Thanks to the economy and skyrocketing costs, convenience stores are paying more in taxes while, at the same time, costs for everyone are going up. Knowing what tax breaks are available can boost your bottom line.
By Mark Battersby, Contributing Editor.
Will this be the last year of the Bush-era tax cuts? A number of the tax provisions that affect convenience store businesses—and their balance sheets—either expired at the end of 2011, or are scheduled to expire at the end of this year. They include the Bush-era tax cuts, the alternative minimum tax (AMT) patch, the temporary payroll tax cut, and other temporary provisions, many of which are commonly referred to as tax extenders.
Although Congress may retroactively reinstate some or all of these provisions, an agreement before the November election seems unlikely, and many are predicting the lame-duck Congress will accomplish nothing despite the threat of the economy falling off a fiscal cliff.
The biggest hit facing convenience retailers, at least in terms of estimated tax savings, includes the write-offs for newly acquired equipment and other business property.
The so-called bonus depreciation write-off was originally created in 2002 as a temporary economic incentive, allowing convenience retailers and other businesses to immediately deduct or write off a large portion of the cost of retail qualifying assets.
A whopping 100% bonus depreciation allowance was in effect through the end of 2011, decreased to 50% for 2012, and is scheduled to expire after Dec. 31, 2012.
The Section 179 enhanced expensing allowances that authorized convenience stores to deduct, as an immediate expense, amounts of up to $500,000 for investing in qualified equipment and other business property in 2011, was reduced to $125,000 for the 2012 tax year, and will revert to $25,000 thereafter.
Unlike bonus depreciation that applies only to new property, a convenience store business may immediately deduct as much as $125,000 in equipment costs. Of course, the Section 179 expensing write-off is reduced, dollar-for-dollar, by any property acquisitions in excess of the $500,000 investment ceiling, limiting the write off to smaller businesses.
Retail and Leasehold Improvements
Before 2012, qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property were eligible for a 15-year recovery period. To qualify for the shorter write-off period, the qualified property had to be placed in service before Jan.1, 2012.
Under current law, this incentive is not available for qualified property placed in service after Dec. 31, 2011. Congress could, of course, extend the incentives retroactively.
Those convenience retailers that failed to take advantage of the incentive before 2012 may benefit from an extension for property placed in service after Jan. 1, 2013. Of course, this is speculative, but every retailer should evaluate the possible benefit from a retroactive extension.
Payroll Tax Cuts
Every convenience store retailer with employees is affected by the Federal Insurance Contributions Act (FICA) and the two taxes it imposes on employers and employees, one for Old Age, Survivors and Disability Insurance (OASDI, which is commonly known as the Social Security tax), and the other for Hospital Insurance (commonly known as the Medicare tax).
To help stimulate the economy by increasing workers’ take-home pay, the 2010 Tax Relief Act reduced by two percentage points the employee OASDI tax rate under the FICA (from 6.2% to 4.2%) and the OASDI tax rate under the SECA tax for the self-employed (from 12.4% to 10.4%) on the first $106,800 of wages.
Although the payroll tax cut benefits most taxpayers, it may not be as targeted or cost-effective a stimulus as other tax policies or direct-spending programs, according to many experts, since it is based on the amount of wages received.
Since the actual value of the tax cut depends on wages—thus providing much smaller benefits to lower earners—the fact that absent Congressional action the OASDI rates will revert to normal levels, generating an estimated $225.7 billion for the government over the next 10 years, may not be that big of a deal.
Worker Hiring Incentive
Another worker incentive that has enjoyed an on-again off-again life remains alive at least temporarily. The Work Opportunity Tax Credit (WOTC) is a direct reduction of an employer’s tax bill as opposed to a deduction, and is available to employers who hire members of certain targeted groups.
Generally, the tax credit was allowed to the extent of 40% of qualifying first-year wages up to $6,000 per employee. This credit expired at the end of 2011. However, an amended version of the credit remains available in 2012, but only for employers that hire qualified veterans.
Unfortunately, under the current law, the window for hiring a qualified veteran to claim the WOTC is short. The qualified veteran must begin work before Jan. 1, 2013 but, remember, the WOTC for qualified veterans can be as high as $9,600.
S Corporation Built-In Gains
The tax on built-in gains is a corporate level tax on S corporations that dispose of assets that appreciated in value during years when the convenience store operation was a regular (or “C”) corporation. The built-in gains tax applies to all convenience store operations that elected S corporation status after 1986, and had a net recognized built-in gain.
Generally, net recognized built-in gain attributable to C corporation years is taxable to an S corporation during the first 10-year period it is an S corporation.
