With only days left before year end, there’s still time to take action that will favorably affect your 2012 tax return. Capitalize now on small-business tax breaks scheduled to expire on December 31, 2012.
Sec. 179 Deduction
The Sec. 179 deduction, named after the section in the Tax Code governing it, allows you to deduct the cost of equipment and machinery placed in service this year, rather than having to depreciate the cost over five years, seven years, or longer periods fixed by law. The cap on this write-off for 2012 is $139,000; it's scheduled to decline in 2013 to $25,000.
To claim the tax break, you must be profitable. However, you can apply the deduction for the purchase of new and pre-owned equipment. You can take the deduction whether you finance the purchase in whole or in part.
For example, your tree work business, which has been extremely busy in the wake of Hurricane Sandy, needs new chainsaws. The models you want cost $900 each and you need five of them ($5,400). You finance the purchase with the dealer so you only have to pay $500 now, with the balance spread over nine months in 2013. As long as they are placed in service before the end of the year, which means they’re ready for business use in 2012, you can deduct $5,400. Say you’re in the 25 percent tax bracket. This deduction saves you $1,350 ($5,400 x 25 percent) on your 2012 return even though you only paid $500 in 2012.
Bonus Depreciation, which relates to the Sec. 179 deduction, allows you to deduct 50 percent of the cost of equipment purchases made in 2012. (This break had been 100 percent in 2011; it is scheduled to disappear entirely in 2013.) The break applies only to new equipment; used items don’t qualify. However, this break can be used even if you’re not profitable. It can trigger or increase a net operating loss (NOL) in your business. If so, the NOL can be carried back to offset income in certain prior years, generating a tax refund.
This break can be combined with the Sec. 179 deduction for optimum write-offs.
The cost of cars, trucks and vans purchased for business driving can be depreciated, but only up to a set dollar limit. That limit is increased if the vehicle is new, so a bonus depreciation allowance of an additional $8,000 deduction in the year of purchase can be used. This $8,000 allowance is scheduled to disappear after 2012. (Without this bonus depreciation allowance, the depreciation cap for a car purchased in 2012 and used 100 percent for business is $3,160, or $3,360 for a light truck or van.)
If you buy a heavy SUV (one with gross vehicle weight of more than 6,000 pounds but less than 14,000 pounds), the usual dollar limits on depreciation for vehicles don't apply. Instead, you can write-off $25,000 as a special allowance, plus use 50 percent bonus deprecation and regular depreciation. All together, these tax breaks mean you can basically write-off the bulk of the purchase price in the first year.
For example, say you buy a Lexus GX 460 for $64,000 (including sales tax). You can deduct $48,400 in 2012:
- Special allowance of $25,000
- Bonus depreciation of $19,500 ($39,000 x 50 percent)
- Regular depreciation of $3,900 ($19,500 x 20 percent)
Most of the popular large SUVs, such as Chevrolet Tahoe, Cadillac Escalade, Jeep Grand Cherokee and Toyota Sequoia, meet the weight requirement. Just about every car maker has a heavy SUV, so check with a car dealer or check online for other qualifying vehicles.
The work opportunity credit for hiring certain veterans means a dollar-for-dollar reduction of your taxes up to $9,600 (depending on who you hire and how much he or she earns). This special category is set to expire in 2012. Qualified veterans include:
- Those unemployed for at least six months during the past year;
- Those entitled to compensation for a service-related disability who were discharged from the service within the past year or who were unemployed for at least six months during the past year.
To qualify for the credit, the qualified veteran must begin work before the end of the year. Then in 2013, you’ll be able to claim the credit based on wages paid for the first year of employment.
Be sure to have the veteran sign IRS Form 8550 when hired. Then submit the form to your state’s workforce agency within 28 days of hiring; the VA will confirm the employee’s eligibility for you to claim the credit. (Find details from the U.S. Department of Labor.)
If your business is incorporated, you may want to declare a dividend payable to shareholders this year. While the corporation cannot deduct the dividends, shareholders pay tax on them at favorable rates scheduled to end this year. Shareholders pay no more than 15 percent on qualified dividends; those in the 10 percent or 15 percent tax bracket pay no tax on these dividends. This favorable tax treatment for dividends is scheduled to end this year.
Talk with your tax advisor now to determine which of these tax breaks may be helpful in your business and what action you need to take before the end of the year to secure them. If you act now, remember to factor in any tax savings when paying the final installment of individual estimated taxes for 2012 on January 15, 2013.
Looking for more tax tips and advice? Read these small-business finance articles.
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