Top Five Year-End Tax Planning Tips for U.S. Corporations
Thomson Reuters tax analyst explains options based on possible legislative actions
End-of-year tax planning for corporations is especially difficult for 2012 because many significant tax provisions will expire at the end of the year and it is not clear what Congress intends to do.
Important rules expired at the end of 2011, including the business research credit, and others will expire at the end of 2012, including the bonus depreciation allowance, expensing allowance, and Bush-era tax cuts. Congress could retroactively extend the rules that have already expired and extend those that are about to expire at the end of this year, or it could pick and choose which of these provisions will continue.
“The lack of certainty makes year-end planning more challenging,” said Marian Rosenberg, a senior tax analyst for Thomson Reuters, “however, there are steps businesses can take before the end of the year to lock in low tax rates for shareholders, avail themselves of the work opportunity tax credit, and secure generous depreciation and expense deductions.”
Stock redemption. “If it serves business purposes, closely held corporations should consider taking money out of the business through a stock redemption before the end of 2012, to qualify for the 15 percent tax rate on the distribution,” Rosenberg advises. A corporate purchase of its own stock can result in long-term capital gain or a dividend for its shareholders depending on a number of factors.
In 2012, the maximum tax rate applicable to both capital gain and dividend income is 15 percent. However, if the Bush-era tax cuts expire at the end of 2012, long-term gains will be taxed at a 20 percent rate and dividends will be taxed as ordinary income at a rate of up to 39.6 percent. In addition, if the taxpayer’s adjusted gross income exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains and unearned income, including dividends, will be subject to a 3.8 percent surtax (the unearned income Medicare contribution tax).
Work Opportunity Tax Credit (WOTC). Employers planning to hire new employees should consider hiring qualifying veterans before year-end, to qualify for a work opportunity tax credit. Under current law, the WOTC for qualifying veterans will not be available for post-2012 hires. The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors such as the veteran's period of unemployment and whether the veteran has a service-connected disability.
Bonus depreciation. Companies should consider putting new business equipment and machinery in service before year-end to qualify for the 50 percent first-year depreciation allowance (or bonus depreciation allowance). Under current law, a bonus depreciation allowance generally applies to qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013. Unless Congress extends the bonus depreciation allowance, it generally will not be available for property placed in service after 2012. “This uncertainty creates a real incentive for businesses that intend to make purchases in early 2013 to accelerate the purchases into 2012, if it is feasible to do so,” said Rosenberg.
Example: Company X, a calendar-year business, intends to buy $500,000 of property that qualifies for the 50 percent first-year bonus depreciation allowance. If it purchases and places the property in service in 2012, it can claim a 50 percent first-year depreciation allowance of $300,000 [($500,000 × .50 = $250,000 bonus depreciation) + ($500,000 − $250,000 × .20 = $50,000 regular first-year depreciation)]. If Company X does not purchase the assets until 2013, and bonus depreciation is not extended, its regular first-year depreciation allowance would be only $100,000 ($500,000 × .20 = $100,000).
Expensing. To get a larger expensing deduction, businesses that intend to purchase machinery and equipment either before the end of 2012 or at the beginning of 2013 should try to accelerate their purchases into 2012.
The maximum amount a business can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for that tax year. The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling).
For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000. The time of purchase does not affect the amount of the expensing deduction. A business can purchase property late in the year and still get a full expensing deduction.
“This means,” according to Rosenberg, “acquiring property and placing it in service in the last days of 2012, rather than at the beginning of 2013, can result in a full expense deduction for 2012.”
Example: During the first eleven months of 2012, Company X, a calendar-year corporation, bought and placed in service $100,000 of expensing-eligible property. It plans to buy an additional $64,000 of expensing-eligible property early next year. Company X should consider advancing $39,000 of the planned 2013 purchase to 2012 (and place these additional assets in service before year-end). By doing this, Company X will be able to expense its purchases in full: a total of $139,000 for 2012 and $25,000 for 2013.
Business vehicles. To maximize first-year deductions, a business that plans to buy a new automobile, light truck, or van for trade or business use should buy the vehicle and place it in service this year. The first-year dollar depreciation cap for 2012 is $11,160 for autos and $11,360 for light trucks or vans (passenger autos built on a truck chassis, including minivans) that qualify for the bonus depreciation allowance. Under current law, these first-year depreciation caps include an $8,000 additional first-year depreciation allowance that expires at the end of 2012. Rosenberg pointed out that “tax saving opportunities could be lost if a business puts off buying an auto until 2013.”
Heavy sport utility vehicles (SUVs)—those that are built on a truck chassis and are rated at more than 6,000 pounds gross vehicle weight—are exempt from the above depreciation caps. Taxpayers can deduct up to $25,000 of the cost of a new SUV as a business expense in the placed-in-service year. In addition, the remaining cost of a new SUV placed-in-service in 2012 is eligible for 50 percent first-year depreciation in 2012. Thereafter, cost is depreciated under rules for five-year depreciation property.
“The 50 percent first-year depreciation and $25,000 expense allowances allow a business to write off most of the cost of a heavy SUV purchased this year,” Rosenberg observed. “But unless current law is extended, a company that purchases a heavy SUV in 2013 will not receive the 50 percent first-year depreciation allowance.”
Taxpayers should consult with a tax advisor before applying these or other tax strategies.
Up-to-date analyses of legislation and regulations affecting corporate taxpayers are available on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
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