This is the time of year that could be filled with extensive tax legislation of drastic changes impacting corporate tax strategies. The uncertainty makes planning difficult, but year-end planning should focus on tax advantages set to expire or decrease at December 31st. As they may or may not be extended, the time to act is now.
The general approach to year-end planning has traditionally included the acceleration of deductions coupled with the deferral of income. This general strategy should also incorporate each taxpayer’s particular situation and planning goals, while being alert to special circumstances. Maximizing tax advantages should include a review of both 2011 and 2012 in order to determine the best strategy for the timing of income and deductions.
- Last chance for 100 percent bonus depreciation. Without any legislative action, the 100 percent first year bonus depreciation allowance will generally not apply to any qualified property placed in service after December 31, 2011. Taxpayers planning to place eligible depreciable property in service in the next year should consider placing the property in service in 2011 as this attractive incentive drops to 50 percent on January 1, 2012. Keep in mind that this bonus depreciation is allowed in full for eligible property, regardless of the length of time the asset is in service during 2011. No pro-ration is required for assets placed in service at the end of the year.
- Maximize the generous Section 179 expensing deduction. For assets placed in service during the year, taxpayers can deduct as an expense, rather than depreciate over the useful life, the cost of new or used tangible personal property placed in service in the taxpayer’s trade or business, up to a specified limit. For tax years beginning in 2010 and 2011, the dollar amount of the expense limitation is $500,000. This limitation will drop to $125,000, indexed for inflation, for tax years beginning in 2012, if Congress takes no action.
- Take advantage of real property expensing. For a limited time only, Section 179 expensing is available for qualifies real property. Historically, only tangible personal property qualified for this advantageous treatment. For tax years beginning in 2010 and 2011, up to $250,000 of qualified real property can be treated as Section 179 property. For expensing purposes, qualified real property includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property, as described in Section 168(e). Without any action from Congress, these properties revert to straight-line depreciation over 39 years for tax years beginning in 2012.
- Accrue year-end bonuses. Certain bonuses accrued, but not paid by year-end, may still be deductible. This strategy is appropriate under the following circumstances:
- The employee does not own more than 50 percent of the corporation’s value;
- The bonus is properly accrued before the end of the current year; and
- The bonus is paid within the first two-and-a-half months of the following tax year. If a personal service corporation pays a bonus to an employee-owner, an S corporation to any employee-shareholder or a C corporation to a direct or indirect majority owner, this deduction would not be allowed.
- S corporations should review basis. If an S corporation incurs a loss, the shareholder will not be allowed to deduct the loss on their personal income tax return unless they have sufficient basis. Prior to year-end, however, they can loan the corporation sufficient funds to increase their basis allowing them to utilize the loss currently, rather than carrying this loss forward for future use.
Without any extensive law changes in the near future, there are several tax incentives scheduled to expire at year-end that should be considered for implementation.
Although the credit for increased research expenditures has been around since 1983, Congress typically only extends the credit for one year at a time. In this uncertain economy, an extension is not guaranteed. Qualified research expenses should be reviewed prior to year-end to take full advantage of the credit.
Several advantageous credits incentives are also expiring at year end, including the following:
- Work Opportunity Tax Credit (WOTC). Employers may claim a percentage of first-year wages of up to $6,000 per employee for hiring workers from one of several targeted groups. Generally, the credit is 40 percent of the first year wages, but only 25 percent for employees who worked at least 120 hours and less than 400 hours. This credit may only be claimed on wages for employees who begin work prior to January 1, 2012, under current law.
- Differential Wage Payments. Before 2012, eligible small business employers may claim a credit of up to 20 percent of differential pay to each qualifying individual, up to $20,000. Differential pay is the payment to employees for periods they were called to active duty with the US uniformed services, for more than 30 days, that the employee would have otherwise received. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which the differential wage payment is made.
- Environmental Remediation Costs Expensing. For expenses paid or incurred prior to 2012, taxpayers are allowed to elect to treat qualified environmental remediation expenses that would otherwise be capitalizable as deductible in the year paid or incurred. The expenses must be related to the abatement or control of hazardous substances at a qualified contaminated site.
- Film and TV Production Costs Expensing. For productions commencing prior to 2012, taxpayers are allowed to elect to expense-production costs of qualified film and TV productions in the U.S., up to $15 million for each qualifying production. The limit is increased to $20 million if expenses are “significantly incurred” in certain low-income communities or isolated areas of distress.
These are just some of the tax savings opportunities that should be considered prior to year end. Unfortunately, some decisions will need to be made within the confines of potentially inconsistent treatment or uncertain tax legislation for next year.
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Mary F. Bernard, CPA, is director — income/franchise tax, at the Dallas, Texas-headquartered tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, RI-basedKahn, Litwin, Renza & Co., Ltd.