Should you be changing any planned spending for the end of the year based on tax law changes? Now is the time to be thinking about filing your 2012 taxes and how they may be impacted by the uncertainty of tax law changes that may, or may not, happen before the end of the year.
Many different areas of the internal revenue code have changed or may change and effect your tax filing for the year. The list below highlights some of the areas that could impact small businesses. Be sure to consult with your tax professional for the latest information and to understand how the changes affect you specifically.
Tax rates – In 2013, tax rates are going up. If you use a cash-basis accounting method, there may be an incentive to get cracking on invoicing and collections before the tax rates increase. You may also want to consider holding off on certain expenses until 2013, as a way to offset income when tax rates increase.
Depreciation – In 2011, 100% of the cost of qualifying business items put into service the same year was tax deductable. In 2012, the Small-Business Jobs and Credit Act of 2010 has expired and the deduction is reduced to 50 percent. This is definitely something to pay attention to if you plan some large purchases at the end of the year.
Payroll – The Temporary Payroll Tax Cut Continuation Act of 2011, continuing the reduced Social Security tax withholding rate of 4.2 percent for employees and the 10.4 percent Self-Employment Contributions Act rate for self-employment income through Feb. 29, 2012 is now expired. The increased new payroll tax rate by the end of January, per the IRS.
Inflation – Several deductions have changed for 2012, adjusted for inflation:
Personal income and dependent deductions increased to $3,800
Standard deduction for married couples filing jointly is now $11,900
Singles and married filing separately can deduct $5,950
Business lodging per diem deduction increased to $77
Vehicle mileage for medical purposes or moving decreased to 23 cents per mile.
The 20+ page complete list of 2012 inflation-based adjustments can be found at www.IRS.gov.
Parking – Increased from $10 in 2011, companies can pay up to $240 a month per employee for parking, tax-free.
Sales Tax – If you live in Washington D.C. or one of the 7 states that don’t collect income tax, then you will want to be aware that the option to deduct either state income or sales tax on your federal income-tax return expired at the end of 2011. Congress does have the ability to renew the option, but entering the last month of the year, it is still expired.
R&D credit – Intended to provide deductions for startups and small businesses with research costs, the credit for research & development has expired. There is a chance it could be renewed, Congress has retroactively reinstated it nine times in the past.
Alternative minimum tax (AMT) – More taxpayers may be required to pay this tax for the first time in 2012. Created in the 1960s, AMT was to ensure that the very wealthy paid sufficient tax. However, exemption levels have now been dropped down to $33,750 for individuals and $45,000 for married couples filing jointly. AMT will definitely be impacting those far below the “wealthy” level in 2012.
Government contracts – Any contract business with a government agency this year, federal, state, or local, is subject to a 3 percent tax withholding.
The uncertainty of tax rates continues into 2013 as the current rates are set to expire and return to their pre-2001 levels of approximately 3% higher for all but the lowest bracket. Congress could still choose to extend the current tax rates, making tax planning for 2013 somewhat challenging.