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By Marcia Richards Suelzer, Toolkit Staff Writer
At the moment the New Year arrived, a wide range of credits, deductions and tax incentives ceased to exist--or continued to exist in a far more anemic fashion. The bulk of these provisions primarily benefited larger businesses, but a significant number had an impact on the tax liability for small businesses and individuals. While it is always possible that Congress will resurrect some (or even all) of these breaks during the coming year, at this point they are no longer available.
Think Ahead. The real impact on small business and individuals will be felt at the end of 2012 when the Bush-era tax rates, including the very favorable capital gains rates, are scheduled to expire. For this reason, tax planning--from timing the sale of assets to the realization of income--will be more important in 2012 than it has been for several years.
AMT Changes Will Affect Many Middle Income Taxpayers
High-net-worth (and many middle-income) individuals will be most affected by changes that affect Alternative Minimum Tax (AMT) liability. In 2012, the AMT "patch" expires and the amount of income that is exempt from AMT reverts to the far less generous, pre-2001 statutory amounts:
Bear in mind that the exemption amount continues to be phased-out for higher-income taxpayers. The exemption is phased out by 25 cents for each dollar your income exceeds:
The phaseout applied to a much lower exemption amount means that a much smaller amount income is needed before the full-impact of AMT is felt. As a result, many middle-income taxpayers will find themselves swept into the AMT system.
Not only did the AMT exemption amount plummet at the stroke of midnight, the number of credits that could be used to reduce the amount of AMT dropped as well. Most nonrefundable credits can no longer be used to offset AMT. Beginning in 2012, the following credits are the only ones that can offset AMT liability:
Other Changes Affecting Individuals
Those who itemize their deductions may notice the following familiar deductions are now gone: the option to deduct state and local sales taxes instead of state income taxes and the ability to deduct mortgage insurance premiums as interest. Two above-the-line deductions also expired:
The provisions that increased the adoption credit and adoption assistance program amounts also lapsed, as did the nonbusiness energy property credit. In addition, charitable distributions from IRAs will no longer be tax-free. Finally, the exclusion of gain from certain small business stock drops from 100 percent back to only 50 percent.
Depreciation, Expensing Changes Will Affect Businesses
Undoubtedly, two of the most important changes for 2012 are the reduction in the amount of first-year bonus depreciation and in the Section 179 expensing election amounts. While bonus depreciation does not completely go away, the amount that you are allowed to deduct in the first year drops from 100 percent to only 50 percent.
An equally dramatic drop occurs with regard to the expensing election. The maximum amount that you can elect to expense dropped from $500,000 to $139,000 (dropping again to only $25,000 in 2013.) In addition, the phase-out of the maximum amount begins at only $560,000, down from $2 million prior to 2012. It will again decrease dramatically to only $200,000 beginning in 2013.
Work Smart. The reduced bonus depreciation percentage and the lower expensing election amounts mean that you will need to plan asset acquisitions wisely in order to minimize your tax liability. While it would have been difficult for a small business to have lose the maximum expensing deduction when the investment threshold was $2 million dollars, that outcome is far more likely now that the threshold is much lower. This could mean that you will want to stagger asset acquisitions over two years.
In addition to these changes to depreciation/expensing, the depreciation period for qualified leasehold improvements, qualified restaurant buildings/improvements and qualified retail improvements more than doubled. Such property placed in service by December 31, 2011 qualified for MACRS 15-year straight-line cost recovery. The exact same property placed into service after December 31, must be depreciated over a 39-year period that applies to other nonresidential real property. This will result in a much smaller annual deduction.
Many Credits Vanished
Although tax credits tend to be complex and cumbersome to calculate and, generally, are limited in their applicability to small businesses, for those who can meet the requirements, tax credits can be of significant benefit. The end of 2011 saw the end of many of these dollar-for-dollar offsets against tax liability. Among those provisions that expired are the following:
Note that these are only some of the changes that took place at the end of 2011. Many other highly targeted provisions expired as well (such as the seven-year recovery period for motorsports complexes or the election to expense advanced mine safety equipment.) Your tax professional is your best source for information related to your specific needs.