December 7, 2011
The holidays are fast approaching, but before Santa slides down the chimney or the ball drops in Times Square, businesses still have plenty of time to make some smart tax moves and maximize their benefits for 2011.
While President Obama and Congress wrangle over the extension of the payroll tax cut, a number of other tax provisions are also set to expire or, in some cases, become less generous. For almost all businesses, that will result in increased taxes next year. Tax credits for research and experimentation and for specific types or hiring are among those that could disappear, and rules for deducting expenses are set to become stricter. “Some businesses think these things will be extended eventually—but that’s really an area taxpayers can’t control,” said Darrin Holley, federal tax partner at KPMG. Holley recommends that businesses do what they can to claim those expiring credits now, “since you cannot bank on those things being there” in the future.
Scores of companies don’t even realize that they are eligible for some of these tax benefits. More than 50 percent of the $70 billion available in federal and state business-related statutory tax credits have gone unclaimed in recent years, according to WTP Advisors, a business tax advisory firm. Recession-induced downsizing has left trimmed-down tax departments directing most of their brainpower toward filing the company’s taxes on time and averting penalties, says Paul Lo of WTP Advisors. “The need to minimize taxes is not at the forefront, which is unfortunate,” Lo says. But the coming weeks are a great time to look for those write-offs and credits. “Once tax departments get into the thick of filing season after the holiday, that’s when things tend to slip through the cracks,” Lo says. “So the holiday lull is the perfect time to examine what you can collect this year, and get that documentation in order.”
Here, six of the smartest tax plays companies can make during the remainder of 2011. Remember to check with your accountant to make sure your business qualifies for the credits.
1. Amp Up Research and Development
Companies focused on engineering, biology, or computer science have until the end of the year to take a few chances, spend some more money on R&D projects and claim a 20 percent tax credit for “qualified research expenses” under the Research and Experimentation tax credit.
This credit was first created in the Economic Recovery Act of 1981 to temporarily bolster U.S. companies’ competitive standing by slashing their after-tax costs. Since then, it has been extended and amended 14 times, starting with the 1986 Tax Reform Act under President Ronald Reagan. Eighty percent of the credit’s federal dollars flow to companies with $250 million or more in gross receipts, according to IRS data. But small and mid-sized businesses can cash in too as long as they meet specific criteria, like having documentation to confirm to the IRS that the research activity was intended to improve their products reliability or functionality.
The credit is set to expire at the end of the year, and tax experts say Congress is unlikely to work out another extension before the 2012 election. Even if the program eventually gets new life, there’s no guarantee the terms will be the same. The good news is that past reinstatements of the credit have been retroactive. “So even though it will most likely lapse, companies should take advantage of it,” Lo says.
If it’s too late to boost your R&D budget at this point, it’s still not too late to take advantage of the credit. Step one is to find and document qualifying research activities. “Just trying to kick in a new project at the end of the year, especially with the holiday taking up so much of the month, may not be technically feasible for a lot of businesses,” Lo says. “But certainly a company should be using time now to get its paperwork in order to substantiate the claim they plan on taking on their 2011 return.”
2. Load Up on Equipment
President Obama’s 2009 American Recovery and Reinvestment Act allows all businesses to deduct the full cost of qualifying equipment or software purchased after Sept. 8, 2010 and before Jan. 1, 2012 from their taxable income. “An easy way to have a more favorable impact on your current tax year bill is to go out and buy more property,” Holley says.
Starting in 2012, these “bonus depreciation” rules will change and businesses will be able to deduct only half of their equipment costs on their tax bills, the level allowed prior to ARRA. Similarly, the cap on expenses that can be written off drops from $500,000 to $125,000 a year.
3. Hire Workers from Economically Vulnerable Populations
An expiring program called the Work Opportunity Tax Credit allows companies to collect tax credits worth anywhere from $1,200 to $9000 for hiring a worker that meets one of the following criteria:
• Is an 18-39 year-old residents of distressed urban or rural communities the government classifies as “Empowerment Zones,” or “Rural Renewal Communities”
• Is an 18-39 year-old members of a family that received food stamps prior to hire
• Is a veteran who is either disabled or has been unemployed for six months or longer
• Is part of a family that received Temporary Assistance for Needy Families (TANF) payments during at least half of the 18-month period prior to being hired
• Is a former felon
• Is disabled, and recently completed a government rehabilitation program
• Receives Supplemental Security Income
The veterans segment is the only part that won’t expire this year—it lasts until 2012. According to the Department of Labor, the credit can be as much as $2,400 per new adult hire, $4,800 per disabled veteran, or $9,000 for TANF recipients who’ve received payments for 18 consecutive months.
4. Donate to Schools and Food Banks
While all businesses can claim charitable contribution deductions for donating to any “qualified” organization, C and S corporations only have until the end of the year to take additional “enhanced” deductions specifically for donating food to any charitable group, books to public schools, or computers and tech gear to any school or library in the United States.
5. Pay Out Bonuses
Businesses can capture current-year tax deductions for bonuses paid out by March 15, 2012 as long as they don’t go to employees that own more than 50 percent of the company’s stock, and that the bonus is accrued on the company’s current year books.
6. Make Sure You Didn’t Miss Out on Tax Benefits Last Year
With the exception of audits, most federal tax matters must be resolved within three years after the date a return was filed. Although states have differing rules, most impose a three- or four-year statute of limitations. So for a business that made major acquisitions or heavy investments over the past few years, it’s possible some tax benefits—including those listed above—were overlooked or under-calculated.