Small business owners may be scratching their heads as to how the recently enacted American Taxpayer Relief Act of 2012 (the “Act”) will affect them and their businesses. The following are three aspects of the Act that small business owners may find particularly relevant:
- Section 179 Business Expensing and Bonus Depreciation—Perhaps the most pro-business provision of the Act is the extension of Section 179 business expensing and bonus depreciation. A business purchasing tangible business property is generally not entitled to deduct the cost of the property in year of purchase, but instead, is required to depreciate the cost of the property annually over the property’s useful life. However, the Act extended Section 179—a special tax provision designed to spur business investment—that permits a business to deduct the entire cost of business property in the year it is placed in service. The deduction is limited to $500,000 per year, and the election is phased out for businesses placing more than $2 million worth of business assets in service within the taxable year. Additionally, the Act extended the bonus depreciation provisions that permit a business to deduct 50% of the cost of business property in the year the property is placed in service. Section 179 business expensing is scheduled to be substantially limited after 2013, and bonus depreciation is scheduled to be mostly eliminated after 2013, so business owners with plans of expansion would be wise to take advantage of these provisions before they sunset.
- Increase in Tax Rates for High Income Individuals; Corporate Tax Rates Remain the Same—Taxpayers with taxable income in excess of an applicable threshold ($400,000 for single taxpayers and $450,000 for married taxpayers filing jointly) are subject to a new 39.6% tax rate. These high-income taxpayers are also subject to a new 20% tax rate on dividends and capital gains. Corporate tax rates, however, will remain at a maximum 35% tax rate.
- Special Business Provisions Extended—The Act also extended a number of tax provisions favorable to businesses including, the complete exemption of gain from the sale of qualified small business stock, the reduced recognition period for the S corporation built-in tax, and the continuance of hiring tax incentives such as the Work Opportunity Tax Credit and the extension of the employer wage credit for activated military reservists.