Several provisions of the American Taxpayer Relief Act of 2012 apply to businesses. For the most part, these provisions extend previous law, often through 2013, while some are retroactive to 2012.
First-year equipment deductions
Under Section 179 of the tax code, businesses can take a first-year “expensing” deduction for equipment placed in service, rather than spread depreciation deductions over several years. Thus, equipment purchasers get the tax benefits more rapidly, which makes them more valuable. Throughout 2012, business owners believed the expensing limitation for the year would be $139,000 of equipment, with a phaseout, dollar for dollar, starting with $560,000 of purchases. The new tax law sets the expensing limit at $500,000, with a phaseout beginning at $2 million. The higher limits apply retroactively to 2012 as well as to 2013. Example 1: Smith Corp. buys $400,000 worth of equipment in 2013. It can take a $400,000 deduction, under Section 179. Example 2: Jones Corp. buys $2.2 million worth of equipment in 2013. Therefore, Jones Corp. is in the phaseout range by $200,000. Consequently, the company’s first year deduction will be reduced from the maximum $500,000 to an allowable $300,000. In 2014, the Section 179 deduction is scheduled to drop to a $25,000 maximum, with a phaseout beginning at $200,000 of purchases. However, Congress has consistently agreed to increase these amounts substantially, with short-term extenders.
In example 2, Jones Corp. buys $2.2 million of equipment in 2013 and expenses $300,000 of those purchases under Section 179 of the tax code. The remaining $1.9 million of equipment purchases must be depreciated. Typically, businesses must spread depreciation deductions over several years. In recent years, though, “bonus depreciation” has allowed more rapid recovery of the cost of qualified property (which includes most equipment and machinery). The new tax law extends 50% bonus depreciation through 2013. Therefore, Jones Corp. may be able to take an additional first-year tax deduction of $950,000 (50% of $1.9 million) for its equipment purchases in 2013. The $950,000 balance will be deducted over a multiyear schedule. Bonus depreciation applies only to new equipment. By contrast, businesses may take first-year expensing deductions under Section 179 for purchases of new or used equipment.
Several other business-related provisions were extended through 2013 in the new tax law. They include the research tax credit, for increases in qualified R&D; the new markets tax credit, for certain investments in low income communities; and the work opportunity tax credit, for hiring individuals from certain groups with high rates of unemployment. Under the work opportunity tax credit, employers who hire a covered individual generally receive a tax credit equal to 40% of first-year wages, up to $6,000. The tax credit for hiring certain veterans can be as high as $9,600.