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Tax Efforts Successful in 2011; Work Ahead in 2012

While the tax agenda for small businesses faces a number of challenges in 2012, there were two major successes in 2011. Congress repealed two provisions that should never have been enacted in the first place:

  1. New Form 1099 filing requirements and
  2. 3% withholding on government contracts.

Both of these provisions found their way into tax legislation without public notice, vetting or comment by the business community. The underlying reason was seeking new sources of revenue; that is, both of these provisions were scored to bring in revenue needed to support the larger tax packages to which they were attached. This made it more difficult to repeal each of these provisions, as some legislators argued that new taxes should be generated to replace the revenue lost on repeal.

Thankfully, as a result of advocacy by CompTIA and other business groups, Congressional repeal of these provisions means that the Form 1099 reporting requirements will continue as last year, and businesses will not have to file Form 1099 for cumulative purchases of $600 or more. Also, those businesses that contract with government to provide goods or services will not be penalized by the now-repealed 3% federal income tax withholding requirement. Both of these provisions were bad for businesses, imposing additional compliance costs.

But even as we commend Congress and the Administration for coming together on the repeal of these two provisions, there are some other important tax provisions that Congress allowed to expire or be scaled-back, each of which are important to small technology businesses:

  • Research and Development Credit: The 20 percent credit for qualified research expenses expired for the 15th time on December 31, 2011. The R&D tax credit benefited companies that incur expenses in the development or improvement of products and technologies. The overwhelming component of which is salaries, compensating workers for their innovative ideas.
  • Small Business 179 Expensing: For 2010 and 2011, the maximum allowable deduction was $500,000, with a phase-out beginning at at $2 million. This $500,000 was not extended, so the limitation for 2012 drops to $125,000 (with a $500,000 phase-out), and then in 2013, the limitation will drop to $25,000 (with a $200,000 phase-out). Also the special expensing provision for real property was not carried over to 2012.
  • Bonus Depreciation: For 2011, businesses were allowed an additional 100 percent bonus depreciation; this limitation will drop to 50 percent in 2012 and will end for 2013 and forward.
  • Small Business Stock Exclusion: For certain “Qualified Small Business Stock” acquired after September 27, 2010, and before January 1, 2012, investors will be allowed to exclude 100% of the gain, provided the stock is held for five years. The 2012 sunset date was not changed, therefore, small business stock investments made in 2012 will not qualify for this tax break.
  • Work Opportunity Tax Credit: The work opportunity tax credit will not be available for employees who begin work after December 31, 2011. This credit provided employers a tax credit of up to 40 percent on wages paid to certain targeted groups, including veterans, vocational rehab workers, food stamp recipients and certain Supplemental Security Income recipients.

We certainly expect 2012 will be an interesting year in Congress, and CompTIA will be working to encourage Congress to re-instate these expired or down-sized tax provisions, which are important to many small technology companies.