The document discusses year-end tax planning considerations for 2012 that are impacted by uncertainties created by Congress's delay in addressing expiring tax rates and extensions of other tax benefits. It highlights that year-end strategies must account for possible changes to individual income tax rates, capital gains and dividend tax rates, and new Medicare contribution taxes taking effect in 2013. Specific strategies discussed include accelerating capital gains into 2012 to avoid higher potential future rates, resetting stock basis, and timing dividends and corporate liquidations.
CBIZ Manufacturing & Distribution Quarterly Newsletter - Feb 2020
2012 Year-End Tax Planning Highlights Possible Hikes In Individual Tax Rates
1. CCH Tax Briefing
2012 Year-End Tax Planning
October 4, 2012 Special Report
Highlights
Tax/Budget Uncertainties Impact
Possible Hikes In Individual
2012 Year-End Strategies
Y
Tax Rates
ear-end tax planning is always compli- the tax rates – a major driver of year-end
cated by the uncertainty that the fol- strategies – will not get any lower than they
3.8% Medicare Surtax On lowing year may bring and 2012 is no are right now. Effectively, the choice may
Net Investment Income exception. Indeed, year-end tax planning in come down to paying the tax now or later.
2012 is one of the most challenging in recent
Reduced Dividend Rate memory. A combination of events – includ- Comment. Democrats and Republicans
In Jeopardy ing possible expiration of some or all of the appear to be taking a wait-and-see ap-
Bush-era tax cuts after 2012, the imposition proach to deciding the fate of the expir-
Techniques To Reset Basis of new so-called Medicare taxes on invest- ing tax provisions and the spending cuts
ments and wages, doubts about renewal of until after Election Day. Alternatively,
many tax extenders, and the threat of mas- the lame-duck Congress could punt the
Over 40 Expiring Extenders sive across-the-board federal spending cuts tax provisions to the new Congress that
– have many taxpayers asking how can they will meet in January 2013. To compli-
Post-Election Triggers prepare for 2013 and beyond … and what cate matters, the Budget Control Act of
to do before then. The short answer is to 2011 imposes across-the-board spending
Eleventh-Hour Strategies quickly become familiar with the expiring tax cuts (called “sequestration”) after 2012.
incentives and what may replace them after To avert the spending cuts, lawmakers
2012 … and to plan accordingly. Year-end must make up revenue somewhere else.
planning for 2012 requires a combination of User fees and other “non-tax” revenues
multi-layered strategies, taking into account can only go so far. Tax incentives, espe-
INSIDE a variety of possible scenarios and outcomes. cially for higher-income individuals and
businesses, may be on the chopping block
Income Tax Rates.................................... 2 This Tax Briefing covers year-end tax plan- before year-end.
Capital Gains/Dividends....................... 2 ning considerations that are especially
unique to 2012. Its focus is on aligning tra-
3.8 Percent Medicare Tax...................... 4 ditional year-end techniques with strategies INDIVIDUAL PLANNING
for dealing with those uncertainties created
0.9 Percent Medicare Tax...................... 6 by Congress’s delay in addressing sunsetting Year-end tax planning for 2012 is compli-
Alternative Minimum Tax..................... 7 tax rates and the extension of other major cated by several unique factors connected to
tax benefits. Year-end strategies in response tax rates:
Education................................................. 8 to the new-for-2013 3.8 percent Medicare
contribution tax are also a focal point of this First, planning must account for the pos-
Estate/Gift Tax.......................................11 Tax Briefing. sibility of the expiring Bush-era income
Business Planning................................. 12 tax rates to move in one of four directions:
STRATEGY. Fence-sitting for some year- (1) complete sunset for all taxpayers, (2)
Health Care ........................................... 15 end strategies may not be possible in De- complete extension for all taxpayers, (3)
cember, or earlier, because of the time it sunset for higher-income individuals
takes transactions to be set into motion. only, or (4) sunset for millionaires only.
Other strategies can be held at the ready Second, the same four scenarios must
with trigger dates, but not executed until be considered in connection with sun-
more is known about how Washington setting Bush-era rates on capital gains
will act. Chances are good, however, that and dividends.
