WOAH WOAH WOAH Business Tax Changes in Tax Compromise

[Jordan]

So, as part of the 2010 tax compromise, businesses will now be able to depreciate any capital investment immediately. Any purchase made in 2011 is depreciated fully in 2011.

Buy a car for a business for $15,000? Count it against 15,000 of 2011 income. Yummay!

This is hugely important...businesses are sitting on $1 Trillion in cash. (http://finance.yahoo.com/news/US-companies-hoarding-almost-rb-2687745036.html?x=0&.v=1)

So now it's time to find some business supply companies, preferably those that have been hurting lately, or in areas that have been pushed off.

Thoughts:

Hmm, car purchases are lagging, and US cars are getting older, but I'm not sure how many corporate cars are out there any more.

Ooooh, agriculture supply names? John Deere? I know they kicked ass when commodities were up a few years ago, but this tax advantage has to get some farmers thinking about a new tractor/farm supply materials.

Or Cowlesy was talking about miner supply firms. Miners are striking it rich, and probably expanding. I bet they'd like to write off the total cost of a new--err, whatchamacallit.

Any ideas?

B2B companies preferred. If you know anything about the IRS and which products usually have a long depreciation schedule, please get in here. There's tons of money to be made on this tax code play, but it'll require we act fast. :D

[Jordan]

Good info from turbo tax:

Three-year property (including tractors, certain manufacturing tools, and some livestock)

Five-year property (including computers, office equipment, cars, light trucks, and assets used in construction)

Seven-year property (including office furniture, appliances, and property that hasn't been placed in another category)

You are allowed to write off real estate over a longer time period:
27.5 years (residential rental properties)
39 years (commercial buildings)

Wikipedia page: http://en.wikipedia.org/wiki/MACRS#MACRS_property_classes_table

[specsaregood]

You got a link to this?

[VBRonPaulFan]

this isn't anything new, it's just the S.179 deduction that has been in effect on and off for the past several years. there is tax planning involved with whether or not to take the full deduction in the current year or amortize depreciation on the asset, as well as the need to have made a profit.

[Jordan]

You got a link to this?


The bill extends the 100% bonus depreciation for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The bill also sets the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The bill then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.


From the Journal of Accountancy (http://www.journalofaccountancy.com/Web/20103669.htm)

Not as good as I originally thought since it'll be mostly limited to small business, but there's still a b2b play to be found somewhere.

[Jordan]

this isn't anything new, it's just the S.179 deduction that has been in effect on and off for the past several years. there is tax planning involved with whether or not to take the full deduction in the current year or amortize depreciation on the asset, as well as the need to have made a profit.

Okay. Keeping this in mind, it would probably not be best to deduct fully now (during recession) if later recovery means higher earnings, greater proportional taxes. For small businesses it brings the question of whether 1) Bush Tax Cuts get extended past 2012 or 2) recovery happens and their income improves or 3) 1 in the hand is worth more than 2 in the bush.

The below is from Forbes:



Expensing. One-year 100 percent depreciation. For 2012 Section 179 at $125,000 and $500,000 phaseout – alas not continuing the much more beneficial $500,000 and $2 million phaseout which is still good for 2010 and 2011 and was included in the small business bill passed this Fall. KEY: according to Joint Tax the provision in general extends the expensing to qualified property placed in service after September 8, 2010 and before January 1, 2012.

This is important information. It rules out the Bush Tax cut uncertainty since the tax benefit is lower for 2012, while the Bush Tax credits don't end until after the full 2012 year. Okay, so September 8, 2010-December 31, 2011 is go time if one were to take maximum advantage of this.

With all this information in mind, it appears that the maximum benefit will be for companies that sell long term goods, since their customers can deduct immediately. Even with the cost of borrowing in the shitter, there's still plenty of logic behind having $100 in hand today compared to $xxx in 2020.

Also, companies that make a point to sell on credit should see a big gain (right?) since they sell something in 2011 on credit, the customer depreciates it all immediately, even if they paid very little cash for it in the current year.

