Year-End Tax Planning For Your Business

We have reached that time of year when businesses need to consider year-end tax planning.  This year is particularly challenging because Congress has enacted a series of tax breaks which are generally scheduled to expire after 2011.  Unless Congress enacts to extend these provisions, the following business tax breaks will generally expire (or become less beneficial) after 2011: 100% §168(k) bonus depreciation; larger and expanded §179 deduction; 100% gain exclusion for “qualified small business stock;” and relaxation of the S corporation built‑in gains tax rules. There have also been recent IRS releases and court cases that address: the ability of self-employed individuals, partners, and S corporation shareholders to deduct health insurance premiums (including Medicare premiums); whether compensation paid to S corporation shareholders is “reasonable”; and the S/E tax exposure of owners of a limited liability partnership.

In the following weeked, we will discuss a number of key areas for business owners to analyze:

• Taking Maximum Advantage of the 100% §168(k) Bonus Depreciation Deduction And §179 Deduction
• Other "Business" Tax Breaks Expiring After 2011
• Other Recent Developments Impacting Business Planning
• Tradtional Year-End Planning for "S" Corporations
• Traditional Year-End General Business Planning

Before going any further, it should be noted that although this blog contains many planning ideas, you cannot properly evaluate a particular planning strategy without calculating the overall tax liability (including the alternative minimum tax) with and without the strategy. In addition, this letter contains ideas for Federal income tax planning only. You should also consider any state income tax consequences of a particular planning strategy. We recommend that you call either your CPA or our firm before implementing any tax planning technique discussed in this letter, or if you need more information.

Taking Maximum Advantage of the 100% §168(k) Bonus Depreciation Deduction And §179 Deduction 

The two most significant business tax breaks expiring after 2011 are: 1) the 100% §168(k) bonus depreciation deduction, and 2) the expanded §179 deduction. These two provisions offer unprecedented up-front deduction opportunities for businesses considering significant capital expenditures.

The 100% §168(k) Bonus Depreciation Deduction Generally Expires After 2011. For qualifying new business property placed-in-service from 2008 through September 8, 2010, businesses were allowed a 50% first-year §168(k) bonus depreciation deduction. The Tax Relief Act of 2010 increased this deduction to 100% for “qualifying business property” acquired and placed‑in‑service after September 8, 2010 and through December 31, 2011. In other words, for §168(k) property acquired and placed-in-service during this period, the entire cost of the property can be fully deducted. For qualifying §168(k) property placed-in-service during 2012, the §168(k) bonus depreciation deduction reverts back to 50%, and generally expires altogether for property placed-in-service after 2012.

The following paragraphs summarize the rules for determining if an asset qualifies for the §168(k) deduction:

• Qualifying 50%/100% §168(k) Bonus Depreciation Property. Property qualifying for the §168(k) bonus depreciation deduction is generally new property that has a depreciable life for tax purposes of 20 years or less; examples include: machinery and equipment, furniture and fixtures, cars and light general purpose trucks, sidewalks, roads, landscaping, depreciable computer software, and “qualified leasehold improvements. Planning Alert! These are only examples of qualifying property. If you have a question about property that we have not mentioned, call us and we will help you determine if it qualifies. 
• Qualified Leasehold Improvement Property. Even though improvements to a commercial building generally do not qualify for the §168(k) bonus depreciation deduction, "qualified leasehold improvement property" (QLHIP) does qualify, if it is "acquired QLHIP and placed-in-service" after September 8, 2010 and before 2012. QLHIP is generally any capital improvement to an interior portion of a building that is used for nonresidential commercial purposes, provided that 1) the improvement is made under or pursuant to a lease either by the lessee, sublessee or lessor of that interior building portion; 2) the interior building portion is to be occupied exclusively by the lessee or sublessee; and 3) the improvement is placed-in-service more than 3 years after the date the building was first placed-in-service. Planning Alert! QLHIP does not include any improvement attributable to: the enlargement of the building; any elevator or escalator; any structural component benefitting a common area; or the internal structural framework of the building. Caution! Leasehold improvements made to property leased between certain related persons will not qualify.
• Newly‑Constructed Or Renovated Buildings And Cost Segregation Studies. Depreciable components of newly‑constructed or newly‑renovated buildings that are properly classified as depreciable personal property under a cost segregation study are generally depreciated over 5 to 7 years. Since these non-structural components have a depreciable life of 20 years or less, they should qualify for the 100% 168(k) bonus depreciation if "acquired and placed-in-service" after September 8, 2010 and before 2012. Planning Alert! In certain situations, these components of the building might qualify for the 100% bonus depreciation deduction even if the construction or renovation of the building itself began before September 9, 2010, provided you make a timely election to apply the 100% §168(k) acquisition rules separately to each component.
• 100% 168(k) Bonus Depreciation Property Generally Must Be “Placed-In-Service” By December 31, 2011.   Whether your business has a “calendar” or “fiscal” tax year, in order to get the 100% §168(k) bonus depreciation deduction, you must place the property in service no later than December 31, 2011.  Generally, if you are purchasing “personal property” (equipment, computer, vehicles, etc.) “placed-in-service” means the property is ready and available for use. To be safe, qualifying property should be set up and tested on or before the last day of 2011. On the other hand, if you are dealing with building improvements (e.g., qualified leasehold improvement property, non-structural components of a building), a certificate of occupancy will generally constitute placing the building or improvement in service.