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3. October 4, 2012
3
mulate losses to offset future gains (which
may be taxed at a higher rate). The first Three Rate-Change Scenarios For 2013
consideration is to identify whether an
investment qualifies for either short-term
Complete Extension:
or long-term capital gains status, because
taxpayers must first balance short-term The existing rates for 2012 of 10%, 15%, 25%, 28%, 33% and 35% continue
gains with short-term losses and long- unchanged for 2013.
term gains with long-term losses. The
“wash sale rule” generally prohibits tax- Complete Sunset:
payers from claiming a tax-deductible loss If Congress fails to extend the Bush-era tax rates, the 2013 rates would change
on a security if they repurchase the same under the mandatory sunset provision based on the following schedule:
or a substantially identical asset within
30 days of the sale. Existing 2012 rate Sunset rate
10% and 15% 15%
Resetting basis. Wash sales are sales of stock
or securities in which losses are realized, but 25% 28%
not recognized, because the seller acquires 28% 31%
substantially identical stock or securities 30
33% 36%
days before or after the sale. Nonrecogni-
tion, however, applies only to losses; gains 35% 39.6%
are recognized in full.
Obama Proposal:
STRATEGY. Both a higher potential cap-
ital gains rate and the 3.8 percent Medi- The 2013 rates would change under President Obama’s plan released in February
care surtax (see, below) may be avoided 2012 (based on Joint Committee on Taxation projections):
by selling before year-end 2012 and then
immediately reinvesting. To buy back the Existing 2012 rate Obama rate proposal
same or substantially similar securities 10% and 15% 10% and 15%
both in kind and amount, of course, re-
25% 25%
quires an upfront cost in finding the cash
elsewhere to pay the tax or lowering the 28% 28%
amount reinvested. 33% 33% up to $200K ($250K joint returns),
inflation adjusted
To obtain long-term rates, investors must
hold the asset (such as stock and most other 33% 36% (above $200K/$250K joint returns)
property) for more than one year. The hold- 35% 39.6%
ing period begins on the day after the asset
is acquired and ends on the day the asset is
disposed of. Stock is generally treated as sold
on the trade date, the date the taxpayer enters sold the stock on December 1, 2012, the sells shares and then must obtain shares
into a contract to sell the stock. The trade taxpayer’s holding period is more than one to close out the transaction. If the stock
date should be distinguished from the settle- year, and gains (or losses) are long-term. price falls, so that the investor will realize
ment date, the date that the investor delivers a gain, the gain is realized on the trade
the stock certificate and receives payment. Example. A taxpayer bought stock on date, when the seller directs the broker to
The settlement date may be 3-5 days after the December 28, 2011 and sold it on De- purchase shares. If the price rises, so that
trade date. The trade date also determines cember 29, 2012. The settlement date is the investor will realize a loss, the loss is
(and ends) the holding period for the seller. January 3, 2013. The stock is treated as realized when the stock is delivered on the
sold on December 29, 2012; with any settlement date.
Example. A taxpayer bought stock on gains or losses recognized on the taxpayer’s
November 30, 2011 and sold it November 2012 return. Comment. In July, the House voted to ex-
30, 2012. The taxpayer’s holding period is tend the current capital gains and dividend
exactly one year, and any gain (or loss) is Caution. Different rules apply for a tax treatment through 2013. The Senate,
short-term. If the taxpayer instead had short sale, where the taxpayer initially however, voted to extend the current fa-
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CCH Tax Briefing
5. October 4, 2012
5
an estate, may subject a taxpayer to the Gross income from interest, dividends, percent rate as short-term capital gains.
3.8 percent tax. Other common tax plan- annuities, royalties, and rents, provided Gain recognition does undergo a netting
ning techniques, such as the conversion of this income is not derived in the ordi- process, however, as explained above.
a rollover IRA into a Roth account, may nary course of an active trade or business;
push an individual into 3.8 percent tax Gross income from a trade or business If property sold was not held in a trade or
territory for everyday stock sales and divi- that is a passive activity (within the business, any gain is NII. Further, if prop-
dends also realized in the same year (see meaning of Code Sec. 469); erty was held in a trade or business, but the
strategies, below). Gross income from a trade or business individual did not materially participate,
of trading in financial instruments or the gain is NII.
