Somewhere between carving the Thanksgiving turkey and popping the bottle of champagne on New Year's Eve, small-business owners will squeeze in some time for tax preparation. Several tax breaks that are scheduled to shrink dramatically in 2012 should be on their list of items to review, according to tax planning experts.
Small-businesses owners can take advantage of two accelerated depreciation rules for 2011 and 2012 that provide significantly greater tax benefits. The rules were approved by Congress as an economic stimulus move intended to make it easier for small businesses to expand. However, they have to take action before Dec. 31, according tax experts.
"To depreciate qualifying property for 2011, the property must be placed in service prior to year end, but can be financed, including purchasing, via credit card," said Tom Astore, CPA, JD, tax director at Rodman & Rodman, P.C., a CPA firm specializing in tax expertise and business strategy for small and medium-size companies throughout New England.
The two main tax incentives regarding equipment that could impact small-business owners are:
Section 179 Depreciation
Small-business owners can also elect to currently expense the cost of depreciable tangible property, including computers, furniture and fixtures and similar new or used equipment, under the enhanced Section 179 provisions, Astore said. For tax years beginning in 2011, a taxpayer can elect to expense up to $500,000 of qualifying property. The $500,000 limit is reduced dollar for dollar, but not below zero, to the extent the taxpayer purchases more than $2 million of qualifying property during the tax year.
The $500,000 deduction and the $2 million phase-out threshold are set to be reduced to $125,000 and $500,000, respectively, for years beginning in 2012 and will be indexed for inflation.
Under the Bonus Depreciation rules in effect for 2011, a taxpayer can deduct 100 percent of the cost of qualifying new property as a depreciation deduction, Astore said. This percentage drops to 50 percent for 2012. He said there are a number of restrictions as to the type of property that qualifies but, in general, new property with a 20-year life or less should qualify.
Michael Custer, a tax principal with Kaufman Rossin, said small-business owners need to carefully consider these tax breaks before making the decision to invest in new equipment. "The tax tail shouldn't wag the economic dog," he said. "That said, if a business owner is considering a capital expenditure in January, February or March of 2012, it may make sense to accelerate that investment to take advantage of the better depreciation environment that will change in 2012."
Custer said that the Bonus Depreciation tax break only applies to new equipment. "That is another consideration for small-business owners , as they must weigh their options between purchasing brand-new equipment or used," he said.
Small-business owners must also take into account that the tax break could be affected if they sell, exchange or otherwise dispose of the property, said Scott Guertin, tax partner at BDO USA. He noted that Section 179 property is subject to recapture of the benefit taken, meaning that if the property is sold, exchanged or disposed of, the additional depreciation is subject to ordinary income tax treatment. "In addition, neither of these tax breaks is subject to the alternative minimum tax, so that has to be considered as well," he said.
David Selig, a tax practitioner at Selig & Associates, said these incentives were not necessarily friendly to small businesses and he doesn't expect their expiration to make much of a difference to small-business owners. "I tell my business owners to think long and hard about it," he said. "For many of my small-business owners who are concerned about their customers being able to pay them, it may be better just to keep the cash on hand."