Tuesday, October 25, 2011

As stated by the IRS through their release dated October 20, 2011, many tax benefits in 2012 have been adjusted due to inflation metrics.  For the 2012 tax year, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation.  The adjustments discussed below are for the 2012 tax year, meaning January 1, 2012 through December 31, 2012 with tax filings due, generally, April 15, 2013. 

By matter of law, dollar amounts attached to various IRS provisions are revised on annual basis to keep “pace” with inflation.  Some of the highlights are as follows for the most recent release of changes:

·         Personal and Dependent Exemption – Up $100 to $3,800 for per exemption.
·         Standard Deduction –
o   Up $300 for those Married Filing Jointly to $11,900
o   Up $150 for those filing Single to $5,950
o   Up $200 for those filing as Head of Household to $8,700
·         Tax brackets widened – For a complete listing of your bracket, please follow this link www.irs.gov/pub/irs-drop/rp-11-52.pdf

A few other changes that I want to highlight are as follows:

·         Adoption Credit – The maximum credit allowed is the amount of qualified adoption expenses up to $12,650 subject to phase out limits for income in excess of $189,710 to $229,710.
·         Eligible Long-Term Care Premiums – In order to be includible in the term “medical care” the limits on premiums are as follows as determined by age group:
o   Age 40 or less -- $350
o   Age 40 to 50 -- $660
o   Age 50 to 60 -- $1,310
o   Age 60 to 70 -- $3,500
o   Age 70 or older -- $4,370

As always, if you have any questions about your tax position for 2011 or as you we move into 2012, please contact your CPA directly or our Firm for a consultation.  Happy Halloween to all!

Wednesday, October 12, 2011

There's Still Time...

....to take advantage of qualified real property expensing.

Historically, Code Sec. 179 expensing has been available only for tangible personal property, but the Small Business Act of 2010 provides an exception for certain types of real property. Specifically, under Code Sec. 179(f)(1), for any tax year beginning in 2010 or 2011, a taxpayer may elect to treat up to $250,000 of qualified real property as Code Sec. 179 property. Unless Congress changes the rules, otherwise eligible property placed in service in tax years beginning after 2011 generally will have to be depreciated over 39 years via the straight line method.

What is qualified real property for expensing purposes? Qualified real property is:

(A) qualified leasehold improvement property described in Code Sec. 168(e)(6)

(B) qualified restaurant property described in Code Sec. 168(e)(7)

(C) qualified retail improvement property described in Code Sec. 168(e)(8)

The qualified property must be depreciable, acquired for use in the active conduct of a trade or business, and can't be certain ineligible property.

Qualified Leasehold Improvement Property

As one of the above categories that qualifies as qualified real property component, qualified leasehold improvements are a hot button topic with many of our clients as they look to improve and grow their business. A qualified leasehold improvement property is an interior building improvement that qualifies for bonus first-year depreciation, except that if a lessor makes an improvement that is a qualified leasehold improvement, it can't be qualified leasehold improvement property to any subsequent owner, subject to exceptions.

In general, qualified leasehold improvement property includes interior improvements to a building if:

(1) The improvement is Code Sec. 1250 property.

(2) The improvement is made “under or pursuant to a lease”

(3) The portion of the building is to be occupied exclusively by the lessee

(4) The improvement is placed in service more than three years after the date the building was first placed in service.

The Code doesn't define what types of building improvements are eligible to be treated as qualified leasehold improvement property. Rather, it lists the types of property that can't be so treated. Under Code Sec. 168(k)(3)(B), qualified leasehold improvement property does not include any improvement for which the expense is attributable to:

the enlargement of the building,

any elevator or escalator,

any structural component benefiting a common area, and

the internal structural framework of the building.

What kinds of improvements are qualified leasehold improvements after eliminating those that are ineligible? The following types of improvements would appear to qualify, if they benefit the tenant's space only rather than a common area:

(1) electrical or plumbing systems (including a sprinkler system);

(2) permanently installed lighting fixtures; and

(3) ceilings and doors.

Two breaks apply to qualified leasehold improvement property bought and placed in service this year. It qualifies for up to $250,000 of expensing under Code Sec. 179, and there's a 100% bonus first-year depreciation allowance under Code Sec. 168(k)(2)(A) for the portion of such property that is not expensed.

Is it Real or Personal?

A number of assets installed in commercial buildings are personal property depreciable over five or seven years under MACRS. As a result, these assets are subject to the general expensing rules for personal property, rather than the more-restrictive rules for qualified real property. Shorter-lived assets also are potentially eligible for the bonus first-year depreciation allowance if bought and placed in service this year. These shorter-lived assets include carpeting, movable and removable partitions, and electrical and plumbing equipment necessary for the operation of specialized equipment (rather than for overall building maintenance and operation).

Identifying whether or not your business is eligible for these write-offs is an important task in determining your tax liability for the year and one that should bear importance on your business and tax planning. If you've made these sort of improvements, have a discussion with your CPA about how they plan to treat the items. If you are planning these sort of improvements, know that time is of the essence and discuss with your CPA the rules that govern your improvements. These elections can provide a positive tax outcome; however, like with any deductions for your business, the business purpose cannot be forgotten. If you have questions regarding this information, please reach out to our Firm and we will be glad to assist.

brad@mcarthurco.com
704.544.8429