Manufacturers & Distributors ARTICLE -

Dust Off the Expansion Plans

3 Tax Incentives Make Now an Attractive Time to Invest In Your Company

Target Audience: Manufacturing and Distributing Companies, M&D Industry

During the recent economic downturn, you may have been forced to put off making investments in your manufacturing company. With the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act late last year, it may be worth your while to revisit your expansion plans.

The Tax Relief act includes incentives designed to jumpstart spending and free up cash for businesses. Let’s take a closer look at three provisions that could benefit your company.

1. Bonus depreciation

If you need new plant equipment or office furniture, buying it now can provide a sizable tax break. Typically you must spread deductions for your asset purchases over several years. But if you buy and begin using a qualified asset by the end of 2011, bonus depreciation will allow you to deduct 100% of the cost on your 2011 tax return. If you buy and begin using the asset in 2012, you can deduct 50% of the expense. (Both deadlines are one year later for certain long-lived and transportation property, such as materials used in building construction and vehicles, respectively.)

Qualified assets include new equipment with a lifespan of 20 years or less, off-the-shelf computer software and “qualified leasehold improvement property,” which generally is an improvement on a rental property that is at least three years old.

Some corporations can choose to accelerate their alternative minimum tax (AMT) credits instead of taking the bonus depreciation for assets they acquire and begin using in 2011 or 2012. For certain long-lived and transportation property, you can buy and begin using those assets through 2013 and accelerate AMT credits. 

2. Section 179 expensing

Under Sec. 179 expensing, you may be able to deduct the cost of qualified business assets, including machinery, equipment, vehicles and furniture, rather than depreciating them over a period of years. Qualified leasehold improvement property is also an eligible asset in 2011, but not in 2012 and beyond.

Annual limits apply to both the total dollar amount you can deduct and the total amount you can buy. For every dollar you spend beyond the purchase limit, your deduction is reduced by a dollar.

Traditionally, the limits were low, so only small businesses benefited from Sec. 179 expensing. The Small Business Jobs Act of 2010, however, ramped up those limits to $500,000 ($250,000 of which can be qualified leasehold expenses) and $2 million, respectively, for 2010 and 2011, so more businesses can now benefit. The Tax Relief act sets the limits for 2012 at $125,000 and $500,000 (both to be indexed for inflation), but the limits are scheduled to drop to only $25,000 and $200,000 in 2013.

Through the end of 2011, it may make more sense to take advantage of 100% bonus depreciation instead of Sec. 179 expensing, because bonus depreciation has no dollar limit. In 2012, when bonus depreciation is 50%, you’ll want to consider the total cost of your purchases when deciding which incentive to use. Also, keep in mind that only new property is eligible for bonus depreciation, whereas both new property and used property are eligible for Sec. 179 expensing.

3. Work Opportunity credit

If you’ve been waiting to boost your staffing, this could be the financial push you need: The Tax Relief act extends the Work Opportunity credit to qualifying hires made through Dec. 31. (The credit previously was set to expire after Aug. 31.)

If you hire from certain disadvantaged groups, such as disabled veterans, food stamp recipients and convicted felons, you can receive a tax credit for 40% of the first $6,000 you pay to each qualified new worker — $12,000 if the worker is a veteran.

Other tax incentives

Other tax breaks you may be able to tap into include enhanced deductions for certain charitable donations and credits for manufacturing energy-efficient appliances. Your financial advisor can help you determine which tax incentives are most applicable for your company.

The research credit extended again

Uncle Sam is once again helping to make it worth your time and money to engage in research — and manufacturers should consider taking advantage while the getting is still good.

The research credit (sometimes referred to as the “research and development” or “research and experimentation” credit) expired at the end of 2009, but the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended it through the end of 2011. Businesses can also carry back the credit to 2010. Congress is mulling making the research credit permanent, but as of this writing nothing is set in stone.

You can use the research credit for virtually any research that benefits your business. Wages for researchers, the cost of research supplies and the cost of computer licensing for research purposes are all expenses that qualify for the credit. 

You can claim the credit in one of two ways: The traditional research credit is equal to 20% of qualified research expenses over a defined base amount related to your gross receipts and previous research spending, while the simplified credit is equal to 14% of any spending for that year that’s over 50% of your qualified research expenses for the previous three years.  

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

related links

M&D Newsletters & Articles 

Tax Services

Audit Assurance and Accounting

Industries

Tax and Business Updates