Which Client Deductions Will Expire after 12/31/11?

More On Tax Planning

from The Advisor's Professional Library
  • Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
  • Long Term Care Insurance: Premiums While premiums for qualified long-term-care insurance may be deductible as medical expenses there are exceptions to this general rule. Learn how to avoid unnecessary tax liabilities.

We’ve all heard ad infinitum about the Bush tax cuts expiring on Jan. 1, 2013, but there are numerous tax breaks expiring after this year that could have a drastic effect on your clients. Peruse a list of tax provisions expiring between 2010 and 2020 and you’ll see that dozens of deductions will no longer be available as of Jan. 1, 2012.

What follows is a discussion of some of the expiring deductions.

Bonus Depreciation

In an effort to stimulate business equipment purchases and stave off recession, Congress enacted “bonus depreciation” legislation in 2008 that allows a business to deduct up to 50 percent of the basis (generally, the purchase price) of certain property in the year the property is placed into service. Without bonus depreciation, businesses are generally required to write off purchases over a number of years.

That legislation was originally scheduled to lapse at the end of 2011, but due to the tenuous economic recovery, bonus depreciation was extended to the end of 2012—and also increased to 100 percent for property placed into service in the last quarter of 2010 or any time in 2011. There are no income or dollar limits placed on bonus depreciation—unlike the limits placed on Section 179 expensing.

Starting Jan. 1, 2012, 100 percent bonus depreciation will no longer be available.

Section 179 Expensing

Section 179 accelerated expensing limits will also ratchet down at the beginning of the year. In 2011, Section 179 allows a business to immediately write off up to $500,000 of certain expenses on purchases of up to $2 million, with the deduction phasing out after that. Starting Jan. 1, 2012, however, only $125,000 of expenses can be written off on qualified expenses of up to $250,000. In 2013 the expensing limit drops to $25,000.

Clients whose Section 179 deductions will be constrained by the 2012 limits should make their purchases now.

Tax-Free Business Sale Under Section 1202

The Creating Small Business Jobs Act of 2010 included a temporary amendment to Section 1202 that permits an eligible Qualified Small Business’ stock to be sold by its original issue shareholders without the shareholders being taxed on the stock sale. But the temporary amendment applies only to stock acquired after the enactment date of the SBJA and by Dec. 31, 2011.

In general, a Qualified Small Business Stock (QSBS) holder may exclude gain from a sale of the stock in the amount of the greater of $10 million or 10 times the adjusted basis in the corporation. For stock to be considered QSBS, the corporation must be a C corporation with assets of $50 million or less, and at least 80 percent of the corporation’s assets must be used in the active conduct of a qualified trade or business. A trade or business is qualified if it is actively conducted and is not one of the disqualified business lines, including certain professional services, athletics, performing arts, banking and financial enterprises, hotels, motels, or restaurants.

The tax-free sale rules are a huge opportunity for some businesses, but there’s little time to act. It is unlikely that Congress will choose to extend the tax-free QSBS sale rules for 2012.

Charitable Contributions From an IRA

The Tax Relief of 2010 extended a provision of the tax Code allowing qualified charitable distributions to be made directly from an individual retirement account. Without this provision, making a charitable contribution from an IRA requires the account owner to take a

distribution from the account, pay any tax due on the contribution, and then make the charitable contribution. Direct qualified charitable distributions take out the middle step, keeping the distribution out of the taxpayer’s taxable income.

Qualified charitable distributions are beneficial for individuals who either do not itemize their deductions or whose income is high enough that their itemized deductions are limited. Many seniors do not itemize deductions, precluding them from taking a charitable deduction for amounts distributed to the senior and then contributed to a charity. These seniors can indirectly take a charitable deduction by making a qualified charitable distribution from their IRAs. Also, for higher income seniors, a direct qualified charitable distribution will not be subject to the limitation on itemized deductions.

Another benefit of making a qualified charitable distribution is that it will satisfy minimum distribution requirements. As a result, a person who is required to take minimum distributions, but whose income is almost at a level where their Social Security benefits will be taxed, can avoid the tax by taking a qualified charitable distribution to reduce their taxable income.

Without action from Congress, direct contributions to charities from IRAs will no longer be possible starting Jan. 1, 2012.

Conclusion

Your clients may assume that the tax deductions we’ve talked about here are set to expire with the Bush tax cuts. This may also be the case with the $5 million applicable estate and gift tax exclusion amount on Jan. 1, 2013. But now may be the final time to take advantage of the deductions. With Congress looking to trim the fat anywhere possible, allowing tax deductions to expire is the easiest choice.

For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, AdvisorFX, for a free trial.

You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.