Estates and trusts. For an estate or trust, commodities; and
the Medicare surtax applies to the lesser of Net gain (taken into account in com- Comment. The material participa-
undistributed net investment income for the puting taxable income) from the dispo- tion standard also applies to a trade or
year, or the amount of AGI that exceeds the sition of property, other than property business held by an estate or trust, but
dollar amount at which the highest tax rate held in an active trade or business. it remains to be seen how the IRS will
bracket begins for estates and trusts (estimat- address material participation for a trust
ed at $11,950 for 2013). Thus, the Medicare Comment. The IRS is expected to pro- or estate. However, the IRS has taken a
surtax applies to a much lower amount for vide guidance on the categories of NII. tough approach in past litigation and
trusts and estates than for individuals. Guidance is needed to identify a busi- in rulings issued to taxpayers, treating a
ness of trading in financial instruments trustee’s management of a business as pas-
STRATEGY. Trusts and estates should or commodities. sive where the trustee hired others to run
make a point of distributing their net the business day-to-day.
investment income to their beneficiaries
rather than having it taxed to the trust “One of the most important If a partnership interest or stock in an S
or estate. A trust’s NII will be taxed at corporation is disposed of, gain or loss is
a low threshold (less than $12,000),
new areas of concern for taken into account only to the extent that
while the income received by a ben- year-end tax planning in gain or loss would be taken into account
eficiary is taxed only if the much higher by the partner or shareholder, if the entity
$200,000/$250,000 thresholds are ex-
2012 is the 3.8 percent had sold all of its properties immediately
ceeded. Trustees and beneficiaries should ‘unearned income Medicare before the disposition. In effect, only net
pay particular attention to this issue. gain or loss attributable to property that is
contribution’ tax on higher- not used in an active trade or business is
Examples (4). A trust has undis- income individuals, estates taken into account.
tributed NII of $5,000, and AGI of
$20,000. The Medicare surtax applies to
and trusts.” NII is the gross income or net gain from
the lesser of $5,000 or ($20,000 minus these items, reduced by allowable deductions
the $11,950 threshold, or $8,050). Thus, that are “properly allocable” to the gross in-
the Medicare surtax applies to $5,000. If Income is NII if the trade or business is a come or net gain. For rental real property, al-
the trust had distributed all of its NII to passive activity with respect to the taxpayer. locable expenses would probably include de-
its beneficiaries, its undistributed NII If the individual materially participates in preciation and operating expenses. Treasury
would have been zero, and the Medicare the trade or business, the income is excluded guidance is expected to address when items
surtax would not have applied. from NII. The Medicare surtax does not ap- are properly allocable to income and gains.
ply to other trades or businesses conducted
(5) A trust has undistributed NII of by a sole proprietor, partnership, or S cor- STRATEGY. For capital gain property,
$15,000 and AGI of $25,000. The poration. Income, gain or loss on working taxpayers should set up a bookkeeping sys-
Medicare surtax applies to the lesser of capital is not treated as derived from a trade tem now so that in 2013 they can begin
$15,000 or ($25,000 minus $11,950, or business. to track both amounts that can increase
or $13,050). Thus, the Medicare surtax the property’s basis and investment ex-
applies to $13,050. STRATEGY. It should also be noted that penses that can reduce net gains.
certain tax-favored income under other
provisions of the tax code are provided
Net Investment Income no special breaks under the 3.8 percent
Exclusions from Tax
NII for purposes of the 3.8 percent Medi- Medicare surtax. For example, long-term The 3.8 percent Medicare surtax does not
care surtax includes: capital gains are taxed at the same 3.8 apply to nonresident aliens, corporations,
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CCH Tax Briefing
7. October 4, 2012
7
Comment. AMT rates – of 26 and 28
Traditional Income Acceleration/ percent (depending on amount of excess)
Deduction Deferral Strategies on the excess of alternative minimum
taxable income over the applicable ex-
Year-end 2012 presents unique challenges due to sunsetting provisions and new emption amount – are not scheduled to
taxes on the immediate horizon. Traditional year-end planning techniques never- change in 2013. However, exposure to
theless remain important. Particularly as applied to these special 2012 year-end the AMT may change as the result of the
circumstances, the following income acceleration and reciprocal deduction/credit scheduled Bush-era sunsets to the regular
deferral techniques should be considered: tax. Since a determination of AMT li-
ability requires a comparison between
Income Acceleration: regular and AMT computations, having
• Sell outstanding installment contracts regular taxes higher if the Bush-era rates
• Receive bonuses before January expire after 2012 may help lower expo-
sure to the AMT by the same amount.
