Don’t Miss Out – Uncle Sam’s Property and Equipment Sale Expires on December 31, 2011

By Mark Kingery

Christmas came early for the American taxpayer, and late for those CPA’s who actually enjoy being able to use the last quarter to talk intelligently with their clients. On December 19, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Obama Tax Cut Act”). This law, among other things, extended the current income and capital gain tax rates through 2012 and also reduced the employee social security contribution by 2% in 2011. The extension of the aforementioned tax rates to all taxpayers obviously created a great deal of angst for many who clearly believe in the adage coined by Martin A. Sullivan that “There may be liberty and justice for all, but there are tax breaks only for some." Despite this, the bill passed as enough of our elected officials realized that absent its passage, virtually every American tax payer would have seen their taxes increase in 2011. So the good news is twofold: first, your tax withholding won’t shock you in January 2011; second, you will have an increase in your net pay to deal with those pesky credit card bills that seem to manifest each January.

In addition to encouraging American consumers to do what they do best (i.e. shop), one of the major goals of the Obama Tax Cut Act, and the Small Business Jobs and Credit Act of 2010 passed in September 2010 (the “Small Business Act”) was to incentivize businesses to purchase property and equipment. The Small Business Act increased the amount of qualifying property and equipment that can immediately be deducted for income tax purposes (i.e. Section 179 expenses) in 2010 and 2011 to $500,000, of which $250,000 can be for the cost of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. This election is subject to a dollar for dollar phase out for each dollar expended in excess of $2,000,000. In effect, your kindly Uncle Sam has agreed to pay up to one third of the cost of such qualifying property in the year you acquire it.

The downside of Section 179 is that such election can only be taken for businesses that have taxable income (after such deductions). Not to worry – the Obama Tax Cut Act allows businesses to deduct 100% of the cost of all qualifying expenditures (i.e. bonus depreciation) made between September 8, 2010 and December 31, 2011 irrespective of whether such businesses report taxable income. However, and unlike Section 179 deductions, bonus depreciation may only be used for new property.

So in a perfect world, a business would write off $250,000 of qualifying property and equipment acquired before September 8, 2011 (at which time bonus depreciation was only allowed for one half of the expenditures) and then bonus depreciation and/or Section 179 would be elected for qualifying assets (including qualifying leaseholds) acquired between September 8, 2010 and December 31 2011. In addition to reducing current period taxes, the use of bonus depreciation could also enhance cash flow by generating a taxable loss that might result in the business being able to recoup all or a portion of taxes it paid in its two preceding taxable years. And finally, if carry backs are not determined to be beneficial, or if you are one of those people that think tax rates are going up in the future, you can carry forward the losses to offset taxable income generated over the next twenty years.

Clearly, the new tax laws are generous and may not only result in additional investments, but also individuals and businesses feeling better about their economic well-being and cash flow. As F. J. Raymond said, "Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund."

In addition to the rules mentioned above, the Obama Tax Cut Act extended various credits, including those relating to certain research and development activities and the “Work Opportunity Credit”,(which provides credits to employers who hire people in certain targeted groups (e.g. unemployed veterans and disconnected youth), through December 31, 2011.

We’re quite confident that you may be thinking – this can’t be right because the concept and math seem too simple for Congress to have written and passed these laws. Well, as you might have guessed from the overuse of the word “generally” and “qualified” in this article, there are certain limitations and exclusions that apply. So to remain in the good graces of our fellow practitioners, as well as your business partners, we recommend you consult your tax advisor before you borrow millions to take advantage of these opportunities.

About the Author
Mark Kingery, CPA, is a shareholder with Kingery & Crouse, P.A., Certified Public Accountants, located in Tampa, Florida.  Mark has over twenty five years of public accounting experience and manages the accounting and audit departments.   During his tenure in public accounting, Mark has served a wide variety of clients, both public and private.  Kingery & Crouse, P.A. is a full service public accounting firm with a staff of dedicated professionals providing audit (including SEC), tax and accounting services. You may contact Kingery & Crouse at (813) 874-1280 or find us on the web @ www.tampacpa.com.