The 10-year period was reduced to seven years by the American Recovery and Reinvestment Tax Act of 2009; for taxable years beginning in 2009 and 2010. The Small Business Jobs Act of 2010 reduced the 10-year period to five years for taxable years, beginning in 2011.
Small Business Stock
Many newly-formed and growing, incorporated convenience store chains have used a unique type of stock to attract badly-needed capital. Special tax treatment of so-called “Small Business Stock,” allows the holder to exclude 50% of the gain realized when cashing out after five years.
The amount excluded is 50% of the gain for qualified stock issued before 2009 or after 2011; 75% of the gain for qualified stock issued after Feb. 17, 2009, and before Sept. 28, 2010; and 100% for qualified stock issued after Sept. 27, 2010, and before Jan. 1, 2012.
New Markets Tax Credit
The New Markets Tax Credit (NMTC) was designed to encourage investments, loans or financial counseling for businesses and real estate projects in low-income communities.
Under the rules, investors could claim the credit by making an equity investment in a community development entity (CDE), which in turn invests the funds in the low-income community. Both individuals and corporations can invest in a CDE, although the investment must be acquired at its original issue, either directly or through an underwriter.
The U.S. Treasury allocates credits to the CDEs. Taxpayers can claim a total credit of 39% of the original amount invested. The credit is claimed over seven years, 5% in the first three years, 6% over the succeeding four years.
Because the majority of investments have involved real estate, the IRS and the U.S. Treasury have begun efforts to encourage investments, primarily as working capital and equipment loans, in businesses that are not involved in real estate.
While the NMTC expired at the end of 2011, it may be extended by Congress
retroactively in 2012, or into 2013 and with $3.6 billion allocated to the program in 2011, every convenience retailer should be on the lookout for investment opportunities.
Dealing with Healthcare “Taxes”
All tax planning should take into account the massive, and controversial, Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act of 2010, the two healthcare reform bills, that included more than $400 billion in so-called revenue raisers and new taxes on employers and individuals.
The tax most likely to affect convenience store businesses, at least those with more than 50 employees, is the Employer Mandate. Under the Affordable Care Act, businesses with more than 50 employees are required to provide employees with health insurance or face an assessable payment. That means a business must be in compliance or face the fine beginning after Dec. 31, 2013.
The IRS has already begun encouraging small employers to explore and, if qualified, claim the new small health insurance coverage credit. The credit was created for eligible small employers to either maintain their current health insurance coverage or to begin offering health insurance coverage to their employees.
Taxmaggedon is Coming
The year 2013 will, in all likelihood, continue to be a year of considerable tax uncertainty, making tax planning difficult.
This year, with the Bush-era tax cuts expiring, many tax planning issues are focused on whether those cuts that were scheduled to expire will re-emerge. With the economy on a slow mend and the Federal Reserve holding interest rates low, both lawmakers and the administration appear less likely to agree to an extension of tax cuts.
In the meantime, every convenience retailer should be aware of the following:
• The distinction between ordinary and qualified dividends will expire at the end of 2012 and all dividends, including those paid by the convenience store business, will be subject to ordinary tax rates (with the top ordinary rate being 39.6%);
• Every convenience store operator can sell appreciated stock by the end of 2012 to utilize the lower capital gains rates. For those fortunate enough to file high income returns, foregoing the 3.8% investment income tax set for 2013 is possible. There is also no restriction on repurchasing the same stock, as there is when sold for a loss.
An investment sale, such as a land or business transaction, may warrant thinking about closing the sale prior to 2013 in order to take advantage of the lower capital gain rates. For those fortunate enough to file high income returns, foregoing the 3.8% investment income tax set for 2013 is possible. There is also no restriction on repurchasing the same stock, as there is when sold for a loss.
For those receiving sale proceeds as payments over several years, called an installment agreement, they may want to consider electing not to defer the gain over the installment period, but instead take the gain entirely in 2012.
As for those almost-inevitable capital losses, one strategy might be to hold off on taking capital losses until after 2012, as they could be more valuable to offset capital gains at the higher capital gain rates.
Some convenience store retailers, petroleum marketers, franchisees and independent business owners or managers have already decided that the uncertainty is too much to take any specific action yet this year. Many have decided to at least wait until after the November elections to think about what 2013 may bring.
Naturally, all should be armed with the facts and options available to intelligently weigh those decisions. To do that effectively requires at least some advanced consideration.
It is important for every chain retailer to take advantage of these tax benefits while they’re still available. To help ensure future prosperity for your business, consult with a tax specialist to discuss opportunities for the 2012 tax-filing season and beyond.