Are you an accountant? Please say so :P

[VBRonPaulFan]

Okay. Keeping this in mind, it would probably not be best to deduct fully now (during recession) if later recovery means higher earnings, greater proportional taxes. For small businesses it brings the question of whether 1) Bush Tax Cuts get extended past 2012 or 2) recovery happens and their income improves or 3) 1 in the hand is worth more than 2 in the bush.

The below is from Forbes:



This is important information. It rules out the Bush Tax cut uncertainty since the tax benefit is lower for 2012, while the Bush Tax credits don't end until after the full 2012 year. Okay, so September 8, 2010-December 31, 2011 is go time if one were to take maximum advantage of this.

With all this information in mind, it appears that the maximum benefit will be for companies that sell long term goods, since their customers can deduct immediately. Even with the cost of borrowing in the shitter, there's still plenty of logic behind having $100 in hand today compared to $xxx in 2020.

Also, companies that make a point to sell on credit should see a big gain (right?) since they sell something in 2011 on credit, the customer depreciates it all immediately, even if they paid very little cash for it in the current year.

Are you an accountant? Please say so :P

not an accountant, but i program tax software for a major tax prep company that specializes in personal income tax. i know some of the nuances of the law as applied to personal income tax rules, but i'm not really up on it for business rules. if you're pretty interested in this, i can talk to a couple people at work next week about the impact on business returns.

[Icymudpuppy]

I may upgrade my truck fleet this year.... New Mahindra diesel compact pickups are supposed to be available in May... !

[Jordan]

not an accountant, but i program tax software for a major tax prep company that specializes in personal income tax. i know some of the nuances of the law as applied to personal income tax rules, but i'm not really up on it for business rules. if you're pretty interested in this, i can talk to a couple people at work next week about the impact on business returns.

Yes please. It's not the biggest deal in the world, but if you get the chance I'd appreciate it.

On a similar note, the 1603 solar/wind/alt energy grant got renewed. Need to figure out how to play that.

[VBRonPaulFan]

Ok, I talked to someone about this and there are two big implications here. (These apply only to Sch C/E/F businesses for personal returns, not corporate).

There is the S179 deduction that is being extended which allows you to take a large portion of your depreciation deduction expense up front for items placed in service in the dates listed in the bill that for accounting purposes decrease the asset value right away for futher expensing later. (If you sell the asset before the end of its asset life as determined by its asset type, you have to recap the S179 as ordinary income). This is basically the same thing as what we had last tax year, but with lower limits... asset value of up to $500,000; S179 of up to $125,000. You have to take this the year you actually place the asset in service, so you couldn't take this on something you bought 2 years ago for your business and have been using...you have to actually have bought the asset in that tax year. S179 is nice because you can take as much of the $125,000 expense as possible upfront, and it carries forward until it is used up and is applied directly to income.

There is also the extension of bonus depreciation. This is the biggie. It allows you to deduct 100% of the cost of the asset placed in service, and can create a net operating loss that can be carried back and applied against prior year gains to recoup some of what you paid. You can only carry back the NOL 2 years though, so if you didn't have a significant profit in the last 2 years, this isn't really going to help you.

Someone really smart could take bonus depreciation on new assets and carry back the NOL to recap any gains they had in the prior 2 year tax returns, and then apply as much S179 as possible to the current years income and keep carrying it forward. Anywho, there is a bunch of tax planning involved as depreciating stuff isn't really for the faint of heart, but yeah you could definitely save yourself some cash if you had a business and you needed some property for it.

The first year they had the new energy credit that came out i think 2 years ago, you could take a tax credit of up to $1500 on alternative fuel vehicles... however there wasn't really any limitation on what qualified as an alternative fuel vehicle. You could've bought an electric golf cart for like $1200 (i looked lol) and gotten the entire cost back as a tax credit at the end of the year, hahaha. I think the second year they put limitations in place so that golf carts and the like didn't qualify... but if you wanted to really work the system you and a bunch of friends could've bought golf carts, all claimed the tax credit to get the entire cost back...and then sold the damn things and easily made a grand profit off the good old gubmint =D