During much of 2010, it seemed as though you couldn’t pick up a financial journal or watch the news without seeing a discussion regarding the extension of the “Bush-Era tax cuts.” For some time, it looked as if Congress would not be able to reach a resolution on these issues, but an agreement was reached, and The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed by the president on December 17, 2010. This Act not only extended the reduction in the individual tax rates as passed by Congress in 2001, but also provided many tax incentives for businesses. Many of the business tax incentives of this Act and The Small Business Jobs Act of 2010 signed by the president on September 27, 2010 are only available on a temporary basis, so it is critical that businesses take advantage of them now, if possible. Let’s review some of the more popular business tax provisions passed during the last part of 2010.
Bonus Depreciation. First, 50-percent bonus depreciation was extended through December 31, 2010. This provision allows a business to claim 50 percent of the basis of certain new 2010 assets as depreciation when placed in service. In addition to the 50-percent depreciation, the taxpayer is also allowed to depreciate the remaining 50 percent of the basis under the normal depreciation rules. This provision was passed in September, but Congress sweetened the incentive in December by increasing the bonus depreciation to 100 percent for assets placed in service after September 8, 2010 and before January 1, 2012. During this time period, businesses will be able to write off 100 percent of their investments in qualified equipment and certain investments in improvements to business real estate. Bonus depreciation is a powerful tool since the deduction is not limited by taxable income and taxpayers have some flexibility in choosing which assets to depreciate using bonus depreciation. With these alternatives, a profitable business could use bonus depreciation to create a tax loss that may be available to carry back to a previous tax year, recouping previously paid taxes.
Section 179 Expensing Election. The §179 expensing election was increased first in September to allow for $500,000 of qualifying assets to be expensed in tax years beginning in 2010 and 2011. The $500,000 is phased out when the aggregate cost of qualifying assets exceeds $2 million. This Act also temporarily expands the definition of qualified §179 property to include certain qualifying real property. Previously, only personal property had been included in this definition. However, businesses are limited to expensing only $250,000 in qualifying real property.
In December, §179 was modified yet again. This time, the maximum §179 expensing was increased to $125,000 with a $500,000 investment limitation for tax years beginning in 2012. Before the December legislation, the limits for 2012 were $25,000 of §179 expense with a $200,000 investment limitation. Similar to 100-percent bonus depreciation, §179 allows a business to expense the cost of certain business assets immediately. Unlike bonus depreciation, the purchased assets can be previously used. Also, as discussed above, there are expense and investment limitations which do not apply to bonus depreciation, and most importantly, this deduction is limited to taxable income prohibiting a taxpayer from creating a taxable loss.
Research and Development Tax Credit. The R&D credit encourages innovation by allowing businesses a tax credit for increasing their investment in research and development. While a deduction reduces taxable income by the dollar amount of the deduction (which lowers taxes paid by the tax rate), a tax credit generally is a dollar-for-dollar direct reduction in the amount of income tax paid. This is an extremely popular temporary tax credit which has expired and been extended many times over the years. While there has been substantial discussion about making this tax credit permanent, the current tax changes do not go that far. This credit was set to expire after 2009, and the December Act extended it for two years through 2011.
Work Opportunity Tax Credit. This credit is intended to encourage employers to hire individuals from certain targeted groups. Subject to certain limitations, the credit is a percentage of the qualified wages paid during an employee’s first year of employment, based on the number of hours worked. It was set to expire after August 31, 2011, but the December Act extends it for individuals who begin employment after August 31, 2011 and before January 1, 2012.
Cell Phones. For years, tax law had not kept up with changes in technology regarding cell phone usage. Previously, employers providing cell phones to their employees were required to keep detailed records substantiating the business use of the cell phones and were required to charge employees for their personal use of the cell phone. In 1989 when this provision was added to the Internal Revenue Code, because of the rarity of mobile phones, this may have made sense. But with the ever-decreasing cost and universal use of cell phones, the outdated law required an unreasonable recordkeeping burden. Finally, in the September legislation, Congress acknowledged the changing environment and lifted the strict substantiation requirements. In addition, the provision enables the fair market of personal use of a cell phone used predominantly for business purposes to be excluded from employees’ wages.
Payroll Tax Cut. Although not affecting the tax liability of the business, the payroll tax cut was a provision in the December legislation affecting the calculation of payroll for employees and the filing of payroll tax returns. This provision reduces the employee’s share of the OASDI portion of Social Security taxes from 6.2 percent to 4.2 percent for wages earned in calendar year 2011 up to the taxable wage base of $106,800. The employer is still responsible for their full 6.2-percent share of this tax.
These are just a few of the business-friendly tax provisions of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 and The Small Business Jobs Act of 2010. The laws contain many more business tax provisions. Talk to your tax adviser to ensure that your business is taking full advantage of the business tax incentives provided in these two pieces of legislation. iBi
Susan Coats is a tax manager at Heinold-Banwart. She can be
reached at (309) 694-4251 or [email protected].