Super-Sized Depreciation Write-Offs
Businesses can now write off purchases of up to $500,000 in new or used equipment and software – a hefty increase over previous Section 179 limits. For the first time, you can also depreciate certain real property costs, including improvements to interior nonresidential, restaurant, and retail buildings that have been held greater than three years. These Section 179 deductions begin to phase-out when new additions exceed $2 million in any one year.
The Small Business Jobs Act also reinstated the 50% bonus depreciation for new purchased property, which had expired at the end of 2009. The bonus depreciation deduction extends to new heavy SUVs, and there’s an even bigger write-off for luxury cars. This means that qualifying taxpayers can take the Section 179 deduction, then bonus depreciation, and finally – on top of all that – regular depreciation.
For example, let’s say Tiger Company buys $1,000,000 of new seven-year MACRS equipment. Tiger can claim $785,750 of depreciation in the first year, computed as follows:
| Section 179 deduction | 50% of $1,000,000 | $500,000 |
| Bonus depreciation | 50% of $500,000 | 250,000 |
| MACRS depreciation | 14.3% of $250,000 | 38,750 |
| Total depreciation |
| $785,750 |
A 79% depreciation deduction in the first year is one whopping write-off!
Domestic Production Activities Deduction – Section 199
This deduction – for firms engaged in qualified activities such as manufacturing, processing, leasing, construction, engineering, or software development in the United States – has risen to 9 percent for tax years starting after 2009.
You compute the Section 199 deduction by subtracting expenses from qualified production activities. Your business needs to have a taxable profit in order to take advantage of it. But if eligible, you can reap a 3.15 percent reduction in their effective tax rate – without doing anything differently than what you’re currently doing. It doesn’t get any easier than that.
Expanded Use of General Business Credits
Here’s more helpful fallout from the Small Business Jobs Act: Qualifying taxpayers can now use General Business Credits to offset their Alternative Minimum Tax (AMT) liability.
General Business Credits are a group of approximately 30 credits, including the Investment Credit, Credit for increasing research activities, Low-income housing credit, Orphan drug credit, and Small Business Health Care Credit (discussed below).
Previously, companies could only use these credits to the extent that their regular tax liability exceeded their AMT liability. But the SBJA now lets you treat your AMT as zero – greatly expanding your ability to use 2010 credits. Your 2010 credits may also be carried back up to five years to offset prior AMT liability, and forward 20 years to offset future liability. (However, a second limitation remains in place that prevents you from using credits to reduce taxes below 25 percent of the difference between your company’s regular tax liability and its AMT liability.)
In order to qualify, companies must have average gross receipts of $50 million or less per year over the prior 3 year period. Owners of pass-through entities (such as LLCs and LLPs) also qualify for the expanded utilization if the owner’s average gross receipts meet the same $50 million test.
The upshot? Pay special attention to capturing all available credits for 2010. And weigh the cost of additional expenditures that could generate credits, against the benefits you could reap by offsetting prior, current, and future years AMT.
Note: As of early December, the federal credit for increasing research activities has not been extended past 2009, but may be extended at a later date and applied retroactively to 2010.
A New Federal Credit for Small Business Health Care...
If you’ve got fewer than 25 full-time-equivalent employees and average annual wages of less than $50,000, you could qualify for the new Small Business Health Care Credit.
For the 2010 through 2013 tax years, the maximum credit is 35 percent of the employer’s health insurance premium expenses. The biggest credit goes to employers with 10 or fewer full-time-equivalent employees and averages wages of $25,000 or less, and phases out as company size and wages increase. The credit is non-refundable and therefore can only offset existing tax liability. However, any unused credit can carry forward 20 years.
To qualify, companies need to pay a uniform percentage (not less than 50%) of the health care premiums for each enrolled employee.
...And Another New Federal Credit for Hiring Unemployed Workers
You could be eligible for this double-pronged credit if you hired previously unemployed workers between Feb. 3, 2010 and Dec 31, 2010.
The first part of this new program provides a credit for the employer’s 6.2% share of social security tax on wages paid to qualified employees, up to a $6,622 maximum per employee. This wouldn’t be included on your 2010 tax return, but instead claimed with payroll tax filings. So companies in a loss position could still realize a net cash benefit in the form of reduced payroll tax liability.
The second part allows you to claim a tax credit of 6.2% of the employee’s salary (up to $1,000 per employee) for each qualified employee retained for at least 52 weeks. This is a non-refundable credit similar to the Small Business Health Care Credit, and would be included in your 2010 tax return.
Who counts as a qualifying employee? This must be someone who hasn’t worked more than 40 hours within the 60 days prior to their hire. It can include recent graduates who were in school for some or all of the 60 days before their hire. Companies should coordinate with their payroll departments and/or outsource providers to compile the potential list of qualifying employees and to claim payroll tax reductions. Qualified employees will have to certify by signed affidavit (W-11 forms, available online) that they didn’t work more than 40 hours in the sixty days before their hire.
Net Operating Loss Deductions for Companies with Income Below $300,000
The government giveth, and the government taketh away. One spot where it recently took away was a new state limit on the use of Net Operating Losses (NOLs).
California Senate Bill 858, signed in October, limited the use of NOLs by suspending California NOL deductions for taxable years beginning on or after January 1, 2010 and before January 1, 2012.
There are some ways to work around this suspension, though. Qualifying companies with less than $300,000 of net business income in these years are exempt from the suspension. Meanwhile, companies exceeding the $300,000 taxable income threshold should consider accelerating expenditures into 2010 to reduce taxable income below this amount.
Fixed asset purchases, salaries and bonuses (if paid within 2 ½ months after year end) can be deducted on the 2010 tax return to reduce taxable income and potentially allow a company to qualify for the exemption. Companies that expect to be above the $300,000 figure should prepare a fourth quarter California estimated tax payment (due December 15, 2010 for calendar year-end corporations) to minimize interest on underpayment of estimated taxes.
