As the final quarter of the year approaches, it is important to start thinking about tax-saving strategies that may be implemented before year-end. Below is a list of some federal tax deductions and credits that businesses may take advantage of before year-end.
Bonus depreciation (for years prior to 2014) and the expensing election enable you to deduct much of the entire cost of a capital asset in the year in which you acquire it. There are two important exceptions to the general rule that you can’t deduct the entire cost of a capital asset in the year you purchase it: (1) bonus depreciation (prior to 2014) and (2) the Code Sec. 179 expensing election. The option to claim bonus depreciation was also extended through the end of 2013 – but only at the 50% level. The 100% bonus depreciation available in 2010, 2011, and 2012 has vanished. And, after 2013, the 50% deduction vanishes as well. For tax years beginning after 2013, the annual dollar limit goes down to only $25,000, while the investment limitation will kick in at $200,000.
Code Sec. 179 Expensing
Expiration of the increased Sec. 179 deduction limits and expanded definition of Sec. 179 property. For tax years beginning after 2013, the increased Sec. 179 expense deduction limit and threshold amount before reduction in limitation will no longer apply. Also, the definition of Sec. 179 property will no longer include certain qualified real property. Unlike bonus depreciation, Sec. 179 applies to new and used property.
Code Sec. 199 Deduction
Often overlooked is the Code Sec.199 domestic production activities deduction.The deduction is targeted to U.S. taxpayers engagedin manufacturing activities. The definition of manufacturing is broad for purposes of the deduction and includes construction activities.
The business standard mileage rate fell to 56 cents per mile, down from 56.5 cents in 2013.
Worker Retention Credit
This is a general business credit to encourage retention of new hires (retained workers). The employer may claim the credit for each retained worker. A retained worker is a qualified employee (as defined for purposes of the payroll tax exemption) who remains an employee for at least 52 consecutive weeks, and whose wages (as defined for income tax withholding purposes) for the last 26 weeks equal at least 80% of the wages for the first 26 weeks. The amount of the credit is the lesser of $1,000 or 6.2% of wages (as defined for income tax withholding purposes) paid by the employer to the retained worker during the 52-consecutive-week period.
Research Tax Credit
The expenditures of research and development (R&D) are generally capital expenses. However, you can choose to deduct these expenditures as current business expenses. You may use one of the two following methods of accounting for R&D expenditures:
- You may deduct your R&D expenditures in the tax year in which you paid or incurred
- You may amortize such expenditures over a period of not less than 60 months
You must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer, and amortize. You may claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit. The R&D credit is a nonrefundable tax credit.
Amortization of R&D Expenditures
- Rather than amortize R&D expenditures or deduct them as a current expense, you have the option of deducting (writing off) R&D expenditures ratably over a 10-year period beginning with the tax year in which you incurred the expenditures.
- You can amortize R&D expenditures chargeable to a capital account, if you meet both of the following conditions: you paid or incurred the R&D expenditures in your trade or business OR you are not deducting the expenditures currently
Work Opportunity Tax Credit
The American Taxpayer Relief Act of 2012 (ATRA) (HR 8) extends the Work Opportunity Tax Credit (WOTC) for hiring certain workers through Dec. 31, 2013.
The VOW to Hire Heroes Act of 2011 made changes to the WOTC, including adding new categories to the qualified veterans targeted group and expanding the WOTC to make a reduced credit available to tax-exempt organizations for hiring qualified veterans. The VOW Act also extended the WOTC for qualified veterans hired before Jan.1, 2013. The other targeted group categories were not extended by the VOW Act and expired for targeted group members other than qualified veterans hired after Dec.31, 2011.
ATRA extends the WOTC for qualified veterans hired before Jan. 1, 2014. ATRA also extends the WOTC for targeted group members, other than qualified veterans, hired after Dec. 31, 2011, and before Jan.1, 2014.
Small Employer Health Insurance Credit
For tax years beginning in 2014 or later, there are changes to the credit:
- The maximum credit increases to 50% of premiums paid for small business employers and 35% of premiums paid for small tax-exempt employers.
- To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
- The credit is available to eligible employers for two consecutive taxable years.
The information contained herein is general in nature and is subject to change. NSCA guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. NSCA assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.This presentation does not,and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.
This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that maybe imposed on any taxpayer.
Source: ww.irs.gov (November 2014)