Most of the press coverage of the fiscal cliff tax debates that concluded 2012 centered on income tax revisions, higher taxation rates for the wealthy and plans to raise tax rates on capital gains and dividends. However, alongside the new items, important measures to extend provisions designed to help entrepreneurs received Congressional approval. Despite fears that small business issues might be overlooked in the tension-wracked days of negotiations, nearly all of the important Bush-era tax incentives survived thanks to extension provisions hammered out during the last-minute legislative sessions.
Here’s a basic overview of some of the critical small-business incentives that were under review. For more detailed information, please contact your professional tax consultant.
- Bonus Depreciation
Since 2008, companies have been able to take advantage of a depreciation allowance that permits a write-off of 50 percent (sometimes more) of certain types of investment during the first year of operations. The provision was set to expire at the end of 2012 but has been extended now until the end of 2013, or in some cases 2014.
- Section 179 Expensing
This incentive allows small companies to fully expense many investments over a one-year period – instead of five years or more. The amount of investment eligible for this immediate expensing increased to $500,000 in 2010-2011 but was set to decrease to $139,000 in 2012 and $25,000 in 2013. New provisions extend the $500,000 limit through 2013 and push the $25,000 cap to 2014. Only companies with annual total capital expenditure of less than $2 million in 2013 and less than $200,000 for the year in 2014 are eligible for Section 179.
- Temporary Exclusion of 100 percent of gain on small-business stock
This provision was due to expire at the end of 2011 but now has been extended through 2013. It is a fairly recent stimulus incentive designed to make investment in small businesses more attractive by creating a special category of tax-free capital gains.
- Work Opportunity Tax Credits
Due to be completely scrapped at the end of 2012, these tax credits for employers who hire military veterans or people who belong to certain disadvantaged groups (e.g. recipients of government assistance) have been extended through 2013.
- Depreciation for Improvements to Leasehold, Retail or Restaurant Property
A depreciation provision, which allowed a renter, retailer or restaurateur to write off qualified improvements in 15 years rather than over 39 years, expired at the end of 2011. The provision has been reinstated through 2013.
- Built-in Gains Tax
Before 2009, in order to avoid paying any capital gains tax incurred when a company was converted from a C corporation to an S corporation, the business was required to retain its assets for at least 10 years. If not, the company paid 35 percent tax on the built-in capital gains that occurred before the company made the conversion. Beginning in 2009, the tax laws shortened this holding time period – ultimately to five years for assets sold in 2011. The new law extends this five-year provision through 2013.
Nearly all the important small business tax provisions escaped the ax – even if for just one year. For input on other tax incentives that were reprieved and for more information on those listed above, contact your tax professional.