After the American Taxpayer Relief Act of 2012 (ATRA)
Congratulations on surviving the end of the “Mayan Calendar” and the United States “Fiscal Cliff”. This article will focus on some domestic business tax issues resulting from recent legislation that may affect your moving company and/or other local businesses.
Business Tax Provisions
Many popular but temporary tax extenders relating to business are included in the American Taxpayer Relief Act of 2012 (ATRA). Among them are Code Sec. 179 Small Business Expensing, Bonus Depreciation, the Research Tax Credit, and the Work Opportunity Tax Credit.
- Small Business Expensing – The ATRA extends through 2013 enhanced Code Sec. 179 Small Business Expensing. The Code Sec. 179 dollar limit for tax years 2012 and 2013 is $ 500,000 with a $ 2,000,000 investment limit. The rule allowing off-the-shelf computer software is also extended.
- Bonus Depreciation – The ATRA extends 50 percent bonus depreciation through 2013. Some transportation and longer period production property are eligible for 50 percent bonus depreciation through 2014. To be eligible for bonus depreciation, qualified property (must be new) must be depreciable under the Modified Accelerated Cost Recovery System and have a recovery period of 20 years or less.
- Research Tax Credit – The ATRA extends through 2013 the Code Sec. 41 Research Tax Credit, which expired after 2011. This incentive rewards taxpayers that engage in qualified research activities with a tax credit. Most moving companies will not qualify for this credit. If your company is considering this tax credit, you are encouraged to hire a research tax credit consultant to assist with your research tax credit application. There is a high IRS audit incidence rate when this tax credit is claimed on a tax return.
- Work Opportunity Tax Credit – The ATRA extends through 2013 the Work Opportunity Tax Credit (WOTC), which rewards employers that hire individuals from targeted groups (i.e. hard-to-employ workers) with a tax credit worth up to $ 2,400 per qualified worker.
More Business Tax Extenders
A number of other business tax extenders expired after 2011 and they are extended through 2013 under the ATRA. They include, among others:
v Employer wage credit for activated military reservists
v 100 percent exclusion for gain on sale of qualified small business stock
v Reduced recognition period for S Corporation built-in gains tax
v S Corporations making charitable donations of property
The income of an S Corporation (S Corp) generally is taxed to the shareholders of the corporation rather than to the corporation itself. A domestic corporation must use Form 2553 to make an election to be an S Corporation. There can be no more than 100 shareholders in an S Corp.
- Eligible Shareholders for an S Corp include individuals and certain trusts. However, a Roth IRA is not a qualified shareholder. Ineligible shareholders could invalidate the S Corp Election.
- Shareholder tax basis is necessary for owners of the S Corp to take losses from an S Corp on the shareholder’s tax return. This is a significant audit issue for the Internal Revenue Service.
- Debt (for example a loan from the shareholder to the S Corp) may count for shareholder basis however the debt must be “Bona Fide Debt”. That means there is a loan document, there is a formal transfer of money and there is interest on the loan.
- S Corp shareholders that work in that business can become the subject of the Reasonable Compensation issue. Some shareholder/workers will try to maintain a low salary to reduce the payroll tax liability. During an IRS audit, the auditor may review comparable salaries for other workers or try to determine what a reasonable salary for the services being provided is.
- The combined Illinois corporate tax rate is 9.5% for the years 2012 thru 2014.
- Net Operating Losses (NOL) – as you may know the use of an Illinois NOL against taxable income from a different tax year was suspended beginning with the year 2011 which was the same time the state increased the Illinois income tax rates. That restriction limited the value of the NOL. Due to recently passed legislation, companies are now allowed to use a maximum of $ 100,000 of their NOL’s for the years 2012, 2013 and 2014. Taxpayers file Illinois Schedule NLD to claim the Illinois Net Loss Deduction.
- If a business receives a Notice of Proposed Deficiency or is contacted by an Illinois tax auditor and there is a dispute regarding the audit results, the business can request an Informal Conference Board (ICB) review. This hearing would be the step before the appeals court. One benefit to this type of hearing is that you may be represented by any person of your choice (such as a Certified Public Accountant) – your representative need not be an attorney. Taxpayers file Illinois Form ICB-1 to request an Informal Conference Board Review.
Please consult with your tax advisor before acting on these or any income tax topics. Your tax advisor can ensure you receive the maximum tax benefits considering your filing status, income tax rates, etc. You can also visit the Internal Revenue Service website http://www.irs.gov/ and the Illinois Department of Revenuehttp://tax.illinois.gov/ for more information on these issues.
Thomas L. Broderick is the Treasurer of Pickens-Kane Moving & Storage Co. in Chicago, Illinois. He is a Certified Public Accountant (C.P.A.), a Chartered Global Management Accountant (C.G.M.A.), holds Federal Securities Licenses #6, #63, and #65 and holds an Illinois Insurance License. He has served as Chairman of the Board of Trustees of the Illinois Movers’ and Warehousemen’s Risk Management Trust from 1996 to 2012. He has also served as president of the West Central Association Chamber of Commerce for the years 2007 through 2009. In 2012, he was named the chairman of the Parish Pastoral Council at St. John Fisher Church in Chicago. Many individuals, small businesses and non-profit organizations consult him for various accounting, investment, insurance and tax issues.
Note 1: Illinois CPA Society Fiscal Cliff Update Meeting on January 17, 2013 was used as a resource for this article.
Note 2: CCH Tax Briefing (Special Report) dated January 3, 2013 was used as a resource for this article.
Revised: January 25, 2013