualified research expenses such as engineering work. "It's pretty much limited to people's time spent on research and development activities," Resch said. "You have to track people's time so that you can prove that you've incurred the expenses."
  • The HIRE Act Retention Bonus for hiring employees. HIRE stands for Hiring Incentives to Restore Employment, and it offers employers an exemption from Social Security payroll taxes for qualified workers hired anytime after Feb. 3, 2010, and before Jan. 1, 2011, assuming the workers still are on the payroll 52 consecutive weeks after their initial hire date. Employers can take the lesser of a $1,000 credit for each employee, or 6.2% of wages paid to the retained worker during that 52-week period.

    "There are some limitations you've got to meet," Resch said. "The wages for the last 26 weeks have to be at least 80% of the wages for the first 26 weeks. As long as you meet those requirements, there is a $1,000 credit per employee that qualifies."

  • The Small Business Health Care Tax Credit. This credit provides an incentive for small businesses and not-for-profits with 25 or fewer employees to offer employee health insurance coverage. Qualifying workers must have an average income of $50,000 or less, and the employer must cover at least 50% of the cost of health care coverage.

    It's based on a somewhat complicated formula, but the credit gradually phases out for companies with average wages between $25,000 and $50,000. The credit will be worth 35% of a qualifying business' health care premium costs in 2011, and it will be worth 25% of the premium costs for tax-exempt employers. In 2014, the rate increases to 50% for qualifying businesses and 35% for tax-exempt employers.

    "You want to take advantage of the small employer health insurance credit if you qualify for it," Resch said. "You have to be a small employer, so once you get to 25 employees, and the average compensation gets up to $50,000, it gets phased out.

    "I don't have numbers as far as how many businesses qualify for that, but in my client base, there is a handful."

  • Bonus depreciation. There are significant opportunities in 2011 to take advantage of 100% bonus depreciation, which applies to qualified assets that were purchased in 2011 and placed in service before Dec. 31, 2011. Bonus depreciation will drop to a 50% write-off for equipment purchased in 2012. "The definition of a qualified asset generally is an asset that has a class life of 20 years or less – intangible property with a recovery period of 20 years or less," Ganshert said. "Things such as any type of equipment, carpeting, computer software, or any asset class that is less than 20 years."
  • Section 179 expensing. This section of the tax code can be used to expense used equipment or assets up to $500,000 annually. "It's also phased out if you buy $2 million worth of property," Ganshert noted.
  • Section 179D federal tax deduction. A tax deduction to encourage energy efficiency. It allows a business to write off a percentage of the cost of real property that meets certain energy-efficient thresholds. The deduction can be worth as much as $1.80 per square foot both for retrofits and new construction, divided evenly (60 cents per square foot) among improvements to a building's interior lighting; heating, cooling, and ventilation; and hot water system. It also can be worth 60 cents per square foot for one component, or $1.20 per square foot for two of the three components.

    "You have to make a reduction in energy costs of at least 50% [for each component] based on the minimum standards of ASHRAE (the American Society of Heating, Refrigerating, and Air Conditioning Engineers)," Ganshert noted. "The improvements have to be qualified by a certified energy consultant."

  • The domestic productivity activity deduction, or DPAD. This is a permanent deduction of 9%, based on net income, for people involved in domestic production. The deduction can be taken for the manufacturing of "tangible" personal property, construction services, and engineering and architectural services related to a U.S. construction project. "If you are in a maximum tax bracket, the DPAD provides basically a 3% reduction in your income tax," Resch said.

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