• Sell appreciated assets
• Redeem U.S. Savings Bonds STRATEGY. Ignoring the possibility of be-
• Declare special dividend ing subject to the AMT can make certain
• Complete Roth conversions year-end strategies counterproductive. For
example, manipulating certain income
• Accelerate debt forgiveness income
and deductions to reduce regular tax li-
• Maximize retirement distributions ability may in fact increase AMT liability
• Accelerate billing and collections because of differences in the income and
• Avoid mandatory like-kind exchange treatment deductions allowed for AMT purposes.
• Take corporate liquidation distributions in 2012
Comment. Tax legislation passed by the
House and Senate earlier this year may be
Deductions/Credit Deferral a good indicator of the amount of an AMT
• Bunch itemized deductions into 2013/ Standard deduction into 2012 patch for 2012. In July, the Senate ap-
• Postpone bill payments until 2013 proved the Middle Class Tax Cut Act (Sen.
3412), which would set the AMT exemp-
• Pay last state estimated tax installment in 2013 tion amount for individuals at $50,600
• Postpone economic performance and at $78,750 for married couples filing
• Watch AGI limitations on deductions/credits a joint return. The House-passed bill, the
• Watch net investment interest restrictions Job Protection and Recession Prevention
Act of 2012 (HR 8) carries the same AMT
• Match passive activity income and losses exemption amounts for 2012 as the Senate
bill. If no patch is passed, the AMT exemp-
tion amounts are scheduled to be $33,750
cent more. Self-employed individuals in surances by Congressional leaders that relief for individuals and $45,000 for married
a similar position should try to accelerate will be forthcoming. couples filing a joint return for 2012.
self-employment income into 2012.
ALTERNATIVE MINIMUM TAX Comment. Even if lawmakers cannot
Comment. Extension of the payroll tax agree on a larger package of tax cut exten-
cut could be part of a year-end tax package Year-end tax planning has traditionally sions, the AMT patch is likely to be enacted
or it could be left out. If an extension of looked at a taxpayer’s potential liability for before 2013. Timing is a huge factor. The
the payroll tax holiday appears less likely by the alternative minimum tax (AMT) and IRS will need time to reprogram its process-
December, employers might consider warn- 2012 is no different. As in past years, tax- ing systems for an AMT patch. The longer
ing their employees that take-home pay will payers are waiting to see if Congress will Congress takes to pass an AMT patch, the
be less as a result, starting in January 2013. enact an AMT “patch” for 2012. The last greater the likelihood that the start of the
If expectations are that the 113th Congress patch – which provided for increased ex- 2013 filing season will be delayed.
will extend the payroll tax holiday retroac- emption amounts and use of the nonre-
tively when it convenes in January, the IRS fundable personal credits against AMT li- STRATEGY. If an individual’s regular
may authorize lower withholding upon as- ability – expired after 2011. tax liability and AMT liability tend to
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CCH Tax Briefing
9. October 4, 2012
9
a taxpayer’s MAGI exceeds these thresh-
old amounts. A taxpayer whose MAGI Life Cycle Changes Important
is greater than $90,000 ($180,000 for To Year-End Strategies
married couples filing a joint return) can-
not claim the AOTC. While tax considerations are important, sometimes life gets in the way. Year-end
tax strategies should also consider personal circumstances that changed during
2012 as well as what may change in 2013. These “life cycle” changes include:
Coverdell Education
Savings Accounts • Change in filing status: marriage, divorce, death or head of household changes
• Birth of a child
Similar to IRAs, Coverdell Education Sav- • Child no longer young enough for child credit
ings Accounts (Coverdell ESAs) are accounts
• Child who has outgrown the “kiddie” tax
established to pay for qualified education
expenses. Under current law, the maximum • Casualty losses
annual contribution to a Coverdell ESA is • Changes in medical expenses
$2,000, and qualified education expenses • Moving/ relocation
include elementary and secondary school
• College and other tuition expenses
expenses. Unless extended, the maximum
annual contribution for a Coverdell ESA is • Employment changes
scheduled to decrease to $500 after 2012. • Retirement
• Personal bankruptcy
STRATEGY. Under current law, taxpay-
• Large inheritance
ers may take a Coverdell ESA distribu-
tion for qualified education expenses and • Business successes or failures
claim the AOTC/Lifetime Learning cred-
