More taxing times ahead

by Bernadette Starzee
Published: December 7, 2011

Several federal tax initiatives were in affect this year to improve companies’ cash flow, with the goal of stimulating business growth and job creation. But heading into 2012, many of these measures are set to be reduced or disappear altogether.

“When stimulus programs were first enacted, they were intended to be a short-term solution,” said Larry Karmel, a tax partner at the Metis Group, an accounting firm with an office in Plainview. “The thinking was that the economy would be doing better by now.”

There is plenty of debate about whether tax incentives set to expire at the end of this year or next year should be extended, and there’s no telling how the 2012 election will impact tax regulations. This creates more uncertainty in an already rocky business environment, making it difficult to plan for the future.

“We have seen a slight increase in hiring among our clients, but companies are keeping things close to the vest and hesitating to make big investments until they feel more confident that things are turning around,” Karmel said.

One of the most popular tax incentives enjoyed by businesses this year is bonus depreciation on qualified, depreciable, new property that’s acquired and placed into service by the end of 2011, said John Ingrassia, a director in the Melville office of the accounting firm Holtz Rubenstein Reminick. Firms purchasing qualified property, such as computers or machinery, by year’s end can write off 100 percent as depreciation in the first year, rather than doing so for multiple years over the life of the asset.

Firms taking advantage of this incentive realized significant cash flow benefits. “A business that acquired and placed in service $10 million of qualified property that elects to take advantage of the 100 percent bonus depreciation deduction could save $3.5 million in taxes at the top corporate tax rate of 35 percent,” said Thomas Theodoropoulos, a tax partner who splits his time between KPMG’s Melville and Manhattan offices. “These savings could be put to good use – for example, capital investment and employee expansion.”

For 2012, the bonus depreciation is set to dip to 50 percent, still significantly greater than the normal depreciation, which varies depending on the number of years a particular type of property should be depreciated. “As we get closer to the end of the year, our clients are aware that the bonus depreciation is being reduced,” Ingrassia said. “If they’re anticipating that they will need to purchase something soon, we’re encouraging them to close it by the end of the year.”

Similar to the bonus depreciation, government stimulus programs generously increased the deduction limits allowed under Code Section 179. In tax years beginning in 2010 or 2011, companies could claim up to a $500,000 depreciation deduction of qualified property, as long as the total amount of equipment acquired did not exceed $2 million. This initiative was geared toward small and mid-sized businesses; if companies purchase more than $2 million worth of equipment, the amount of the deduction declines, based on how far over the threshold the purchase goes. Eligible assets include computers, office equipment and furniture, as well as leasehold improvements, which qualify for a deduction of up to $250,000.

Caps are set to decrease in 2012, said Jill Schneider, tax director of MayerMeinberg, the Syosset-based accounting firm, who noted the deduction limit will be $139,000, with a total purchase ceiling of $560,000 next year. The deduction and ceiling are scheduled to decrease further in 2013, she added.

“If you have a machine that is going, it’s a good time to replace it,” Schneider said. Unlike bonus depreciation, which can only be used for new equipment, the Section 179 deduction applies to both new and used equipment, Schneider noted.

The Code Section 199 deduction – based on qualified production activities income resulting from domestic production – which was 9 percent in 2011 and is scheduled to continue at the same rate next year, gives companies an incentive to manufacture qualified tangible personal property, computer software, sound recordings and other products domestically.

Through the end of 2011, the Work Opportunity Tax Credit is in place to encourage employers to hire hard-to-employ individuals from nine targeted groups, such as qualified food stamp recipients and long-term family assistance recipients.

The WOTC is generally 40 percent of the qualified worker’s first-year wages up to $6,000 (or higher or lower for certain groups), and applies to qualified employees after working 400 hours, Theodoropoulos said. He added a 25 percent credit applies if the employees work less than 400 hours. At this point, the WOTC is set to expire at the end of this year, except in the case of qualified veterans, Schneider noted.

There has been much debate over whether the payroll tax holiday – which increased the take-home pay of individual workers – will be extended into the new year. Rather than having the usual 6.2 percent in taxes for social security deducted from their paycheck, workers have only had 4.2 percent deducted this year, for the first $106,800 of compensation.

But unless government acts, the holiday will be over, with workers seeing a reduction in their discretionary income in 2012.