San Diego Business Journal

Do you anticipate a 2013 budget deal will include an investment tax credit for capitalized acquisitions? What advice do you have for businesses making capital purchases in the coming year?

ADVERTORIAL: Accounting/Tax Law Roundtable Supplement By Jeanne Taylor and Andrew Davidson Monday, January 21, 2013
Jeanne Taylor, CPA, CVA, CM&AA
Tax & Business Consulting Principal
AKT LLP

Jeanne Taylor, CPA, CVA, CM&AA Tax & Business Consulting Principal AKT LLP

The investment tax credits have been limited mainly to alternative energy credits since 1986. However, Congress recently passed The American Taxpayer Relief Act of 2012 (“ATRA”), and businesses will once again benefit from highly lucrative accelerated depreciation limits for the acquisition of property and equipment. The passing of this law extends both types of ‘‘first year depreciation” deductions, the Section 179 deduction and the bonus depreciation deduction.

The Section 179 deduction has long been an incredible deduction for business owners. For tax years 2012 and 2013, the ATRA extends the Section 179 deduction limit to $500,000 on up to $2,000,000 of qualifying property acquisitions. If a business acquires qualifying property (which is a very broad definition and includes most types of new or used business property), it can take a full deduction in the year of acquisition, and does not need to depreciate the cost over the asset’s life. This rapidly accelerates deductions and helps to drive down taxable income. Included in qualifying property are off-the-shelf computer software, certain automobiles, and certain types of leasehold improvements.

In addition to the Section 179 limitations, the ATRA also extends the 50 percent bonus depreciation deduction for qualifying property (which, again, is a broad definition, and includes most types of NEW business property).

For example, if a business acquires a piece of new equipment for $1,000,000, it can use Section 179 to deduct the first $500,000, followed by bonus depreciation of 50 percent of the remainder, which is an additional $250,000. Lastly, it is still entitled to its normal depreciation deduction which is approximately another $50,000. All in all, this is a total deduction of approximately $800,000 in the first year. Assuming a 35 percent tax rate, this is a cash savings of $280,000, so the actual cost of the equipment is only $720,000.

Unfortunately, California does not conform to the accelerated depreciation limits of ATRA. California reverts back to a maximum Section 179 deduction of $25,000 on up to $200,000 of qualifying property, and does not offer any sort of bonus depreciation. So in the above example, the business would be fully phased out of Section 179 and only entitled to its normal depreciation deduction of approximately $200,000.

With lenders offering very low interest rates on equipment financing, now is the time to consider capital acquisitions, especially if business growth is the goal. By expediting depreciation deductions, some business owners can help lower their overall taxable income and help mitigate the impact of the new, higher individual income tax rates.

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A tax practice that is better than the others should possess many of the following qualities and attributes:

Sophistication with a mission to help clients achieve and exceed their business and personal goals. The ability to tailor year-end tax planning services with clients to devise a list of items they need to do before year end to minimize their tax, and a resulting estimate of tax obligations in order to avoid tax surprises before the due dates. The process of ongoing planning and accurate advice helps clients maximize their wealth, and tax minimization services should be a vital part of strategy too.

Offering many different services

The capacity to offer many different services, such as accounting, tax, compliance, pension and wealth management, business valuation, business purchase and sale, international tax services, and management consulting to businesses, nonprofit organizations, and individuals.

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