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Post-Election Tax Policy for Businesses
What You Need to Know for Year-End Tax Planning by Jo Ann Koontz, Esq., CPA
Business extenders likely to be renewed are:
· Code Sec. 179 small business expensing
· Work Opportunity Tax Credit
· 15-year recovery for qualified leasehold improvements, restaurant property and retail improvements
· New Markets Tax Credit and Code Sec. 41 Research Tax Credit
Code Sec. 179 gives businesses the option of claiming a deduction for the cost of the qualified property all in its first year of use. Under current law, the dollar limitation for 2012 is $139,000 with a $560,000 investment limit. The deduction limit is scheduled to drop to $25,000 for 2013 with $125,000 investment limit. Businesses may want to accelerate purchases into 2012 and as long as the equipment is placed in use before the end of the tax year, the taxpayer gets the entire expensing deduction for that year.
The purchased property may qualify for both Code Sec. 179 expensing and bonus depreciation (currently 50%, schedule to expire after 2012). Code Sec 179 expensing should be taken first, followed by bonus depreciation, and then regular first-year depreciation. Careful consideration should be taken when planning for depreciation;
Work Opportunity Tax Credit (WOTC) rewards employers that hire individuals from targeted groups. Under current law the WOTC is not available for 2012 except for the target group of qualified veterans, but the qualified veteran must begin work for the employer before January 1, 2013. Both for-profit and not-for-profit employers can benefit from hiring a qualified veteran – the credit for qualified veteran can be as high as $9,600.
President Obama’s re-election will result in continuing implementation of the Patient Protection and Affordable Care Act. The following are some of the tax-related provisions in that Act that are scheduled to take effect in 2013 and beyond:
· 3.8% Medicare contribution tax (2013)
· 0.9% additional Medicare tax (2013)
· $2,500 contribution limit on health flexible spending accounts (2013)
· Increased threshold for itemized medical expenses (2013)
· Increase in small employer health insurance tax credit (2014)
The Medicare contribution tax of 3.8% applies to net investment income (including interest, dividends, annuities, royalties, rents, and net capital gains). It will apply to the lesser of the taxpayer’s net investment income or the amount of modified adjusted gross income above a specified threshold – $250,000 for joint filers and $200,000 for single filers. This tax is essentially imposed on unearned income of higher-income individuals. As a result, taxpayers are facing many important planning decisions – whether to sell assets and recognize gains in 2012, how to reduce net investment income in 2013 and how to reduce modified adjusted gross income in 2013.
For example, unusual spikes in income such as gain on sale of residence in excess of exclusion amount, taxable inheritance from an estate, or conversion of IRA into Roth account, may subject a taxpayer to 3.8% tax for interest and dividends also realized in the same year.
Taxpayers may also want to demonstrate that income is from an active business, not a passive investment. Close analysis will have to be done of whether any property disposed at a gain was held in a trade or business and whether individual materially participates in an activity to deem it active versus passive.
Additional 0.9% Medicare tax applies to total wages, other compensation, and self-employment income that exceed the applicable threshold amount - $250,000 for joint files and $200,000 for individual files. Consideration should be given to paying annual bonuses, recognizing income on stock-based contingent compensation, and accelerating service-related income in 2012.
Affordable Care Act increases the 7.5% threshold for itemizing medical expenses to 10%. However, it temporarily exempts individuals age 65 older – they may continue to apply the 7.5% threshold. The Act also caps the maximum salary reduction contribution to a health flexible spending arrangement at $2,500. Salary reductions in excess of $2,500 will subject the employee to tax on distributions from the FSA.
Overall, Democrats and Republicans generally agree that the longer they wait to make decisions, the greater the likelihood of a delayed 2013 filing season. The IRS will need time adjust its processing systems for late legislation. The question is: will lawmakers go along with the President’s proposals and when will they act?
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Jo Ann Koontz is an attorney and CPA practicing in the areas of real estate, business law and taxation. She can be reached at (941) 225-2615 or email@example.com.