Legislation enacted last year included some very favorable, but very temporary, business tax changes. The best of the bunch are scheduled to expire at the end of this year unless Congress acts. These are the breaks.
100% First-Year Bonus Depreciation
For qualifying new (not used) assets that are put to use in your business by Dec. 31, 2011, you can claim 100% first-year bonus depreciation. This translates to deducting the entire cost in year one. There's no dollar limit on this deal, and even the largest businesses are eligible. If your business adds enough new stuff to generate an overall tax loss for the year, you can carry the loss back to 2009 and 2010 and recover some or all of the federal income taxes paid for those years.
To be eligible for 100% bonus depreciation, an asset must pass three tests.
* It must be qualified property, which includes most equipment and software and some leasehold improvements.
* It must be purchased and put to use by Dec. 31, 2011.
* It must be new rather than pre-owned.
New passenger cars and light trucks are subject to relatively stingy first-year depreciation allowances. The bonus depreciation break increases the maximum first-year deduction by $8,000 for new vehicles that are put to business use by yearend. Specifically, for new light trucks and vans used 100% for business, the maximum first-year depreciation deduction is increased to $11,260. For new passenger autos used 100% for business, the maximum write-off is $11,060.
If you buy a new "heavy" SUV, pickup or van (one with a gross vehicle weight rating, or GVWR, in excess of 6,000 pounds), you can deduct the entire business-use percentage of the vehicle's cost on this year's return -- assuming the business-use percentage (based on mileage) exceeds 50%. You can usually find a vehicle's GVWR on a label on the inside edge of the driver's side door where the door hinge meets the frame.
For 2012, the 100% bonus depreciation break is scheduled to be replaced by 50% bonus depreciation. That's still good, but it's not nearly as good as 100%.
$500,000 Section 179 Deduction
For tax years beginning in 2011, the maximum first-year Section 179 depreciation deduction is $500,000. This translates to being able to deduct the entire cost of up to $500,000 of assets in the first year. Even better, the Section 179 break is available for both new and used equipment and software. However, unlike first-year bonus depreciation, you cannot claim Section 179 deductions that will create or increase an overall business tax loss for the year. So for new assets, the Section 179 deduction privilege is less valuable than the 100% bonus depreciation break. For tax years beginning in 2012, the maximum Section 179 deduction is scheduled to drop back to only $125,000.
For tax years beginning in 2011, the maximum Section 179 deduction allowance is phased out dollar-for-dollar once your business's eligible asset additions exceed $2 million. This rule makes the Section 179 deduction off limits for larger businesses. For tax years beginning in 2012, the threshold for reduced deductions is scheduled to drop to only $500,000.
$250,000 Section 179 Deduction for Real Estate
For tax years beginning in 2011 only, your business can claim up to $250,000 of Section 179 deductions for qualified real property additions, which include the following:
* Qualified leasehold improvement property costs. The definition covers only nonresidential building interior costs. Some interior costs are excluded (such as elevators and any interior structural framework of a building). The improvements must be put to use more than three years after the date the building opened for business.
* Qualified restaurant property costs. The definition covers both building and improvement costs. To qualify, more than 50% of the building's square footage must be devoted to the preparation of meals and customer seating.
* Qualified retail improvement costs. The definition covers only nonresidential building interior costs for a building that is open to the general public and used in a retail business of selling tangible personal property to the general public. Certain interior costs are excluded (such as elevators and any interior structural framework of a building). The improvements must be put to use more than three years after the date the building opened for business.
Section 179 Details
For "heavy" SUVs with GVWRs in excess of 6,000 pounds, the maximum Section 179 deduction is limited to $25,000. That's still a good deal.
If your business uses a non-calendar year for tax purposes, you have extra time to take advantage of today's ultra-favorable Section 179 rules. For example, if your business has an Oct. 31 tax yearend, its 2011 tax year won't begin until Nov. 1, 2011.
0% Tax Rate on Qualified Small Business Corporation Stock Gains
If you invest in qualified small business corporation stock that is issued between now and Dec. 31, 2011, you'll be eligible for a 0% federal capital gains tax rate when you sell the shares after owning them for more than five years. But if you invest after this year, the maximum tax rate on gains from shares held more than five years is scheduled to be 14%. I like 0% much better. If you are interested in this idea, talk to your tax pro because there are some tricky rules regarding the definition of qualified small business corporation stock. For instance, the corporation's gross assets cannot exceed $50 million. Professional service businesses are off limits. So are banking, leasing, financing, investing, farming, oil and gas extraction, and hotel, motel and restaurant operations.