its, if eligible. This treatment, however, is
scheduled to expire at the end of 2012. STRATEGY. If the current law treatment STRATEGY. Many taxpayers now deduct-
is not extended, employee income and ing student loan interest may no longer be
STRATEGY. Taxpayers who have not wages for tax years beginning after 2012 able to do so after 2012 if the extension
contributed the maximum amount to a will include all employer-provided edu- of existing enhancements is not forthcom-
Coverdell ESA should before year-end. Al- cation assistance that pays for graduate ing. The income thresholds are scheduled
though Congress may extend the $2,000 education expenses or does not qualify as to be $55,000 for individual taxpayers
maximum threshold for another year, the a working condition fringe benefit. Em- and $75,000 for married couples filing a
$2,000 amount is certain for 2012. There ployers should investigate converting an joint return after 2012. Moreover, quali-
is no limit on the number of Coverdell ac- existing tuition reimbursement policy to fied interest will be deductible only if paid
counts that can be established for a ben- a working condition fringe benefit in during the first 60 months that interest
eficiary. However, the total contribution time to cover tuition that may be due payments are required. If a borrower is
to all accounts on behalf of a beneficiary in January. in arrears on payments, making them by
cannot exceed $2,000 for 2012. year-end 2012 may preserve a final inter-
Student Loan Interest Deduction est deduction for 2012, should Congress
not extend this popular provision.
Employer-Provided Individual taxpayers with MAGI below
Education Assistance $75,000 ($150,000 for married couples
filing a joint return) may be eligible to
Higher Education
Employer-provided education assistance deduct interest paid on qualified educa- Tuition Deduction
is scheduled to undergo some significant tion loans up to a maximum deduction
changes after 2012, unless the current en- of $2,500, subject to income phase out The above-the-line higher education tuition
hancements are extended. Under current rules. There is also no limitation as to the deduction expired after 2011. The maxi-
law, qualified employer-provided educa- number of months during which interest mum $4,000 deduction was available for
tional assistance of up to $5,250 may be ex- paid on a student loan is deductible. The qualified tuition and fees at post-secondary
cluded from income and employment taxes. enhanced treatment for the student loan institutions of learning, including colleges,
The 2010 Tax Relief Act extended the exclu- interest deduction is scheduled to expire universities, and vocational schools, subject
sion through 2012 only. after 2012. to income phaseouts.
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CCH Tax Briefing
11. October 4, 2012
11
to certain restrictions. Renewal of this tax liability created by the mortgage note, was no requirement that individuals
break into 2012 is uncertain at this time. even though it may later abandon its provide third-party documentation sup-
claim. This is more likely in the case of porting the purchase of qualifying prod-
STRATEGY. Amounts prepaid for quali- vacation homes, which are not covered ucts and/or costs associated with making
fied mortgage insurance, except for mort- by the exclusion, in which the lender as- energy efficient improvements, nor if these
gage insurance provided by the VA or the sumes that the borrower has other assets. qualified purchases and/or improvements
RHA, were required to be allocable to were in fact made to their residence. If the
periods beyond the year in which they are Code Sec. 25C credit is revived, Congress
paid up to 84 months and are charged
Residential Energy Incentives could impose documentation require-
to a capital account and treated as paid Two incentives, the Code Sec. 25C residen- ments similar to those imposed to prevent
in the allocable year. Therefore, although tial energy property credit, and the Code abuse of the first-time homebuyer credit.
this tax break may not be renewed for Sec. 25D residential energy efficient prop-
2012, prior premiums that had been pre- erty credit, are designed to reward taxpayers
paid may be allocable to 2012. who, on the consumer level, make qualified ESTATE/GIFT TAX
energy improvements. The Code Sec. 25C
Exclusion of discharge of indebtedness in- credit expired after 2011. The Code Sec. Estate tax planning in recent years has been
come. When a debt is forgiven, it is general- 25D credit is scheduled to expire after 2016. complicated by significant uncertainty over
ly considered imputed income to the debtor long-term federal estate and gift tax rates.
