Two small tax bills came out of Congress in the last days of 2011 that may have implications for
employers and employees alike. Conversely, two depreciation incentives were not extended. Please
read on for more information.
Hiring Military Veterans
Congress has significantly expanded the tax credits available for hiring various categories of military
veterans. These credits are generally based on 40% of the wages paid to the new worker, and require at
least 120 hours of employment in the first year to gain any portion of the credit, and at least 400 hours
to gain the maximum credit. There are five specific categories of veterans that qualify the employer for
a tax credit, including several very broad definitions (i.e., those unemployed for as little as 4 weeks in
the 12 months preceding hire, a veteran who was a member of a food stamp household, or a veteran
unemployed at least 6 months in the preceding year.) Each category of eligible veteran has a maximum
credit amount, running from a low $2,400 to a maximum of $9,600.
Most of these categories do not require recent military service. In other words, a Vietnam-era vet can
be an eligible new hire for most categories of the credit. To determine eligibility, the employer uses IRS
Form 8850, a pre-screening notice, which is sent by the employer to the state workforce agency for the
verification process. This pre-screening form must be submitted within 28 days of the commencement
of employment.
2% Payroll Tax Waiver
Throughout 2011, Congress had reduced the employee share of the Social Security tax, as well as the
self-employment tax rate, by 2% as a method of stimulating consumer spending. This cut has been
temporarily extended through February 29, 2012.
If Congress does not agree on an extension for the full year, there is a small planning point for those
who are employees of their own farm corporation, or who issue occasional salary checks to family
members for their farm services. In order to receive the 2% waiver, payroll must be issued in the
first two months of 2012. And to maximize the savings, the worker must receive at least $18,350 of
compensation in the first two months of the year ($18,350 is 1/6th of the $110,100 maximum amount
subject to Social Security tax in 2012). So for those who only draw an occasional paycheck from their
farming entity, such as an S corporation or a C corporation, there is a tax savings (albeit under $400) if
roughly $18,000 of that payroll is drawn within the first two months of 2012. But if Congress extends
the 2% cut for all of 2012, this becomes a moot point.
Diminished Depreciation Incentives
Congress has been using two incentives to encourage businesses to expend for capital equipment.
Through 2011, new equipment (but not used) qualified for a 100% bonus depreciation deduction. But
for calendar year 2012, the first-year bonus percentage drops to 50%, and for 2013 there is no bonus
percentage. The 100% incentive for 2011 required that the asset must have been both legally acquired
and placed in service by December 31, 2011.
The long-standing Section 179 first-year depreciation deduction was $500,000 for tax years beginning
in 2011. But for a tax year beginning in 2012, this deduction is only $139,000. This first-year incentive
deduction applies to both new and used assets, and is claimed before applying the 50% bonus for 2012.
As an illustration, assume that a farmer acquires $339,000 of various items of machinery and equipment
during 2012. Up to $139,000 of Section 179 expense can be claimed, and that should be applied to used
items rather than new equipment. That leaves the remaining $200,000 of cost to which the 50% bonus
is applied for another $100,000 deduction (assuming this remaining $200,000 is all new equipment
eligible for the percentage bonus.) The remaining $100,000 is subject to the normal seven-year
depreciation schedule. So, for this example under 2012 rules, there is $239,000 of first year deductions
on total costs of $339,000.
The bonus depreciation provision applies to new acquisitions of assets that have a 20-year or shorter
depreciation period. Consequently, farm machine sheds and shops, which are 20-year assets, qualify for
bonus depreciation. If completed and placed in service during 2012, bonus depreciation applies to 50%
of the cost with the remaining 50% depreciated over 20 years (1/2 year for the first year).
Please let us know if you have any questions regarding these developments or if we can assist with these
or other tax planning opportunities for 2012.
