Finances: ‘Fiscal Cliff’ Package Offers Tax Savings Opportunities
The so-called “Fiscal Cliff” tax package recently passed by Congress and signed into law renewed more than 50 temporary tax breaks through 2013, saving individuals and businesses an estimated $76 billion. Admittedly, single individuals with incomes above the $400,000 level and married couples with income higher than $450,000 will pay more in taxes in 2013 because of a higher 39.6 percent income tax rate and a 20 percent maximum capital gains tax.
In fact, employees will find less in their paychecks in 2013 because the American Taxpayer Relief Act did not extend the payroll tax holiday that had reduced Social Security payroll deductions from 6.2 percent to 4.2 percent on earned income up to the Social Security wage base ($113,700 for 2013). It is a similar story for the self-employed.
For the owners and operators of small- and medium-sized tennis retailers and facilities, there is good news and bad news in the fiscal cliff tax laws. First, the good news: Greater certainty in taxes. The owners and operators of many businesses have grown used to many longstanding tax breaks but they also have had to get used to the uncertainty of whether they will be renewed each year. While many tax breaks were allowed to expire at the end of 2011, the new tax law renews them retroactively, allowing tennis facility operators, retailers and other business owners to claim them on both their 2012 and 2013 tax returns.
Equipment and Facilities
- Expensing Write-Off: The American Taxpayer Relief Act extended through 2013 the Tax Code’s Section 179, first-year expensing write-off. Now, the higher expensing limits in effect in 2011 have been reinstated for 2012 and extended for expenditures made before Dec. 31, 2013. Thus, a tennis business can expense and immediately deduct up to $500,000 of expenditures in 2012 and 2013. Of course this is subject to a phase-out if total capital expenditures exceed $2 million. The maximum amount that can be expensed in years beginning after 2013 will, without amendment, drop to $25,000.
- Computer Software: The election to expense off-the-shelf computer software under Section 179 has also been extended and applies to expenditures made before Dec. 31, 2013.
- Real Property Write-Offs: Those tennis businesses with expenditures in 2012 and 2013 for qualified real property such as land and whatever is erected on it can now claim Section 179 expensing treatment for such expenditures.
- Qualified Leasehold Improvements: Those in the industry who had given up on the prospect of recovering the cost of improvements to leased property, or retail improvements over the former shorter 15-year period, should now review their capital expenditures for 2012 — or think about making expenditures that qualify before the end of 2013. The new law extends the 15-year straight-line recovery for qualified improvements made to leased property, qualified restaurant buildings, and qualified retail improvements for expenditures made before Jan. 1, 2014. Best of all, the write-off applies to all property placed in service after Dec. 31, 2011.
- Bonus Depreciation: The tax-break that allows a profitable tennis facility or business to write-off large capital expenditures immediately — rather than over time — has long been used as an economic stimulus. One hundred percent “bonus” depreciation expired at the end of 2011. Today, the new law allows 50% bonus depreciation for property placed in service through 2013. Some transportation and longer-lived property are even eligible for bonus depreciation through 2014.
To be eligible for bonus depreciation, property must be depreciable under the standard MACRS system, and have a recovery period of less than 20 years. Code Section 179 first-year expensing remains a viable alternative especially for small businesses. Property qualifying for the Section 179 write-off may be either used or new in contrast to the bonus depreciation requirement that the taxpayer be the “first to use.”
The part of the tax laws that imposes dollar limits on the annual depreciation deductions for cars and light trucks used in business operation is also impacted by the new bonus depreciation rules. If bonus depreciation had not been extended, the 2012 tax year would have been the final year in which substantial first-year write-offs for buyers of business automobiles would be available.
Among the business provisions in the new law are:
- Work Opportunity Tax Credit (WOTC), a tax credit that rewards employers that hire individuals from targeted groups, has been extended to Dec. 31, 2013, and applies to individuals who begin work for the employer after Dec. 31, 2011. Under the revised WOTC, businesses hiring an individual from within a targeted group are eligible for a credit generally equal to 40 percent of first-year wages up to $6,000.
- Employer-Provided Educational Assistance: The new tax law extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250. The business may also deduct up to $5,250 annually for qualified education assistance paid on behalf of an employee.
- Wage Credit for Active Duty Servicemen: The employer wage credit for employees who are active duty members of the uniformed services now applies to payments made after Dec. 31, 2011 and before Dec. 31, 2013.
- New Markets Tax Credit: The new law extends the New Markets Tax Credit that has helped many within the industry with financing for their operations, through 2013. What’s more, the new law extends the carryover of the credit through 2018 (from 2016). The amendments apply to calendar years beginning after Dec. 31, 2011.
- S Corporation’s Built-In Gains: Although an S corporation is a pass-through entity and not usually subject to income taxes, it is liable for the tax imposed on built-in gains or capital gains. The tax on built-in gains is a corporate-level tax on S corporations that dispose of assets that appreciated in value during the years when the operation was a regular “C” corporation. The new law provides for a 5-year holding period for the sale of property with built-in gain for taxable years beginning in 2012 or 2013.
Estate Taxes Never Die
Always of significant interest to family-owned businesses, the estate tax has long been a bit of a mixed bag — the $5 million per person exemption was kept in place (and indexed for inflation continued), however the top rate is increased to 40 percent — effective date Jan. 1, 2013. This change to 40 percent increased revenues from 2012 policy by $19 billion.
Other good news for estate planning — portability is kept in place and estate and gift remains unified — i.e., the $5 million stays in place for gift tax purposes as well. And it is all permanent.
The majority of tennis facilities, retailers and many other businesses operate as pass-through entities, such as partnerships and S corporations. Profits are passed through to their individual owners and therefore are taxed at individual income tax rates. A regular “C” corporation, with its current tax rate of 35 percent, may become more attractive with rates rising to 39.6 percent for some individuals.
Many popular but temporary tax extenders relating to businesses were included in the American Taxpayer Relief Act. Unfortunately, the Act is not the grand bargain envisioned by lawmakers and promised to taxpayers. Despite the Code Section 179 small-business expensing, bonus depreciation, and the Work Opportunity Tax Credit, the new law is essentially only a stop-gap measure designed expressly to prevent the onus of the expiration of the Bush-era tax cuts from falling on middle-income taxpayers. Congress must still address spending cuts and may even tackle tax “reform.”
The time is now — hopefully before filing your business’s 2012 tax returns — for every tennis facility operator, retailer and business owner or manager to consult with their accountants and/or tax professionals to focus on the potential savings offered by these newly revised, extended and expanded business credits, deductions and tax write-offs.
Mark E Battersby is a tax advisor in Ardmore, PA.
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About the Author
Mark E. Battersby is a tax advisor and author in Ardmore, Pa.