The Agenda

How small-business issues are shaping politics and policy.

This summer, executives at Gray Construction, a closely held company in Lexington, Ky., decided it was time for a new telephone system. Gray, which builds factories and other industrial projects, has about 500 employees in offices in California, North Carolina, and Alabama, and executives concluded that a new Internet-based phone system would pay for itself in lower long-distance call costs in just five years, said Scott Parker, who is the company’s chief operating and financial officer and also an owner.

The only question was when to purchase the system. “We met with our tax advisers and they said that if we could have it up and running by the end of the year, it would be much better than waiting until next year,” Mr. Parker said. That’s because as a relatively small business, Gray Construction can take advantage of Section 179 of the tax code, which allows small companies to fully expense many capital investments in just one year, instead of over at least five years. Since the recession, Congress has allowed companies to expense more investment under Section 179, but the cap fell sharply in 2012, and is scheduled to fall sharply again in 2013, to just $25,000. “We’re able to write that phone system down faster by purchasing it in 2012 than if we purchased it in 2013,” Mr. Parker said. The phone system was up and running by early November.

This is not the only business decision Gray Construction made with an eye on the possibility of higher taxes in 2013. The company is structured so that its profits pass directly to its shareholders, who pay the taxes on that profit when they file their individual returns. Mr. Parker said the company sold $3 million of its stock investments in order for its owners to take their capital gains this year rather than next year, when the capital gains rate for wealthy taxpayers will rise by at least 3.8 percent, the result of a provision in the Affordable Care Act. (If the Bush-era tax cuts on wealthier Americans expire, their rates for capital gains will increase another 5 percent.) “In many, many cases, we will repurchase those same stocks, many almost immediately,” Mr. Parker said. “To us, it was sort of a no-brainer.”

As lawmakers and presidential advisers prepare to haggle over the so-called fiscal cliff, some small businesses are making their own plans. And while most of the discussion about taxes right now is focused on the expiring Bush-era tax cuts on wages and capital gains, as well as dividends and estates, a host of other deductions and credits that directly affect small businesses are on the line — and on the table.

•Section 179 Expensing: The depreciation provision that Gray Construction is taking advantage of this year is set to be trimmed from $139,000 in 2012 to $25,000 in 2013. In addition,the expensing of real estate purchases, made possible by 2010’s Small Business Jobs Act, will no longer be permitted. “At that level, it’s really too low to provide much bang for the buck to businesses in terms of being able to deduct expenses for purchases,” said Chris Whitcomb, tax counsel for the National Federation of Independent Business, the lobbying group. (For investments made in 2011, companies could immediately expense up to $500,000.) But Mr. Whitcomb notes that both the House and Senate support maintaining at least the current Section 179 expensing limit for 2013. “I’m optimistic that 179 will be at some higher level next year,” Mr. Whitcomb said.

Executives at Gray Construction weren’t willing to take that risk. “We chose the path of let’s deal with what we know, and let’s not speculate about what we don’t know,” Mr. Parker said. But for those willing to bet on having at least the same expensing limit in 2013, the decision on when to make an investment that would trigger the expensing rules hinges on how well the company anticipates it will do next year, said Grafton Willey, an accountant in Providence with the accounting firm CBIZ Tofias and a trustee of the National Small Business Association, another lobbying group. If next year looks to be as good or better than this year, take the expenses next year, said Mr. Willey, who believes that  limits for expensing will rise in 2013.

•Bonus Depreciation: Since 2008, companies have been able to take advantage of a special depreciation allowance that allows them to write off 50 percent (and sometimes more) of certain kinds of investment in the first year. The provision is especially helpful to companies too big to take advantage of Section 179 (which is only available to companies with total capital purchases under a certain threshold — $560,000 in 2012), but it is set to expire at the end of this year.

•The Research and Experimentation Tax Credit: The RD tax credit, as it’s also known, expired at the end of 2011. Economists debate the merits of providing an incentive for an activity that technology-driven businesses are likely to undertake anyway, but this so-called temporary credit has been extended 13 times.

•Built-in gains tax: Normally, when a company converts from a C corporation to an S corporation, it must retain its assets for at least 10 years or pay a 35-percent tax on the built-in capital gains that occurred before the company made the conversion. (The provision is intended to discourage a corporation from making the conversion simply to avoid double taxation — first at the corporate level, then at the shareholder level — on capital gains.) Since 2009, Congress has shortened the period, first to seven years for assets sold in 2009 and 2010, and then to five years for assets sold in 2011. Mr. Whitcomb, of the N.F.I.B., expects the more lenient built-in gains treatment will be revived for 2012 and 2013 as part of a last-minute deal.

•Temporary exclusion of 100 percent of gain on certain small-business stock: This provision, an incentive to invest in small companies by making the capital gains tax-free, is yet another creature of recent stimulus laws that has been expanded over the last few years, and like the others, it also expired at the end of last year. However, its fate is murkier. “It’s not a bad idea, just one that hasn’t generated a lot of consideration,” said Mr. Willey, the accountant.

•Work opportunity tax credits: These are tax credits for employers who hire military veterans or people belonging to certain disadvantaged groups (for example, people receiving government assistance or living in distressed areas). Tax credits for hiring the disadvantaged expired in 2011; the tax credits for hiring veterans expire at the end of this year.

•Fifteen-year depreciation for qualified improvements to leasehold, retail or restaurant property: We’re getting deeper in the weeds here, but without this provision, which expired in 2011, a renter, retailer, or restaurateur has to write off improvements over 39 years, longer than one might realistically expect to be in business (or renting at the same location).

•Enhanced charitable deduction for donating computer equipment: Still deeper in the weeds, this provision allowed C corporations the opportunity to donate computer equipment to schools and libraries and get a bigger deduction for it. The provision expired in 2011.

In addition, new tax rules and laws take effect in 2012 and 2013, among them several provisions of the Affordable Care Act (including the surtax on capital gains for the wealthy). Some people, particularly opponents of these new provisions, would like to see them on the negotiators’ agenda.

So which of these incentives will get a new lease on life? Mr. Willey said that apart perhaps from the Section 179 rules, all of them are in jeopardy, because the main fight is over the tax rates. “I don’t think we’ll know until New Year’s Eve,” he said.

Article source: http://boss.blogs.nytimes.com/2012/11/29/for-small-businesses-more-than-income-tax-rates-are-at-stake-in-deficit-talks/?partner=rss&emc=rss