Capitol Hill politicians reached a compromise on the fiscal cliff, though it took 15 hours after midnight on New Year’s Eve to get full approval from the U.S. House of Representatives.
The looming across-the-board tax hikes and draconian spending cuts that threatened to plunge the national economy into a double-dip recession were officially avoided with bicameral support for a plan forged by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-KY).
However, while the news might not be so good for individuals making more than $400,000 and families earning more than $450,000, the fiscal cliff deal includes some $46 billion in business tax breaks.
Income.com urges entrepreneurs to explore every avenue of cost-saving while they can. While tempered optimism may be the sentiment of the day, politicians once again punted on several key issues – debt ceiling and deficit reduction – and another political scramble looks probable just two months from now.
Section 179 and Bonus Depreciation extended
One of the biggest implications from the fiscal cliff deal is the extension of the Section 179 deduction and Bonus Depreciation, massively important tax code features that enable entrepreneurs to save thousands of dollars on each one.
The Section 179 deduction allows entrepreneurs to write off equipment purchases through financing or leasing that are put into service for tax year 2013. Instead of dipping to $25,000, the total amount entrepreneurs can write off for equipment in 2013 will stand at $139,000 for total purchases up to $560,000.
The Bonus Depreciation was also extended for 2013, allowing entrepreneurs to write off up to 50 percent of qualified assets put into service for the tax year. The deduction was extended to promote further business expansion.
The key insight from these extensions is that with an uncertain economic future again in the cards for 2014, entrepreneurs may be better served replacing equipment instead of shelling out for more repairs. It may be wise to consider expansion now rather than later.
Research and Development
Another crucial small-business tax break addressed by the fiscal cliff legislation is the one-year extension of the research and development tax credit, which allows for businesses engaged in qualified research to write off costs incurred in the process.
However, the tax credit (expected to save $14.3 billion during the next 10 years) is a legally dense part of the tax code. It also requires that you fulfill a series of requirements that prove your research and development-minded intentions are worthy. In other words, make sure they qualify as acceptable research activity, are meant to discover technological information and constitute a process of experimentation.
Some of the expenses entrepreneurs can write off are wages, cost of supplies and the amount of research contracts.
Income.com sees a prolonged fight over deficit reduction and spending cuts to come in just a few short months. Business conditions and economic growth is at risk, and more than ever, entrepreneurs need to find legal avenues of cost reduction. Take advantage of the Section 179 and Bonus Depreciation by acting without delay when it comes to equipment purchases or business expansion. Ensure you qualify for the research and development tax credit, because who knows what will happen when the tax debate rears its ugly head once again by the end of the year.