The fiscal cliff fix passed on New Year?s Day includes a measure that could allow some businesses to claim tens of thousands of dollars-worth of extra deductions related to equipment purchases in 2012.
That was one of the few surprises Minneapolis business tax experts could pull out of the legislation, which was meant to prevent at least some of the automatic tax increases Americans were facing this year.
Many tax credits businesses rely on ? from research and development credits to credits for hiring people from low-income backgrounds ? were retroactively extended back a year, then rolled forward through 2013.
Developers hoping to build affordable housing also got a reprieve. The bill extended the life of the 9 percent Low-Income Housing Tax Credit program through 2013.
?An awful lot of the legislation was continuing the present system,? said Andy Biebl, a tax partner at CliftonLarsonAllen?s Minneapolis headquarters, about the deal passed Tuesday.
Michael Saarela, an accountant at Mahoney Ulbrich Christiansen Russ PA in St. Paul, reported a quiet phone Wednesday at his office. He thinks it?s because many of the changes were expected. ?I think they?re kind of waiting for the dust to settle,? Saarela said of his clients.
Even so, the equipment purchases measure was a surprise because it restores economic stimulus measures the federal government employed during 2010 and 2011. ?Nobody knew what was going to happen on that,? Saarela said.
Biebl and Saarela reported they knew of many businesses rushing to finish purchases of new equipment before Dec. 31, 2012, when a tax deduction involving half the equipment?s value expired.
Now the 50 percent ?bonus depreciation? has been extended through 2013. ?Surprise, you didn?t have to worry about it,? Saarela said.
On top of that, a business that made less than $2 million in equipment purchases in 2012, both new and used, can now claim up to a $500,000 deduction. Before Tuesday?s law, it was a $139,000 deduction.
Biebl calls it a ?retroactive economic stimulative effect.? The good news is that taxes for 2012 could be lower than planned for businesses such as manufacturers that purchase a large amount, but the bad news is that the money could have been spent last year on hiring workers, research and development, and other economy-boosting activities.
Businesses now have more incentives to buy equipment this year, but Biebl also cautioned, ?Businesses should be making capital improvements based on their needs.?
As for the Low-Income Housing Tax Credit program, the guaranteed 9 percent subsidy was scheduled to switch to a benchmark floating rate, which would be about 7.2 percent today, said Jeffrey Koerselman, a tax lawyer with Minneapolis-based Winthrop & Weinstine.
And that would have been a problem for projects budgeted on the old fixed rate.
?I have a client who stood to lose $1.2 million in equity if that change had occurred,? Koerselman said.
Congress? 11th-hour action was a short-term reprieve for projects in the pipeline, but it didn?t end the longer-term threat the program faces, as lawmakers continue to look for ways to reduce the federal deficit.
Deficit reduction advocates such as the Simpson-Bowles task force have urged elimination of many tax credits as a way to increase revenue and reduce federal debt.
?There?s another round of very difficult conversations coming, which will concern tax reforms,? said Chip Halbach, executive director of the nonprofit Minnesota Housing Partnership. ?These [tax credit] programs will be vulnerable in those conversations, but at least this action puts Congress on the record saying housing tax credits are important, and will continue it for another year,? Halbach said.
Many of the other changes in the fiscal cliff law were less of a surprise.
Income, capital gains and estate tax rates went up for the wealthiest ? individuals making more than $400,000 a year, or married couples earning more than $450,000.
After strong lobbying from the AARP, the Social Security payroll tax holiday is over, which means workers making around $50,000 a year will see their biweekly take-home pay go down around $25 or nearly $680 for the year, according to a New York Times analysis.
But payroll processing companies such as ADP were expecting the change, said Saarela.
Workers should notice a change in their first January paycheck.
With the capital gains rate expected to rise for the wealthy, a flurry of business sales occurred at the end of 2012 as owners seeking to sell sought to pocket the gains at a lower tax rate, said John Erhart, an officer and shareholder specializing in business planning and tax-related law at Minneapolis-based Fredrikson & Byron.
Such sales now appear to have been prudent, and Erhart expects a resulting lull in business sales during the first few months of 2013.
Erhart thinks the new law reduces some worries about the future that business owners were facing. Still, ?I think that we?re still not out of the woods on this,? he said. ?I think increasing taxes in a weak economy is not the best economic policy.?
Timothy Barnett, a shareholder at Winthrop & Weinstine, has heard clients, many of them owners of privately held, medium-sized companies, complain that they will have to carry a higher tax burden than their employees.
?He looks around and says, ?I?ve got to pay an additional 10 percent out of my income out of this business. ? I need to find some of that 10 percent in the expense side of my business,? ? Barnett said.
This entry was posted on Wednesday, January 2nd, 2013 at 4:30 pm and is filed under Business & Economy, Economic Development. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
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