2011 a good year for small business investment
But on-again, off-again tax rules by Congress create uncertainty, CPA says
As the saying goes, you have to spend money to make money. Before 2011 ends, business owners may want to think about investing in capital improvements to earn some tax breaks as well.
Some popular federal tax credits designed to spur capital investment are particularly lucrative this year, said Scott Flood, tax director with RSM McGladrey Inc. in Des Moines.
This year only, qualified small businesses can write off $500,000 of new or used equipment purchased by Dec. 31 under the Section 179 expensing election, “so there’s kind of an incentive to these small businesses to do it now,” Flood said. In 2012, the expensing limit reverts to $125,000.
Another potential good deal small businesses should consider: This year, improvements to leased property by tenant businesses may qualify for the same accelerated one-year expensing, for up to $250,000 of Section 179 expensing and 100 percent of bonus depreciation.
“It applies to businesses that are leasing a building that’s at least 3 years old,” Flood said. “If you go into that building and make interior improvements, such as walls, heating/ventilation/air conditioning and things like that, those will qualify for bonus depreciation and Section 179. Usually, building improvements aren’t considered equipment and don’t qualify for this write-off. That’s a pretty big break, and it’s only available in 2011. … I see a lot of restaurants doing it to refinish the space the way they want it.”
In the current weak economy, many companies aren’t strong enough financially to borrow to make improvements. “But the ones that are doing well are in a position to have significantly less taxes because of these tax breaks that are built in,” he said.
Flood, a 35-year certified public accountant who has been with McGladrey for the past 12 years, said he’s encouraged by the increased number of start-up businesses he has worked with this year. A number of them have been launched by former corporate employees who were laid off during the recession.
“I’m more optimistic now about the future prospects for small business than I was two years ago, and usually small business leads the way,” he said. “The problem is, we won’t see the double-digit growth we’ve seen before. It will be slow growth; everybody’s more cautious.”
The onset of the recession was also the most difficult time for McGladrey in recent memory, Flood noted.
“We saw a big reduction in the consulting business. Businesses were a lot harder on us on fees, and we saw hardly any start-up businesses,” he said. “Now, most of these businesses have made these hard cuts, and the ones that were marginal have been shaken out. So what you have now are well-run companies; the survivors are doing well. And the casualties of businesses getting lean have created unemployed people who are now coming back and starting their own businesses.”
The weak economy has caused uncertainty, but Flood thinks Congress’ hodgepodge approach to passing tax legislation has created its own level of unease for businesses.
“Everything is so budget-driven now; if they pass a law, it will most likely be only for a year or two, and then it will change to something different,” he said. “Our tax laws and tax planning are so short-term now; it just creates a lot of uncertainty. Congress used to always pass tax laws so we could follow them prospectively. Now, the taxes are being passed after the fact and being made retroactive, so it’s hard to plan right now because of the short-term approach to tax law by lawmakers.”
Nevertheless, a few of those short-term measures will benefit small businesses this year, among them the payroll tax cut that reduced employees’ Social Security tax rate from 6.2 percent of wages to 4.2 percent. For 2012, President Barack Obama has proposed reducing the tax to 3.1 percent and giving an equivalent break to employers on the first $50 million of wages for new employees. “So if you were going to hire new employees and you think this is going to happen, you would want to wait until 2012,” Flood said.
Two other changes may do more to reduce small business owners’ intake of Tylenol than their tax bills: The repeal of a provision in the Patient Protection and Affordable Care Act that would have expanded Form 1099 reporting requirements next year means that employers won’t have to worry about filing those forms for contractors they pay more than $600 annually for expenses. Also, cellphones are no longer considered “listed property” by the Internal Revenue Service, which means businesses can deduct for business use of their phones without having to maintain a log of business use, “which no one did anyway,” Flood said.
The health-care tax credit, which provides a 35 percent credit on premiums paid by smaller employers through 2013, is “worth checking into,” he said. “I commonly see credits of $4,000 to $6,000. There is some paperwork that goes with it, but if you qualify, it’s probably justified.”
The credit will increase to 50 percent in 2014, when the bulk of provisions of the Affordable Care Act go into effect. Businesses with fewer than 10 employees will see the greatest benefit from the break, which phases out at 50 employees.
Another break, the so-called manufacturers’ deduction, this year is fully phased in at 9 percent of qualified income from production. Despite the name, the deduction also applies to a number of other businesses, among them construction contractors, engineering and architectural firms, computer software companies and farmers.
“It could get repealed, because it’s a fairly expensive tax break (for the government),” Flood said.
Looking ahead to 2012, tax experts expect some type of action to reduce corporate tax rates, which are presently the same as individual rates and much higher than corporate rates in other developed countries. Such a move would significantly change the tax landscape, Flood said.
“If that happens, I could see a lot more movement toward fewer flow-through entities like S corporations and limited liability corporations, and back to more corporate business paying taxes,” he said. “And I think the incentive for the United States to do that is so we’ll be competitive worldwide.”