The American Taxpayer Relief Act of 2012, commonly known as the “fiscal cliff bill,” was passed at the beginning of 2013 after intense debate in Congress. The legislation enacted several changes in the tax code for small businesses, including many provisions which were retroactively reinstated or renewed.
Here we review some of the most important tax changes for small businesses in 2013.
Section 179 Deduction: The $500,000 limit for Section 179 deductions set to expire in 2012, was retroactively extended through 2013. Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.
Accelerated Depreciation: Up to $250,000 of qualified leasehold improvements, restaurant property, and retail improvements placed in service during the 2012/2013 tax years are eligible for deduction, with a 15 year accelerated depreciation (the depreciation period was previously 39 years). Additionally, companies can take advantage of a 50% bonus depreciation on qualified investments. Both of these accelerated depreciation provisions were extended through 2013.
Research and Development Tax Credit: The R&D tax credit was extended and reinstated retroactively for 2012, allowing business owners to receive tax breaks for between roughly 6 – 14% of their research and development expenditures.
Work Opportunity Tax Credit: The WOTC tax credit, which gives tax breaks to businesses that hire from underemployed groups such as youths and veterans, was extended through 2013.
Environmental Credits: Credits for renewable energy, efficient energy, and alternative fuel vehicles were extended or renewed for the 2012 and 2013 tax years, including the production (PTC) and investment (ITC) tax credits for qualifying renewable energy projects, credit for new or renovated energy efficient residencies, the Manufacturers’ Energy Efficient Appliance credit, the Alternative Motor Vehicle credit, and the Plug-In Electric Vehicle credit.
Educational Assistance: The 2012 provision that allowed employers to reimburse an employee on a tax-free basis for up to $5,250 in educational assistance was extended permanently. The tax-free educational assistance applies to both undergraduate and graduate school costs, and need not be job-related.
Transportation Fringe Benefits: The provision allowing employers to provide tax-free transit and commuter highway vehicle (i.e. vanpool) and parking benefits to their employees was extended through 2013, and benefit limits were increased from $125 to $240 per month.
S Corporation Built-in Capital Gains: Normally S corporations that convert from C corporate status, must retain their assets for a 10 year “recognition” period, or else are subject to a built-in gains tax at the highest corporate tax rate. The tax break enacted in 2009 which shortened the recognition period from 10 to 5 years, was extended through 2013. This means S corporations can sell assets in 2013 that have been held at least 5 years without triggering built-in gains tax.
Capital Gains Exclusion: The stimulus provision which incentivized investment in small companies by making capital gains earned through the sale of certain small business stocks 100% tax-free, has been extended through 2013.
Charitable Contributions: The provision which adjusts the basis of stock in an S corporation by the adjusted basis of charitable contributions of property, was extended through 2013. The enhanced charitable deduction for contribution of food inventory was also extended through 2013.
Patient Protection and Affordable Care Act: While this tax increase won’t apply to most small businesses, beginning in 2013, employers will be required to withhold an extra .9% for employees with incomes above $200,000 and $250,000 for married filers. This increase applies to income earned through self-employment as well.
Read Part Two of our Small Business Tax Primer: Tried and True Small Business Tax Tips and the most common small business tax mistakes.