Did you know many temporary tax provisions are scheduled to expire at the end of 2013 under current law? Most of the provisions set to expire in 2013 have been part of past temporary tax extension legislation. These ‘tax extenders’ are often extended by Congress for only one or two years. Since Congress has been enacting tax provisions on a temporary basis, it is vital to be informed and understand how you and your business can benefit.
The current business provisions that are set to expire after 2013 include the research and experimentation (R&D) tax credit, the renewable energy production tax credit, the tax deduction for energy-efficient commercial buildings, the work opportunity tax credit, enhanced expensing for small businesses and 15-year straight-line recovery for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.
One of the most commonly used tax provisions would be the enhanced expensing for small businesses. What is enhanced expensing? Business enhanced expensing is also known as Section 179 expensing and bonus depreciation expensing. If your business had taxable profit in the given tax year, you could possibly elect up to a $500,000 deduction on the first $2,000,000 of capital assets placed in service. This limit is only good for the 2013 tax year. The 2014 limits are set to drop drastically to only a $25,000 deduction on the first $200,000 of capital assets put into service. The bonus depreciation expense for new assets in 2013 is an automatic 50% deduction on any new assets purchased and placed in service if Section 179 was not elected or was not able to have been taken. This deduction can be used even if the business had no taxable profit for the year. The 50% bonus depreciation provision is set to expire and drop to 0% beginning in 2014.
Be aware that year-end tax planning for 2013 also includes new and unwelcome taxes along with a few higher tax rates. Here is a brief breakdown of those changes:
- There is a new 39.6% tax bracket if your tax filing status is single and your taxable income is over $400,000 or you are married filing jointly with taxable income over $450,000. Any taxable income over these thresholds will be taxed in this new bracket. This is an increase from the once top bracket of 35%.
- If your taxable income is the same as listed above ($400,000 single and $450,000 jointly), then your long-term capital gains above this threshold are subject to 20% tax. This is an increase from the 15% tax rate that everyone had enjoyed no matter how large your taxable income.
- There is a new Net Investment Income Tax of 3.8% on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over $200,000 for single taxpayers or $250,000 for married filing jointly.
- Yet another new tax is the 0.9% Medicare Surtax on wages. The 0.9% surtax is a tax imposed on single taxpayers with over $200,000 of wages or self-employed income. This tax is adjusted for married filing jointly taxpayers at $250,000 of wages or self-employed income. This Medicare Surtax is sure to cause complications for employers, as well as employees and self-employed individuals.
There has never been a better time to consider and evaluate your tax planning BEFORE year end.
Kevin J. Deardorff, CPA, MBA is a Manager in the Naples, Florida office of Hill, Barth & King LLC (HBK) and has been with the firm since 2003. Kevin has extensive experience in tax planning and business consulting. He provides a variety of accounting and tax services to clients ranging from individuals to small to medium size businesses. He can be reached via email ('firstname.lastname@example.org') or by phone at 263-2111.