This is the time to capitalize on remaining tax incentives and to focus on employee morale and retention concerns. While many related tax incentives are expiring, opportunities remain to capitalize on Section 179 elections, research and development (R&D) credits, and S Corporation elections. Amidst improving economic conditions, companies should also consider the value of implementing or enhancing a qualified pension plan.
A Section 179 Expense Election—Internal Revenue Code Section 179—allows a company to write off the full cost of acquired equipment on a piece-by-piece basis. The equipment must be used in the active conduct of a trade or business, must not be acquired from a related party and must be placed in service before the end of 2010.
While the Section 179 limit is lower for 2010, taxpayers can expense the first $125,000 of equipment placed in service. Companies must have taxable income to make that election. The deduction is also reduced by one dollar for each dollar spent above $500,000. Once equipment costs exceed $625,000, no Section 179 expense election can be made.
The Research and Development (R&D) Credit applies to activities related to a new function, performance, reliability or quality of a business component, and not just to new product development. Qualifying R&D credit expenses include employee wages, related supplies and 65 percent of outside consulting costs. Because this is a tax credit, each dollar of R&D credit offsets one dollar of tax liability. Various methods exist for claiming the credit. A common method entails claiming 20 percent of R&D expenditures in excess of a base year’s R&D expenditures as a credit.
This is also a great time for a privately held corporation to make an S Corporation election. The time frame for the Built-in Gains tax that applies to S Corporation elections and asset sales has been reduced from 10 years to seven years. For an owner wanting to sell a business after seven years, the S Corporation election would likely eliminate taxes for two reasons.
First, with a traditional corporation, taxes are paid at the corporate level and then at the shareholder level. Secondly, corporations have no preferential rate on capital gains. S Corporation income is only taxed at the shareholder level. Also, S Corporation assets sold at a capital gain are taxed at the 15 percent individual capital gains rate.
Employee retention
Early signs of economic recovery call attention to employee morale and retention concerns as well. Stock market fluctuations over the past several years also highlight retirement income concerns. In response to those issues, consider implementing or altering a qualified pension plan.
Various qualified pension plans allow employees to defer some compensation, with a relatively small match required by the employer. For an existing plan, consider increasing the employer matching or employee contribution percentages to make the plan more appealing to employees.
Entrance and matching contribution requirements can be simultaneously stiffened. For example, current policy may require someone be employed 90 days and work at least 500 hours before deferring any compensation. The same standards may apply to matching contributions. That plan can be modified to allow deferred compensation after 90 days of employment, with matching contributions provided after 1,000 hours worked, including employment on the last day of the year.
Matching contributions can be deferred until the company tax return due date, including extensions. That due date is Sept. 15 for calendar-year corporations. Pension plan introductions and revisions require employee notification early in the year. Contact a qualified plan administrator soon if you would like to take advantage of these options.
Lisa Cochell, CPA,Lisa.Cochell@WeaverLLP.com, is a Senior Tax Manager at independent certified accounting firm Weaver, with offices in Dallas, Fort Worth, Houston, San Antonio and Austin.
A Section 179 Expense Election—Internal Revenue Code Section 179—allows a company to write off the full cost of acquired equipment on a piece-by-piece basis. The equipment must be used in the active conduct of a trade or business, must not be acquired from a related party and must be placed in service before the end of 2010.
While the Section 179 limit is lower for 2010, taxpayers can expense the first $125,000 of equipment placed in service. Companies must have taxable income to make that election. The deduction is also reduced by one dollar for each dollar spent above $500,000. Once equipment costs exceed $625,000, no Section 179 expense election can be made.
The Research and Development (R&D) Credit applies to activities related to a new function, performance, reliability or quality of a business component, and not just to new product development. Qualifying R&D credit expenses include employee wages, related supplies and 65 percent of outside consulting costs. Because this is a tax credit, each dollar of R&D credit offsets one dollar of tax liability. Various methods exist for claiming the credit. A common method entails claiming 20 percent of R&D expenditures in excess of a base year’s R&D expenditures as a credit.
This is also a great time for a privately held corporation to make an S Corporation election. The time frame for the Built-in Gains tax that applies to S Corporation elections and asset sales has been reduced from 10 years to seven years. For an owner wanting to sell a business after seven years, the S Corporation election would likely eliminate taxes for two reasons.
First, with a traditional corporation, taxes are paid at the corporate level and then at the shareholder level. Secondly, corporations have no preferential rate on capital gains. S Corporation income is only taxed at the shareholder level. Also, S Corporation assets sold at a capital gain are taxed at the 15 percent individual capital gains rate.
Employee retention
Early signs of economic recovery call attention to employee morale and retention concerns as well. Stock market fluctuations over the past several years also highlight retirement income concerns. In response to those issues, consider implementing or altering a qualified pension plan.
Various qualified pension plans allow employees to defer some compensation, with a relatively small match required by the employer. For an existing plan, consider increasing the employer matching or employee contribution percentages to make the plan more appealing to employees.
Entrance and matching contribution requirements can be simultaneously stiffened. For example, current policy may require someone be employed 90 days and work at least 500 hours before deferring any compensation. The same standards may apply to matching contributions. That plan can be modified to allow deferred compensation after 90 days of employment, with matching contributions provided after 1,000 hours worked, including employment on the last day of the year.
Matching contributions can be deferred until the company tax return due date, including extensions. That due date is Sept. 15 for calendar-year corporations. Pension plan introductions and revisions require employee notification early in the year. Contact a qualified plan administrator soon if you would like to take advantage of these options.
Lisa Cochell, CPA,Lisa.Cochell@WeaverLLP.com, is a Senior Tax Manager at independent certified accounting firm Weaver, with offices in Dallas, Fort Worth, Houston, San Antonio and Austin.
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