October 07, 2013
Five Year-End Tax Tips for U.S. Corporations
NEW YORK - As the end of 2013 approaches, corporate tax planners face challenges from the pending expiration of many significant tax provisions and the lack of certainty as to whether, when, and how Congress will deal with them.“The political climate of 2013 has so far proven to be as challenging as in prior years,” says Catherine Murray, Esq., a tax analyst at Thomson Reuters. “And given the continued budgetary concerns, coupled with a slow but palpable economic recovery, the justifications for extending a number of popular tax breaks for businesses may not hold up this year.”
Up-to-date analyses of legislation and regulations, authored by Murray and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Murray offers the following strategies that tax planners can use to keep corporate clients ahead of the game, regardless of what actions Congress chooses to take:
- Bonus depreciation . Under current law, a 50% bonus first-year depreciation allowance generally applies only to qualified new property acquired and placed in service by year-end. The post-2013 fate of this provision is unknown, so companies that intend to acquire eligible property should consider taking advantage of this opportunity if doing so makes good business sense. This deduction is determined without any proration based on the length of the tax year, meaning that it is available even if qualifying assets are in service for only a few days in 2013.
Example: A calendar-year business intends to buy $500,000 of bonus-depreciation-eligible, five-year property. If it purchases and places the property in service in 2013, it can claim a $300,000 depreciation allowance for that year ($250,000 in bonus depreciation, plus $50,000 in regular depreciation). In contrast, if it does not purchase the assets until 2014 and bonus depreciation is not extended, then its regular first-year depreciation allowance for that year would be only $100,000.
- Expensing limits . The generous expensing rules that we have seen for the past few years are also currently set to expire at the end of the year. Under the current rules, the maximum amount that a taxpayer can expense – that is, deduct currently -- is $500,000, reduced by the amount by which the cost of qualifying property placed in service during tax years beginning in 2013 exceeds the $2 million “investment ceiling.” For tax years beginning after 2013, these amounts are slated to drop to $25,000 and $200,000, respectively.
Therefore, businesses that intend to purchase machinery and equipment in the near future should consider doing so by year-end. As with bonus depreciation, so long as the purchase is made by year-end, the amount of the expensing deduction will not be affected. And careful timing of purchases can enable a business to make the most of today’s generous expensing limits.
Example: During the first eleven months of 2013, a calendar-year business bought and placed in service $400,000 of expensing-eligible property, and plans to buy an additional $125,000 of expensing-eligible property in the near future. If feasible to do so from the business standpoint, it should consider accelerating $100,000 of the purchases into 2013 and placing these assets in service before year-end. This way, even if the expensing limit drops to $25,000 next year, it will be able to fully expense its purchases ($500,000 for 2013 and $25,000 for 2014).
- Expensing-eligible real property . Under current rules, within the overall $500,000 expensing limit, a taxpayer may elect to expense up to $250,000 of certain types of real property. This property consists of certain leasehold improvement property, restaurant property, and retail improvement property, all of which must be depreciable, acquired for active business use, and meet technical tax law definitions. Like other aspects of the expensing rules, it is uncertain whether this provision will continue for tax years beginning after 2013, so businesses should consider whether accelerating purchases of qualifying real property into this year makes sense for them.
- Generous rules for business “luxury” autos . 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 2013 is $11,160 for autos and $11,360 for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs), except as noted below) 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 is set to expire at the end of 2013. If the vehicle is not bought until next year, first-year depreciation deductions will plummet if this allowance is not extended.
Heavy SUVs, defined as 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 because they aren’t considered passenger automobiles. Within the overall expensing limit, taxpayers can deduct up to $25,000 of the cost of a new SUV (bought and placed in business in 2013) as a business expense in the placed-in-service year. The remaining costs are also eligible for 50% first-year depreciation, meaning that taxpayers who buy and place in service new heavy SUVs by year-end may be entitled to write off most of the cost of the vehicle in 2013.
- Work Opportunity Tax Credit (WOTC). This tax break, available to businesses that hire workers from certain targeted groups including qualifying veterans, currently applies only to qualifying hires that begin work for the employer by year-end. Therefore, employers, who are considering hiring WOTC-eligible individuals, should make their move before year-end if they want to lock in these credits. An early start is generally recommended because of the involved process of certifying eligible workers.
Corporate taxpayers should consult with their tax advisers before applying these or other tax strategies.
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