Wider World of Business
Most of the discussion about the last-minute legislation to avert sharp tax increases for 2013 has concentrated on the Bush tax cuts — their permanent extension for most Americans and their expiration for a very few. But the bill also renews dozens of other income-tax provisions for individuals and businesses through a series of provisions that the legislating class calls “extenders.” And though advocates for small businesses were concerned legislators might overlook their interests in the high-pressure negotiations, it turns out their pessimism was unfounded.
Nearly all of the most important provisions won a reprieve through at least this year. (It just goes to show that an old temporary tax credit almost never dies, it just becomes an extender.)
Here’s where things stand for many of the small-business tax incentives that were on the table:
• Section 179 expensing: This popular provision allows small companies to fully expense many investments in just one year, instead of over five years or more. The amount of investment eligible for immediate expensing grew to $500,000 in 2010 and 2011, but was to fall to $139,000 in 2012 and $25,000 in 2013. The new law extends the $500,000 limit through 2013, and pushes the $25,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold — $2 million through 2013 and $200,000 starting in 2014.
• Bonus depreciation: Since 2008, companies have been able to take advantage of a special depreciation allowance that allows them to write off 50% (and sometimes more) of certain kinds of investment in the first year. The provision was set to expire at the end of 2012, but has been extended through the end of this year, or, in some cases, through 2014.
• Research and Experimentation Tax Credit: The R&D tax credit, as it’s also known, expired at the end of 2011. The new law extends it through 2013 and increases the potential credit for businesses that acquire other companies.
• Built-in gains tax: Normally, when a company converts from a C corporation to an S corporation, it must retain its assets for at least 10 years or pay a 35% tax on the built-in capital gains that occurred before the company made the conversion. (The provision is intended to discourage a corporation from making the conversion simply to avoid double taxation — first at the corporate level, then at the shareholder level — on capital gains.) Since 2009, Congress has shortened the period, ultimately to five years for assets sold in 2011. The new law extends the five-year period through 2013.
• Temporary exclusion of 100% of gain on small-business stock: This recent stimulus provision, an incentive to invest in small companies by making the capital gains tax-free, expired at the end of 2011 but has been extended through 2013.
• Work opportunity tax credits: These are tax credits for employers who hire military veterans or people belonging to certain disadvantaged groups (for example, people receiving government assistance or living in distressed areas). Tax credits for hiring the disadvantaged expired in 2011 and those for veterans expired at the end of 2012; both have been extended through 2013.
• Fifteen-year depreciation for qualified improvements to leasehold, retail or restaurant property: Under this provision, which expired in 2011, a renter, retailer or restaurateur can write off improvements in 15 years, rather than over 39 years (which may be longer than the business would even exist). It has been extended through 2013.
• Adjustment to stock of S corporations making charitable contributions: This temporary provision made it easier for owners of an S corporation to take deduction for making donations. It expired at the end of 2011 but now is extended through 2013.
• Enhanced charitable deduction for contribution of food inventory: This provision allowed companies to donate their inventory of “apparently wholesome food” — that’s a legal term, really — and take up to twice the deduction they would normally get. It expired in 2011, but has been extended through 2013. However, a similar provision that allowed C corporations a bigger deduction for donating computer equipment to schools and libraries was not renewed.