It seems to happen every year. The fate of several soon-to-expire tax breaks for small businesses remains unknown.
Strategy: Take full advantage of the key tax breaks that suit your business needs while they’re still available.
If Congress eventually passes legislation extending these tax incentives, it’s likely you’ll be no worse off than if you had waited.
Here are seven of the “biggest and best” on the books.
1. Nail downdeductions. Under the American Taxpayer Relief Act of 2012 (ATRA), your business can currently deduct up to $500,000 of qualified assets placed in service in 2013, subject to a $2 million phaseout threshold. If the maximum allowance isn’t extended, it will plummet to a paltry $25,000 in 2014, with just a $200,000 phaseout threshold.
2. Reward yourself with a tax bonus. Bonus depreciation has been around for several years in various forms. The current version allows a business to claim a 50% bonus, on top of other available tax breaks like Section 179 (see No.1) for qualified new (not used) assets placed in service in 2013. This tax break generally expires in 2014, although the deduction continues through next year for certain types of property with longer production periods, such as aircraft.
3. Speed up other write-offs. It generally takes almost 40 years—39 to be exact—to write off the cost of improvements to business buildings. But you can elect a faster write-off period of 15 years for the cost of qualified leasehold improvements, qualified retail improvements and qualified restaurant buildings and improvements, using the straight-line method. Unless it is extended, this tax break expires next year.
4. Take aim at worker credits. If your business qualifies, it can claim the Work Opportunity Tax Credit (WOTC) for hiring from certain “targeted groups.” The credit is generally equal to 40% of first-year wages up to $6,000, for a maximum of $2,400 credit per worker (or up to $9,600 for certain disabled veterans). ATRA extended the WOTC, but only through 2013.
5. Investigate the research credit. Your firm can claim a credit, as extended and modified by ATRA, for qualified research expenses incurred in 2013. The credit is equal to 20% of qualified expenses over a base amount or you can elect a simplified 14% credit. Although the credit has been extended numerous times, the estimated cost of $14.3 billion over 10 years is a deterrent.
6. Cut down the BIG tax. When a C corporation converts to S corporation status, it may have to pay a “built-in gains” (BIG) tax if it holds appreciated property. The minimum holding period to avoid the BIG tax was gradually reduced from 10 years to seven years to five years. ATRA temporarily extended the shorter five-year period for sales occurring through 2013.
7. Acquire qualified small business stock. Assuming certain requirements are met, you can exclude up to 100% of the taxable gain that would normally be recognized on a future sale of qualified small business stock (QSBS). This tax break was scheduled to expire after 2011, but was prolonged by ATRA to cover shares issued in 2012 and 2013. So the window of opportunity for QSBS may be closing at the end of this year.
Tip: Congress may or may not get around to addressing these issues before 2014. We’ll keep you posted.
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