When businesses began planning late last fall for 2011, there was a lot of uncertainty surrounding taxes. Congress had yet to act, and with no solid numbers in place, businesses were left with no clear direction.
The passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 in December settled some of those questions in a way that will benefit businesses through the end of this year, says Marc Berger, a shareholder at Burr Pilger Mayer, Inc.
“The passage of the act provided a greater incentive for businesses than expected,” he says.
Smart Business spoke with Berger about how companies can take advantage of changes in bonus depreciation, Section 179 and the qualified small business exclusion.
How did passage of the act impact bonus depreciation?
Bonus depreciation increased from 50 percent to 100 percent for purchases made on or after Sept. 9, 2010, through the end of 2011. Instead of depreciating an asset over its useful life, bonus depreciation allows you to write off the entire amount in the year of purchase. The act is retroactive, so equipment bought on or after Sept. 9 qualifies.
There are no limits on the tax deduction, but equipment must be purchased new, and it must be placed in service in the year in which it is claimed. Because the legislation was passed so late in the year, unless the order was already made, few companies would have had the opportunity to order equipment and have it in service by the end of the year.
However, for almost any business, this is a tremendous incentive to purchase equipment in 2011. This is a push to get the economy moving this year, but bonus depreciation is scheduled to revert to 50 percent for purchases made in 2012.
Almost any company can benefit, but if a business has the research and development credit, it may want to compute taxes both ways to see which way gives it the best benefit: taking the bonus depreciation and reduced R&D credit, or taking regular depreciation and the entire R&D credit.
How can businesses take advantage of the changes to Section 179 expensing?
Section 179 limits were increased as a result of the Jobs Act of 2010. The section specifies the limitation on how much can be written off in the first year of an asset purchase and is different from bonus depreciation in that it can apply to used property, as well as new. It also applies to certain classes of assets that don’t qualify for bonus depreciation, such as certain leasehold improvements.
With the increase in limitations, a business can write off up to $500,000 in qualified capital expenditures. Because the intent is to encourage smaller businesses to spend, you can only take this credit if your business is purchasing total equipment valued at $2 million or less. Typically, a larger corporation would choose bonus depreciation over Section 179 because its purchases exceed the $2 million limit, but use Section 179 for certain leasehold improvements.
This increase to $500,000 is only in effect through 2011 and will revert to a limit of $125,000 in 2012.
How can the purchase of qualified business stock provide increased returns to investors?
If an individual owns qualified small business stock and meets all of the requirements, when that person sells it, the entire amount of the gain is nontaxable
Previously, there was a 50 percent exclusion for small business stock, but Congress has tinkered with that over the years to make it increasingly beneficial, to the point where, in 2010, stock acquired after Sept. 27, 2010, through the end of 2011 will qualify for a 100 percent exclusion. None of the gains will be taxable, and they won’t be taxable for the purposes of AMT, either.
To take advantage of qualified business stock, the company from which the stock is issued must first be a C corporation — LLCs, S corporations and partnerships do not qualify. As a result, one of the emerging issues is whether a company that is an S corporation or an LLC should convert to a C corporation to take advantage of this provision.
To qualify for the nontaxable gain, the investment must also be in an active business — it can’t be an investment entity — and it has to have had assets of $50 million or less at the time of the business’s inception. In addition, the stock must be held for five years. Finally, there’s a limitation on how much gain can be excluded of $10 million, or 10 times what the taxpayer paid for the stock, whichever is greater.
Qualified business stock is essentially providing a benefit to people who are willing to invest in a venture-funded company, making this a good time to invest.
How can a business benefit from being located in an Enterprise Zone?
There are five California tax incentives available for a business located in an Enterprise Zone. The incentives are a hiring credit, sales or use tax credit, business expense deduction, interest deduction and net operating loss deduction. There is a common misperception that enterprise zones are only in blighted areas, but that is not the case; there are areas of the financial district in San Francisco, for instance, that are in enterprise zones. To qualify for the hiring credit, potentially the most beneficial incentive, a company must also have qualified employees. One of the criteria for qualified employees is that they reside in a Targeted Employment Area (TEA).
With so many changes in the tax laws, businesses should consult with their advisers to see whether they qualify for credits and to plan their year to take maximum advantage of the tax laws.
Marc Berger is a shareholder at Burr Pilger Mayer, Inc. Reach him at MBerger@bpmcpa.com or (925) 296-1030.