§168(k) Bonus Depreciation For Passenger Automobiles, Trucks, And SUVs.   For a business auto first placed-in-service in calendar year 2011, the maximum first-year depreciation deduction is generally capped at $3,060 ($3,260 for trucks and vans not weighing over 6,000 lbs). However, Congress previously increased the first-year depreciation cap for vehicles qualifying for the §168(k) up-front bonus depreciation deduction by $8,000 for 2008 and 2009. The Tax Relief Act of 2010 extended this $8,000 increase through 2012 for new vehicles otherwise qualifying for the §168(k) bonus depreciation deduction. For example, let’s say your business is planning to purchase a new vehicle weighing 6,000 lbs or less that will be used 100% for business purposes. If you buy the new car and place it in service during 2011, your first‑year depreciation deduction will be $11,060. Heavy Vehicles. “Heavy Vehicles” (i.e., trucks, vans, and SUVs with loaded vehicle weights over 6,000 lbs.) are generally exempt from the passenger auto annual depreciation caps discussed above. Therefore, if you buy a new “heavy” truck or SUV and use it 100% for business in 2011, you could deduct the “entire cost” for 2011 using the §168(k) deduction.
Expanded §179 Deduction.  For the last several years, Congress has temporarily increased the maximum §179 up-front deduction for the cost of qualifying “new” or “used” depreciable business property. For property placed-in-service in tax years beginning in 2010 and 2011, the overall cap was increased from $250,000 to $500,000, and the beginning of the deduction phase-out threshold was increased from $800,000 to $2,000,000. In addition, for 2010 and 2011 purchases, a taxpayer may elect for “qualified real property” to be §179 property. Prior to this change, real property generally did not qualify for the §179 deduction. Caution! For tax years beginning after 2011, the maximum §179 deduction is currently scheduled to drop back to $139,000 and there will be no §179 deduction for “qualified real property.”

•   Up To $250,000 Of “Qualified Real Property” Temporarily Qualifies As §179 Property.  Traditionally, the §179 deduction has been limited to depreciable, tangible, “personal” property, such as equipment, computers, vehicles, etc. However, businesses may “elect” to treat qualified “real” property as §179 property, for property placed-in-service in tax years beginning in 2010 or 2011. The maximum §179 deduction that is allowed for qualified real property is $250,000. “Qualified Real Property” includes property within any of the following three categories: 1) Qualified Leasehold Improvement Property (generally capital improvements to an interior portion of certain leased buildings that are more than 3 years old and that are used for nonresidential commercial purposes); 2) Qualified Retail Improvement Property (generally capital improvements made to certain buildings that are more than 3 years old and which are open to the general public for the sale of tangible personal property); and 3) Qualified Restaurant Property (generally capital expenditures for the improvement, purchase, or construction of a building, if more than 50% of the building's square footage is devoted to the preparation of, and seating for, the on‑premises consumption of prepared meals). Caution! If you want to take the §179 write-off for “qualified real property” for your tax year beginning in 2011, you must place the building (or improvements) in service by the end of your 2011 tax year.  A certificate of occupancy will generally constitute placing the building or an improvement to a building in service.
•     Planning Alert! The §179 rules for “qualified real property” are extremely tricky and time sensitive. Furthermore, the depreciation rules become even more complicated if you are planning to do a cost segregation study where you break out nonstructural components of a building for depreciation purposes. Please call our firm if you are improving, acquiring, or constructing a building. We will help you devise a strategy that will maximize your depreciation deductions, including the §179 deduction.
  

Tune in next week as we discuss the additional tax planning topics as listed aboce.  If you have any questions the in meantime, please contact our firm at 704.544.8429

Until then,  Happy Turkey Day to you all!

brad@mcarthurco.com

704.544.8429

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