By Cheryl L. Johnson and Jeffrey A. Cohen
The end of the 2013 tax year is rapidly approaching. There is still time to take advantage of some tax opportunities before year”™s end.
Bonus First-Year Depreciation
The bonus depreciation rules allow businesses to claim an additional 50 percent depreciation of the basis of certain property if placed into service before Jan. 1.
Additionally, unlike regular depreciation, businesses are entitled to the full 50 percent depreciation regardless of when the property is purchased during the year.
To be eligible for the bonus depreciation, the property must be new computer software, qualified leasehold improvement property or have a depreciation recovery period of 20 years or less. Qualified leasehold improvement property includes interior improvements by a lessor or lessee to nonresidential real property that is more than three years old pursuant to the terms of a lease. Property with a depreciation recovery period of 20 years or less includes a wide variety of assets.
Thus, businesses planning to purchase new depreciable property this year or next year may wish to purchase the property before the end of the year to decrease their taxable income for the 2013 tax year.
Businesses may also want to take advantage of the enhanced business property expensing provision in the Internal Revenue Code (“IRC”) that is set to expire at the end of the year. Businesses can elect to expense rather than capitalize the cost of qualifying personal property placed in service during the 2013 tax year. Expensing the property as opposed to capitalizing it allows the business to deduct its cost during the tax year that it is placed in service and, again, reduce its taxable income for the tax year.
The deduction is limited to the amount of taxable income from the taxpayer”™s active conduct of a trade or business during the tax year. However, any amounts that cannot be deducted can be carried over and deducted in future tax years, subject to the following annual limitations.
The 2013 annual limitation on expensing is $500,000. A phase-out applies so that the $500,000 deduction is reduced dollar-for-dollar for amounts above $2,000,000 invested in qualifying property for the year.
In 2014, the $500,000 dollar limit is scheduled to plunge to $25,000 unless the enhanced amount is extended by Congress. The $2,000,000 phase-out is scheduled to drop to $200,000. Thus, a huge incentive exists for businesses to place qualifying property into service before the end of the tax year.
Qualifying personal property includes new or used depreciable tangible personal property purchased for use in the active conduct of a trade or business, as well as off-the-shelf computer software. Qualified real property includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
Tangible Property Regulations
Recently, the Internal Revenue Service released regulations that explain when businesses can elect to immediately deduct expenses for acquiring, maintaining, repairing and replacing tangible property that would otherwise have to be capitalized.
To qualify for the election, a business must have written accounting procedures for expensing amounts paid or incurred for such property and treat such amounts as expenses in accordance with those procedures.
The amount that can be expensed under the election depends on whether the business has an Applicable Financial Statement (“AFS”), which include financial statements: (1) filed with the Securities and Exchange Commission, (2) provided to a federal or state government or agency other than the SEC or IRS, and (3) certified audited financial statements used for credit purposes, reporting to owners or other substantial nontax purposes.
If a business has an AFS, the regulations allow up to $5,000 to be expensed per invoice. For businesses without an AFS, the regulations allow up to $500 to be expensed per invoice.
The regulations apply to tax years beginning on or after January 1, 2014. Thus, businesses that wish to take advantage of the election will need to put accounting procedures into place before the start of the 2014 tax year.
The IRC currently allows noncorporate businesses to exclude from gross income 100 percent of the gain realized from the sale or exchange of qualified small business stock held for more than five years if the stock is acquired before January 1, 2014.
The 100 percent exclusion will dip to 50 percent for qualifying stock acquired after December 31, 2013 unless legislation is passed to extend the 100 percent exclusion.
To be considered qualified small business stock, the stock must be purchased from a domestic C corporation that is engaged in an active trade or business and has gross assets which do not exceed $50 million when the stock is purchased.
Thus, C corporations with assets under $50 million seeking a cash infusion should encourage investors to purchase stock before the end of the year.
Cheryl L. Johnson and Jeffrey A. Cohen are attorneys with Westport-based Levett Rockwood P.C. T heir respective practices focus in the areas of taxation and business law. They can be reached at 203-222-0885.