at the time of forgiveness. However, under Code Sec. 25C Credit. The Code Sec. 25C Indeed, few federal tax provisions have un-
a relief provision precipitated by the home credit was available for certain improvements, dergone as many changes as the federal es-
mortgage crisis, discharge of indebtedness including qualified windows, skylights and tate tax rules in recent years. The current
income is excluded from gross income if the doors, building insulation systems, certain estate and gift tax effective through 2012 is
indebtedness discharged is “qualified prin- roofing materials, central air conditioning set at a maximum rate of 35 percent with a
cipal residence indebtedness” that is dis- systems, and certain water heaters. $5.12 million exemption amount. Unless
charged any time after December 31, 2006, extended, the maximum estate tax rate will
and before January 1, 2013. Code Sec. 25D Credit. The Code Sec. 25D revert to 55 percent after 2012 with a $1
credit is available for qualified solar electric million exemption amount.
“Qualified principal residence indebted- property, solar water heating property, fuel cell
ness” is defined as “acquisition indebted- property, small wind energy property, quali- Comment. The maximum estate tax
ness” of $2 million or less. “Acquisition fied geothermal heat pump property. The tax- rate is expected to increase after 2012,
indebtedness” is any indebtedness incurred payer’s residence must be his or her principal but likely not to 55 percent. A top rate
for the acquisition, construction, or sub- residence and be located in the U.S. Purchas- of 45 percent with a $3.5 million exemp-
stantial improvement of the principal resi- ers of new homes may qualify for the credit. tion amount has reportedly been discussed
dence and is secured by the residence. This among Congressional Democrats but there
is an expiring provision that likely may be STRATEGY. Prospects for extending Code is also significant support for keeping the
renewed, given that many homeowners are Sec. 25C are uncertain. Several bills to maximum rate at 35 percent with an
still underwater on their mortgages. extend the credit through 2012 or 2013 inflation-adjusted $5 million exemption
have been introduced in Congress but amount. A separate $1 million exemption
STRATEGY. Determining precisely the have either languished in committee or from gift tax has also been proposed.
tax year in which debt forgiveness occurs have been rejected. Installation of the
may enter into year-end planning, both energy-saving equipment must take place STRATEGY. Gift-giving, ideally on an
for purposes of claiming the exclusion in in the year for which the credit is claimed, annual basis that includes 2012, should
2012 under current law and for purposes as a mere sales contract dated in the year continue to form part of one’s overall es-
of accelerating or postponing discharge of of the credit is insufficient. tate plan. The annual gift tax exclusion
indebtedness income in those instances per donee on which no gift tax is due is
where the exclusion does not apply. Dis- The Code Sec. 25D credit, however, re- $13,000 for 2012 (and is projected to
charge of indebtedness income, regardless mains available through 2016, and is not be $14,000 in 2013), with $26,000 al-
of the applicability of the exclusion, gen- subject to any cap. lowed to each donee by married couples
erally will not be recognized before any filing a split-gift election ($28,000 in
sale or foreclosure takes place. Discharge Comment. In 2011, the Treasury In- 2013). Making a gift at year-end 2012
of indebtedness income may also not take spector General for Tax Administration to take advantage of this annual, per-
place until well after a sale if the lender (TIGTA) uncovered significant abuse of donee exclusion should be considered by
pursues the borrower under the personal the Code Sec. 25C credit because there anyone with even modest wealth.
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CCH Tax Briefing
13. October 4, 2012
13
alty) that is placed in service during the last property must be newly purchased new the $139,000 expensing limit, then defer
three months of that year exceed 40 percent or used property, rather than property you in 2013 to maximize the $25,000 limit
of the aggregate bases of all property placed in previously owned but recently converted (or higher, should Congress decide to be
service during the tax year. The mid-quarter to business use. Examples of types of prop- more generous).
