Commentary: Congress extended and expanded several key deductions
This article was written by Bill Bischoff, Marketwatch, February 6, 2013, reprinted by permission.
Last month’s fiscal-cliff legislation included lots of tax provisions. Media attention has focused heavily on changes that affect individuals. But the new law also provides some valuable tax-saving breaks for businesses. Here’s the most important stuff to know for your outfit’s 2013 tax year.
Generous Depreciation Deductions for New and Used Assets
The Section 179 depreciation deduction privilege allows eligible businesses to deduct 100% of the cost of qualifying new and used assets in Year 1. For qualifying assets placed in service (set up and ready for business use) in tax years beginning in 2013, the fiscal-cliff legislation set the maximum Section 179 deduction at $500,000 (same as for 2010-2012). Without this change, the Section 179 maximum deduction for 2013 would have been only $25,000.
Somewhat surprisingly, the new law also extended a temporary provision that allows up to $250,000 of Section 179 deductions for the cost of qualifying real property placed in service during tax years beginning in 2013. Eligible property includes designated leasehold improvements, certain restaurant buildings and improvements and certain retail space improvements. Note that the $250,000 allowance for qualifying real property is part of the overall $500,000 Section 179 deduction allowance; it is not in addition to the overall $500,000 allowance.
The $500,000 and $250,000 allowances are reduced if your business places in service over $2 million worth of assets that would otherwise qualify for Section 179 deductions. This phase-out rule usually only affects larger businesses.
Warning: Unlike 50% bonus depreciation deductions (explained below), Section 179 deductions cannot exceed the taxpayer’s business taxable income calculated before the Section 179 deductions. In other words, Section 179 deductions cannot create or increase an overall business tax loss for the year. Special rules apply to unincorporated businesses (sole proprietorships, partnerships, and LLCs) and S corporations. Consult your tax pro for details about how the Section 179 deduction rules work and whether your business can benefit.
50% First-Year Bonus Depreciation for New Assets
The new law extended 50% first-year bonus depreciation for an additional year to cover qualifying new (not used) business assets that are placed in service during calendar year 2013. The 50% bonus-depreciation write-off is on top of the first-year depreciation deduction allowed under the “regular” rules. Therefore your business can deduct over half the cost of qualifying new assets in Year 1 instead of writing them off over a number of years.
For many small businesses, the single most important element of the 50% bonus depreciation deal is the $8,000 increase in the maximum allowable first-year depreciation deduction for cars, light trucks, and light vans.
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* For new cars, the maximum first-year depreciation deduction for 2013 will be about $11,300 (the IRS has yet to announce the exact figure). Without the new law, the maximum deduction would have been $8,000 less. To claim the maximum deduction, you must use the car 100% for business. The deduction is proportionately reduced if you use it over 50% for business but less than 100%.
* For new light trucks and light vans, the maximum first-year deduction for 2013 will be about $11,500. Without the new law, the maximum deduction would have been $8,000 less. To claim the maximum deduction, you must use the vehicle 100% for business. The deduction is proportionately reduced if you use it over 50% for business but less than 100%.
Key point: Unlike Section 179 deductions, your business can claim 50% bonus depreciation deductions even if it has little or no taxable income for the year. Therefore, bonus depreciation deductions can create or increase a so-called net operating loss (NOL) for the year. If your business has an NOL for the 2013 tax year, you can carry the NOL back to 2012 and/or 2011 and recover some or all of the income taxes paid for those years.
Special First-Year Depreciation Rules for “Heavy” Vehicles
If you buy a business vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds, it’s generally treated as a truck (as opposed to a passenger vehicle) for tax purposes. Truck treatment is much more favorable, because the maximum first-year depreciation deductions for cars, light trucks, and vans will only be a little over $11,000 this year (as explained earlier).
If the heavy vehicle is an SUV or short-bed pickup, you can claim a Section 179 deduction of up to $25,000. If the heavy vehicle is not an SUV or short-bed pickup, there is no $25,000 limit on the Section 179 deduction. Instead, the larger $500,000 Section 179 deduction limit applies. For example, the larger limit applies to heavy long-bed pickups and heavy shuttle vans and delivery vans.
If the heavy vehicle is new (not used), 50% first-year bonus depreciation is also allowed.
100% Gain Exclusion for Qualified Small Business Corporation Stock
The fiscal cliff legislation extended the temporary 100% federal income tax exclusion for gains from sales of qualified small business corporation (QSBC) stock issued in 2013. However, don’t get too excited just yet. QSBC shares must be held for more than five years to be eligible for the gain exclusion privilege, so we are talking about gains from stock sales that occur years from now. That said, the 100% gain exclusion is obviously a great deal if you qualify. If you’re thinking about injecting new capital into your business this year, consult your tax adviser to see if you can position yourself to take advantage of this tax-saving opportunity.
Tax-Free Transit and Parking Deals for Employees
For 2013, your company can provide employees with up to $245 per month in tax-free transit passes. In addition, you can give employees up to $245 per month tax-free for parking. The advantage of such a program for your employees is obvious. The advantage for your company is these amounts are exempt from federal employment taxes (unlike wage payments).
If you don’t want the company to pay for these fringes, you can offer employees a salary reduction arrangement instead. Under this alternative, each employee could set aside up to $245 per month for transit passes and up to $245 per month for parking. These amounts are subtracted from the employee’s taxable salary. On the employee side of the deal, this arrangement allows for most or all commuting costs to be covered with before-tax dollars. On the company’s side of the deal, you don’t have to pay federal employment taxes on the salary reduction amounts. It’s a win-win proposition.