By Barbara Weltman
Small Business Administration Guest Blogger
WASHINGTON (Oct. 28, 2013) — Dozens of federal tax breaks are scheduled to end Dec. 31 unless Congress extends them. No one knows for sure which ones, if any, will apply next year, so business owners should explore expiring rules and take advantage of them while they can. Here are some expiring breaks that may appeal to you:
Break 1: Faster write-offs for buying needed equipment.
Need to upgrade your computers? Provide staff with tablets and smartphones? Add new machinery? You have two better ways to deduct your costs this year than merely depreciating the costs over a number of years:
♦ Deduct up to $500,000 of the cost of qualified equipment (whether new or pre-owned) this year as long as you’re profitable. Next year, the deduction limit is scheduled to be $25,000.
♦ Deduct 50 percent of the cost of new qualified equipment, even if it adds to or creates a business loss. Next year, this deduction is set to disappear entirely.
Note: You can use either break even if you finance your purchase in whole or in part.
Break 2: Faster write-offs for improving your facilities.
Usually when you make capital improvements to your workspace, the cost can only be depreciated over a period of 39 years. However, for improvements to leaseholds (by the lessor, lessee or subleasee), restaurants, and retail establishments, you can use any or all of the following rules as long as the improvements are completed before the end of this year:
♦ $250,000 first-year expensing for eligible improvements
♦ 50 percent bonus depreciation for eligible improvements
♦ 15-year amortization period for any costs not deducted with first-year expensing or bonus depreciation
Find details about write-offs for qualified property in IRS Publication 946.
Break 3: Tax credits for hiring certain workers.
If you need more employees on your payroll and have projected the cost of this hiring after factoring in future health care obligations, think about hiring from certain targeted groups. Doing this may entitle you to a tax credit that can be used to offset your tax bill:
Work opportunity credit for hiring certain disadvantaged workers, including certain veterans. Make sure that you timely submit IRS Form 8850 to your state work force agency to get eligible workers certified as entitling you to the credit.
Indian employment credit if you hire an enrolled member, or spouse of an enrolled member, of an Indian tribe who performs services within an Indian reservation.
Empowerment employment credit if your business is located within a federally-designated empowerment zone.
The amount of each credit and eligibility rules vary, but each requires that you hire an eligible employee before the end of this year.
Break 4: Exclusion for gain on certain stock.
If your business is a C corporation involved in technology, manufacturing, retail, or wholesale and is seeking new investors, consider issuing new stock before the end of the year. If the stock meets the definition of qualified small business stock and investors hold it for more than five years, then all of their gain will be tax free. Stock issued next year will give investors only a 50 percent exclusion for their gain unless the current 100 percent exclusion is extended.
Note: You can issue qualified small business stock to employees as payment for services (i.e., year-end bonuses) to enable them to reap tax-free returns.
Break 5: Tax credit for doing research
If your company does research to create a new product, you may be eligible for a tax credit of up to 20 percent of increased research expenses. This credit is set to expire at the end of this year unless Congress extends it. While an extension is probable — the research credit has been extended 14 times since its inception in 1981 — it’s still smart to use the credit while you can.
The credit is not limited to research to create products for sale. It also applies to research for internal processes (e.g., internal use software) that improve your business operations. For more details see the instructions to IRS Form 6765.
A bi-partisan Congressional budget committee is supposed to decide by Dec. 13 what measures (including tax rules) will apply for the future. By that time, it may be too late for certain actions that would otherwise be helpful for your business and tax savings this year. Meet with your tax advisor to explore which of these or other expiring tax breaks you may want to use before the end of the year, and what steps you need to take to nail them down now.