convention treats all property placed in ser- erty that would qualify for Code Sec. 179
vice during any quarter of a tax year (or dis- expensing are office equipment or equip- The Code Sec. 179 deduction is also lim-
posed of during any quarter of a tax year) as ment used in the manufacturing process. ited to a taxpayer’s trade or business taxable
having been placed in service (or disposed of) income. Any excess beyond taxable income
at the midpoint of that quarter. STRATEGY. Year-end may be the time to may be carried forward (unlike bonus depre-
invest in off-the-shelf computer software. ciation, which may generate a net operating
STRATEGY. Bonus depreciation is not Code Sec. 179 expensing is allowed for loss that may be carried back or carried for-
subject to half or quarter year conven- off-the-shelf computer software placed in ward). The taxable income limit, however,
tions; a qualifying asset purchased on service in tax years beginning before 2013. is applied to all trades or businesses owned
the last day of the tax year qualifies for by the taxpayer. In another twist, wages are
as much bonus depreciation as an asset Caution. Real property generally is considered when computing the taxable
purchased on January 1st of the same year. excluded from Code Sec. 179 expensing. income limit, therefore enabling some em-
However, the remainder of regular depre- The 2010 Tax Relief Act provided that ployees with side businesses at home to ex-
ciation for year-end purchases is subject to qualified leasehold property, qualified pense the full value of equipment purchases.
those conventions. restaurant property and qualified retail
improvement property placed in service Interplay with bonus depreciation. The
in 2010 or 2011 were eligible for spe- purchased property may qualify for both
CODE SEC. 179 EXPENSING cial expensing rules. However, starting Code Section 179 expensing and bonus de-
in 2012, no such expansion of Code Sec. preciation. Code Sec 179 expensing should
Many taxpayers have grown accustomed to 179 expensing has been available. be taken first, followed by bonus deprecia-
enhanced Code Sec. 179 expensing. How- tion and then regular first-year depreciation.
ever, the generous dollar limitation and STRATEGY. If qualified equipment pur- For example, a 2012 purchase of $400,000
investment limitations are scheduled to chases for the year exceed the expensing in assets that qualify as five-year property
plunge after 2012. dollar limit (but not the overall invest- for depreciation purposes would be enti-
ment ceiling), the taxpayer may decide tled to a $139,000 Code Sec. 179 deduc-
Code Sec. 179 gives businesses the option of to split the expensing election among the tion, a $130,500 bonus depreciation and a
claiming a deduction for the cost of qualified new assets any way it chooses. It may be $26,100 regular depreciation deduction as-
property all in its first year of use rather than more valuable to expense assets with the suming a half-year convention.
claiming depreciation over a period of years. longest depreciation recovery periods. As
Under current law, the dollar limitation for long as the taxpayer starts using the newly De minimis expensing alternative. New
2012 is $139,000 with a $560,000 invest- purchased business equipment before the de minimis expensing rules allow a taxpayer
ment ceiling placed on the purchase of all oth- end of the tax year, the taxpayer gets the to deduct certain amounts paid or incurred
erwise qualifying property. The Code Sec. 179 entire expensing deduction for that year. to acquire or produce a unit of tangible
dollar limit is scheduled to drop to $25,000 The amount that can be expensed depends property if the taxpayer has an Applicable
for 2013 with a $200,000 investment ceiling. upon the date the qualified property is Financial Statement (AFS), written account-
placed in service; not when the qualified ing procedures for expensing amounts paid
Comment. A precipitous drop has al- property is purchased or paid for. or incurred for such property under certain
ready taken place from $500,000 with a dollar amounts, and treats such amounts as
$2 million investment ceiling applicable Comment. While a decision on what to expenses on its AFS in accordance with its
to 2010 and 2011. expense need not be made until 2012 re- written accounting procedures. An overall
turns are filed, proactive management of ceiling limits the total expenses that a tax-
STRATEGY. Businesses may want to ac- qualifying purchases before year end can payer may deduct under the de minimis rule.
celerate purchases into 2012 to take ad- lead to higher tax savings.
vantage of the still generous Code Sec. STRATEGY. The de minimis expensing
179 expensing dollar and investment STRATEGY. The limitations are per-year rule is especially useful to businesses that
amounts. Qualified property must be tan- and not cumulative. The optimal bal- may exceed the $560,000 investment
gible personal property, actively used in ance between 2012 and 2013 in pur- ceiling or $139,000 dollar limit im-
the business, and for which a depreciation chasing equipment, therefore, would be to posed in 2012 for use of Code Sec. 179
deduction would be allowed. Qualified engage in 2012 purchases that maximize expensing. The de minimis expensing rule
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CCH Tax Briefing