Accounting Today - October 2011

taxstrategy

BY GEORGE G. JONES AND MARK A. LUSCOMBE
Year-end tax planning:
Something old,
something new

The year-end planning process should begin with an awareness of the variables involved.

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As tax year 2011 starts heading toward the exit, the annual expectation arises that year-end tax planning can somehow help lower tax liability before it becomes fixed for the year, as well as helping to identify and maximize certain tax opportunities that may end with the New Year.

Some year-end strategies such as decisions over capital purchases may need to start being executed immediately because of delays between placing an order and its being placed in service. Others may need to be identified now simply to be ready for quick action at the eleventh hour, depending upon how circumstances develop. In either case, the process should begin with an awareness of many of the variables involved. Important to year-end tax planning is an identification of what tax opportunities may be sunsetting at the end of this year, which may be worth waiting for starting in 2012 or later, and in general what developments coming out of the Internal Revenue Service or the courts since last year bear upon the practitioner’s standard toolkit of year-end techniques. This article attempts to provide such as an overview.

percent bonus depreciation and enhanced Section 179 expensing are two of the most valuable, and therefore our article gives them extra attention before tackling the other time-sensitive deadlines.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.

EXPIRING PROVISIONS

Although many taxpayers have become conditioned to expect a group of provisions known collectively as “the extenders” to regularly and routinely be given new life by Congress either immediately before (or sometimes immediately after) they are set to expire, the extension of provisions expiring at the end of 2011 may be a more difficult sell to a Congress concerned over deficit spending. Some, such as extension of an Alternative Minimum Tax exemption amount or equivalent and the additional R&D credit, appear likely to be extended. Others, such as the more generous small-business stock exclusion or Section 179 expensing, seem less likely to be given automatic renewal. Those that may be extended likely will be done late in 2011 or even retroactively in early 2012.

According to the staff of the Joint Committee on Taxation in JCX- 2-11, there are over 50 provisions that will expire at the end of 2011. Among those provisions for businesses, 100

100 PERCENT BONUS DEPRECIATION The bonus rate for qualifying assets acquired after Sept. 8, 2010, and placed in service before 2012, was increased by the 2010 Tax Relief Act from 50 percent to 100 percent. For assets placed in service in 2012, the bonus rate is scheduled to drop to 50 percent. No bonus depreciation is scheduled after 2012.

Bonus depreciation may only be claimed
on qualifying property that satisfies “acqui-
sition date” and “placed-in-service date”
requirements. An asset is placed in service
on the date that it is in a condition or state of
readiness for a specifically assigned function
in a trade or business on a regular, ongoing
basis. The placed-in-service deadlines for
the 50 percent and 100 percent rates are ex-
tended one year for property with a “longer
production period.”
Especially relevant to year-end planning,
the rules for determining the acquisition
date of an asset are different for the 50 per-
cent and the 100 percent rate. For purposes
of the 50 percent rate, an asset is considered
acquired on the date that the taxpayer takes
physical possession or control of the prop-
erty (or under a written contract before Jan. 1,
2013). In contrast, 100 percent rate property
is considered acquired when its cost is paid
for by a cash-basis taxpayer or incurred by
an accrual-basis taxpayer. An accrual-basis
taxpayer generally incurs the cost of prop-
erty when the property is “provided,” which
is usually when it is delivered. A taxpayer,
however, is also permitted to treat property as
“provided” when title to the property passes.
In making the choice, the taxpayer should
remember that the elected treatment con-
stitutes a method of accounting that must be
used consistently in the future and cannot be
changed without IRS consent.

the aggregate expensing limitation under Code Section 179 is set at an all-time-high $500,000. For 2012, the cap is lowered to $125,000 (adjusted for inflation), with a reduction to $25,000 (adjusted for inflation) scheduled for tax years beginning after 2012. The phase-out trigger amount of aggregate qualifying property placed in service in 2010 or 2011 is also at an all-time-high $2 million. This phase-out amount drops to $500,000 for tax years beginning in 2012 and $200,000 after 2012.

Whether purchased and placed into service in January 2011 or December 2011, the same full amount of expensing is allowed. Year-end purchasing strategies should also take advantage of maximizing the caps for 2011 and 2012, and look to expense assets that other wise would have the longest recovery period.

Expensing certain Section 1250 property: For tax years beginning in 2010 and 2011, up to $250,000 of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are also able to be expensed, subject to the overall Section 179 limitations. This is an exception to the rule that generally only tangible property subject to MACRS that is Section 1245 property may be expensed under Section 179. Unlike other Section 179 property, however, the amount of a carry-forward of a Section 179 deduction that is attributable to qualified real property may not be carried forward to a tax year that begins after 2011.

ENHANCED EXPENSING

For tax years beginning in 2010 or 2011,

OTHER BUSINESS PROVISIONS

In addition to bonus depreciation and en-
hanced expensing, the following additional
tax benefits will expire at the end of 2011 if
not extended by Congress:
The 20 percent credit for excess quali-
fied research expenses under Code Sec.
41(h)( 1)B);