What the New Tax Law Means to Your Business

The American Taxpayer Relief Act of 2012 (the Act), which was signed into law on January 2, 2013, helped to avert the so-called fiscal cliff. It directly impacts your 2012 return as well as your tax planning for 2013. The Act is extensive, but recognizing opportunities is vital for you to take advantage of breaks on both your 2012 and 2013 tax returns.

Tax changes for 2012
When the year ended, we still did not know the fate of dozens of tax rules that had expired at the end of 2011. The Act, with a few exceptions, extended all of the expired rules for 2012 and 2013. It also increased the dollar limit on the Sec. 179 first-year expensing deduction. Here's a list of the key breaks that may affect your 2012 return:
  • Sec. 179 deduction. The dollar limit that had been allowed for 2012 was $139,000; it has been increased retroactively for all of 2012 to $500,000. This means that you can elect to expense the cost of qualifying equipment and machinery bought and placed in service before January 1, 2013, rather than depreciating the cost of a number of years. Bonus depreciation at the rate of 50% of cost is also allowed, but only for qualifying property that is new (not pre-owned).
  • Research credit. If your company increased its research expenditures in 2012, it may qualify for a tax credit of up to 20% of the increase over a base amount figured from certain prior years. This is the 15th time that this credit has been extended. It was not made permanent by the Act, but was liberalized to allow it to be claimed with respect to certain expenditures in acquisition situations.
  • Enhanced deduction for donations. If your business donated food inventory, it can claim an enhanced deduction rather than simply your cost for the food. However, the enhanced deductions for donations of books and computers from inventory, which expired at the end of 2011, were not extended.
  • Employment-related credits. Credits for hiring individuals from targeted groups (called the work opportunity credit), on Indian reservations, and in empowerment zones have been extended. Similarly the credit for wage differential payments to employees called to active duty has also been extended.
  • 100% exclusion for qualified small business stock acquired in 2012 or 2013. You must hold the stock for more than five years, so while the impact of this tax break won't be felt on 2012 returns, it is very valuable to note. Because this is an exclusion, even high-income owners, employees, and investors will pay no tax on gain when they sell the qualified stock.
Caution: The federal income tax breaks do not automatically apply for state income tax purposes. States that have de-coupled their income tax rules would need special legislation to incorporate the changes on 2012 returns, something that is not likely to be done at this late date. However, check with your tax advisor about state income tax rules that affect your business.
Tax changes for 2013
While all of the changes that are available for 2013 are retroactively effective for 2012, there was no time last year to implement them, but now there is. Here are some benefits that businesses can offer to employees:
  • Transportation fringe benefits. For 2013, free parking and monthly transit pass expenses up to $245 per month are tax free to employees.
  • Employer-provided education. Up to $5,250 is tax free to employees for college or graduate courses. (Because of nondiscrimination rules for an education assistance plan, this is usually implemented only by larger companies.) Of course, there's no dollar limit on employer-paid education that's job related.
  • Adoption assistance. For 2013, employees can receive employer-paid assistance tax free up to $12,970. Again, typically only larger companies can afford to offer this benefit, but it also allowed for smaller businesses.
Other changes for 2013 include:
  • Business vehicles. Because of the extension of bonus depreciation, the dollar limit on depreciating a new business vehicle in 2013 increased by $8,000.
While much of the Act's new rules are good, there are some negative changes that will impact small business owners who are high-income taxpayers:
  • The 39.6% tax bracket applies when taxable income exceeds $400,000 for singles, $425,000 for heads of households, $450,000 for joint filers, and $225,000 for married persons filing separately.
  • A 20% tax rate applies to long-term capital gains and qualified dividends for those in the 39.6% bracket.
  • High-earners lose some of their itemized deductions and some or all of their personal exemptions when adjusted gross income exceeds $250,000 for singles, $275,000 for heads of households, $300,000 for joint filers, and $150,000 for married persons filing separately.
Note: These changes are in addition to those created in 2010 under the Patient Protection and Affordable Care Act that impose a Medicare surtax on earned income and another surtax on net investment income. Taken together, the tax hikes on high-earners are significant. As yet, there have been no figures released on how many small business owners fall into the "high-income" category. However, those who potentially could be in this category should work with a tax advisor to avoid or minimize the impact of these new levies.
There are two takeaways from changes to taxes for 2012 and 2013:
  • Late enactment delayed the filing season. The filing season for 2012 is now under way, having started on January 30. Those filing certain forms, such as Form 4562 for depreciation or Form 3800 for the general business credit, may have to wait longer (perhaps until late February or beyond) until the IRS can program its system to process these forms. If you are expecting a tax refund, let this be a lesson not to overpay in 2013 (and effectively make an interest-free loan to the government).
  • Tax changes can now be factored into your 2013 budget and plans for this year. Now may be the time to buy equipment that still qualifies for favorable bonus depreciation and the high Sec. 179 deduction. Similarly, 2013 may be the year to expand your payroll (as long as you don't become a large employer subject to the health care mandate starting in 2014).
When in doubt about what actions to take, consult with a tax advisor.

Big Ideas for Small Business®
Find it for free on the App Store.