Do Not Let the Ball Drop on Year-End Tax Planning

It is never too early to start planning your New Year’s Eve celebration.  More importantly, with various tax incentives scheduled to expire once the ball drops in 2012, it’s also never too early to consider year-end tax planning.  Currently, there are many expired and expiring tax provisions.  We will take a look at three of them as they relate to your year-end hiring and purchasing decisions.

1. The incentive deadline to hire vets under the VOW to Hire Heroes Act of 2011 is nearing.  A tax credit of up to $9,600 is available only if the qualified veteran is hired and begins work before January 1, 2013.  A number of factors determine the credit amount and more information is available on the IRS website.
2. Bonus depreciation is another incentive with its expiration approaching.  In recent years, Congress has used bonus depreciation to encourage economic growth.  Currently, a special 50% bonus deprecation allowance is available for qualified property.  That means 50% of the cost of new property is immediately deducted with the remainder being depreciated over the remaining depreciable life.  This special allowance is scheduled to expire after 2012.  (Note:  The special 15-year life for qualified restaurant property previously expired on January 1, 2012.)
3. Many taxpayers have grown accustomed to Section 179 expensing and the ability to deduct the entire amount of qualified fixed asset additions in the year of purchase.  The dizzying part of Section 179 expense is the annual gyrations of the maximum amount.  In 2011, the limit was $500,000; in 2012, the limit is $139,000.  The limit is scheduled to drop to $25,000 in 2013.  Businesses may want to accelerate purchases into 2012 to take advantage of the higher limit amount.

Some added complications – Making these purchasing decisions in light of the shifting landscape of income tax rates might be just as difficult as it is to get a taxicab on New Year’s Eve.  The so-called “Bush-era” tax rates are scheduled to expire after 2012.  The ordinary income tax rates currently ranging from 10% to 35% are scheduled to rise in 2013 to pre-2001 levels, with rates ranging from 15% to 39.6%.

As the ball is dropping on the veteran hiring credit, employers should act soon if they are planning on hiring.  When it comes to the purchasing decision it may also make sense to act soon; however, in some cases, it could be beneficial to defer certain purchases until 2013 as a hedge against the possible tax rate increases.  The President and Congress are currently considering the framework of possibly extending the current tax rates, so please stay tuned and as always feel free to contact ORBA with your questions.