Tax Breaks for Businesses

Making the most of business tax incentives can help you accomplish your short- and long-term goals. With proper planning, you may be able to lower your tax bill while purchasing new equipment, making energy-efficient property improvements, or saving for retirement. Favorable tax reform in recent years continues important tax savings and presents some new opportunities for businesses to lower their tax bills. Understanding the changes helps you take advantage of the savings available to your business.

Section 179 Expensing

As the result of 2004 reform, business owners are no longer permitted to apply the full Section 179 expensing limit to the purchase of certain types of SUVs. The revised rules call for a deduction of no more than $25,000 for an SUV or truck that weighs between 6,000 lbs. and 14,000 lbs.

Section 179 expensing allows business owners to take an upfront deduction on qualified equipment purchases, including off-the-shelf computer software. For tax year 2012, businesses are permitted to expense up to $139,000 of Section 179 property with $560,000 set for the cost-of-equipment limit.

Benefits for Manufacturers

Tax legislation in 2004 created the Section 199 deduction, which allows U.S. manufacturers to write off a wide range of domestic production activities. Qualified activities include certain types of film and video, computer software, and energy production, as well as certain agricultural processing, construction, engineering, and architectural activities. In 2012, businesses may deduct 9% of the lesser of their qualified production activities income (QPAI) or their taxable income.

Recent reform stipulates that taxpayers may consider only 50% of wages allocable to domestic production gross receipts (DPGRs), which are used to calculate QPAI. Business owners must now track the portion of an employee’s time and pay related to qualifying activities.

Rules for Nonqualified Deferred Compensation Plans

Limiting the flexibility of distributions, 2004 tax legislation stipulates that nonqualified deferred compensation must be included as taxable income at the time of vesting, unless certain conditions are met. Noncompliance will result in penalties. The effective use of offshore rabbi trusts is also limited. While nonqualified deferred compensation plans are broadly defined by reform as any plan that defers compensation, it is important to note that qualified retirement plans, tax-deferred annuities, and 457(b) plans are not subject to these regulations.

Energy Efficiency Incentives

Energy-efficient property improvements may also qualify for tax breaks. Businesses may claim a maximum of $1.80 per square foot for the cost of major energy-saving improvements to, and property purchased for, commercial buildings. In addition, businesses are eligible for tax credits for investing in solar energy property, for installing qualified fuel cell power plants, and for purchasing stationary microturbine power plants.

Retirement Plan Reform

When troubled pension plans fail to meet their obligations, such as some in the airline industry, a greater burden falls on the Pension Benefit Guaranty Corporation (PBGC), the federal corporation that insures defined benefit plans. To help alleviate pension-funding problems, reform passed in 2006 compels companies outside of the airline industry to cover 100% of the liabilities in their pension plans over seven years, up from the current minimum funding level of 90%. Sponsors of plans that remain underfunded below certain levels face stricter funding requirements, restrictions on benefit offerings and payouts, and limits on executive deferred compensation. To ease the burden of higher minimum funding levels, the law permits larger tax deductions for contributions to pension plans—employers may deduct up to 150% of current plan liabilities.

The law also makes permanent incentives for qualified retirement savings, including higher contribution limits and catch-up amounts for IRAs and 401(k) plans, accelerated vesting of employer matching contributions, and higher deductible amounts for employer contributions to employee retirement accounts. In addition, the law creates opportunities for employers to facilitate tax-advantaged retirement savings for their employees, including permitting employers to automatically enroll employees in 401(k) plans. However, employees must have the option to opt out of their company’s 401(k) plan. Also, 401(k), IRA, and retirement plan providers are permitted to offer personalized investment advice to accountholders. By making the newly available Roth 401(k) a permanent part of the tax code, the legislation is expected to encourage 401(k) sponsors to add a Roth option to their plans.

Given the complex nature of tax reform and the possibility of further changes on the horizon, it is important to regularly review your business tax strategies. For more information and specific guidance, consult your tax professional.


Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.