Dealer Insights – May/June 2011 - Business tax planning in light of recent laws
Has your dealership used provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 or the Small Business Jobs Act of 2010 (SBJA) to its benefit yet this year? With a good part of the year remaining, there’s still time to invest in your business and make it worth your while tax-wise.
Here are three suggestions. Let your dealership’s specific circumstances — and your tax advisor — guide you to your best tax-planning decisions.
- Take advantage of 100% bonus depreciation and invest in your dealership. Perhaps you delayed much-needed improvements during the recession and could use everything from part bins and diagnostic equipment to manufacturer-required furniture and a new computer server. If you buy qualified new assets before Jan. 1, 2012, you can apply 100% bonus depreciation, as long as the assets are put in service by year end.
So, for example, if your dealership buys (and starts using) $500,000 in new equipment this year, it can claim a $500,000 deduction on its 2011 tax return. For 2012, bonus depreciation is scheduled to drop to 50%, and it will disappear in 2013 if Congress doesn’t take action. (Later deadlines apply to certain long-lived property.)
Keep in mind that bonus depreciation applies only to new tangible property with a recovery period of 20 years or less, such as most equipment and office furniture you’d buy for your store.
- Write off assets through Section 179 expensing. Rather than buying new, perhaps you sometimes prefer to buy lightly used equipment and furniture when they’re available. Some good buys are still on the market from dealership consolidations of the last few years.
If used is your choice, you can take advantage of Sec. 179 expensing and get an especially attractive tax break this year. Under the SBJA, the expensing limit doubled from $250,000 to $500,000 for assets placed in service in 2011.
The expensing phaseout threshold also jumped from $800,000 to $2 million. Your Sec. 179 expense deduction will be reduced by $1 for every $1 of asset purchases in excess of $2 million. So if your 2011 purchases exceed $2.5 million, you’ll receive no benefit from Sec. 179 expensing.
The Sec. 179 expensing limits will drop to $125,000 and $500,000, respectively (but both indexed for inflation), in 2012 unless Congress extends higher levels. Even with those lower limits, Sec. 179 expensing may become more attractive next year. Why? Because Sec. 179 expensing can be applied not just to used assets but also to new assets, and it can allow a 100% deduction in the year of purchase, which bonus depreciation isn’t scheduled to provide in 2012.
- Claim a Work Opportunity credit. If you’re like many dealerships, you’ve been operating with a reduced staff the last few years to economize. And your staffing needs may now be noticeable — or even glaring — as consumer interest in buying new vehicles rises.
If employees eligible for the recently extended Work Opportunity credit might meet your needs, it might be a good time to start hiring. Businesses can claim a credit equal to 40% of the first $6,000 of wages paid to new hires from certain targeted groups ($12,000 for wages paid to qualified veterans). Eligible employees generally include:
- Short- and long-term recipients of Temporary Assistance for Needy Families (TANF) benefits,
- Veterans who are disabled or receive food stamps,
- Ex-felons hired within one year after conviction or release from prison,
- Individuals age 18 to 39 who live in empowerment zones, enterprise communities or renewal communities or who receive food stamps,
- Disabled individuals referred after completion of a qualified vocational rehabilitation program,
- Summer youth employees age 16 and 17 who live in designated communities and work at least 90 days between May 1 and Sept. 15, and
- Individuals receiving Supplemental Security Income (SSI) benefits.
Specific requirements apply to each target group. Employees must be hired before Jan. 1, 2012, unless Congress extends the credit again.
Also, under a different provision, an employer can claim a wage payment credit for employees who are active duty members of the uniformed services. The Tax Relief act extended a credit of 20% of differential wage payments made to active military reservists before Jan. 1, 2012.
Finally, keep in mind that, if you retain for 52 consecutive weeks workers who qualified for new-hire payroll tax forgiveness last year, you may be eligible for a retention credit.
Dealer Insights – May/June 2011