Many businesses may benefit from purchasing assets by Dec. 31 to take advantage of depreciation-related deductions that are scheduled to either disappear or become less favorable in 2013:

Bonus depreciation. For qualified assets acquired and placed in service through Dec. 31, 2012, this additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With a few exceptions, bonus depreciation is scheduled to disappear in 2013.

Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets, and it’s subject to different rules than bonus depreciation. On the plus side, used assets can qualify for Sec. 179 expensing. On the minus side, a couple of rules may make Sec. 179 expensing less beneficial to certain businesses:

• For 2012, expensing is subject to an annual limit of $139,000, and this limit is phased out dollar for dollar if purchases exceed $560,000 for the year. So larger businesses may not benefit.
• The election can’t reduce net income below zero. So for businesses that are having a bad year, it can’t be used to create or increase a net operating loss for tax purposes.

The expensing and asset purchase limits are scheduled to drop to $25,000 and $200,000, respectively, in 2013.

These depreciation opportunities, however, bring with them a challenge: Determining whether the larger 2012 deductions will prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.

In some situations, future deductions could be more valuable. For example, tax rates for individuals are scheduled to go up in 2013, which means flow-through entities, such as partnerships, limited liability companies and S corporations, might save more by deferring the deductions.

Finally, keep an eye on Congress: It’s possible the current versions of these breaks could be extended or even enhanced.

Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.

Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.

Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners can exclude from their taxable income up to $2 million in COD income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). But the exclusion is available only for debts forgiven (via foreclosure or restructuring) through 2012.

QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).

If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home. Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it’s generally better to defer tax when possible.

So if you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion while it’s available.

After being in session for only two weeks in September, Congress has now adjourned until after the November 6 elections — without reducing any tax law uncertainty. The “lame duck” session is the next possibility for legislative activity. The Senate will return for the week of Nov. 15, break for the week of Thanksgiving and return again on Nov. 29 for a period of time yet to be determined. The House’s schedule likely will be similar.

Congress has a full plate awaiting them in the lame duck session. This includes addressing tax breaks that expired at the end of 2011 as well as the rates and breaks that are scheduled to expire at the end of this year.

The results of the election should shed some light on what Congress will try to accomplish in the lame duck session — and what they’ll punt to next year. (In terms of the latter, tax law changes could be made retroactive.)

According to popular wisdom, the Republican leadership may be more likely to strike an agreement with Democrats on the substance of extending tax cuts if President Obama is re-elected. If Gov. Romney is elected, Republicans would have less reason to compromise.

Other election results that will affect legislative action are which party will control the Senate and by what margin. The Republicans are expected to retain control of the House, but also significant will be how many of the Tea Party members elected two years ago retain their House seats.

As tax law uncertainty continues, year-end tax planning remains a challenge. It’s a good idea to perform a year-to-date review of your income, deductions and potential tax now. That way you can be ready to take quick action once it’s clear what, if any, tax law changes Congress will make before year-end.

It depends on the amount of your gain, your tax filing status, and your modified adjusted gross income (MAGI). If the gain on the sale qualifies for the home sale exclusion of $250,000 ($500,000 on a joint return), then you don’t have to worry about any additional Medicare tax on the sale. The Patient Protection and Affordable Care Act that created the new Medicare tax did not change the home sale exclusion. However, if you have any gain over the exclusion amount, the excess is treated as investment income for purposes of the tax. You’ll owe the tax only if your MAGI exceeds a threshold amount for your filing status (e.g., over $200,000 if you’re single or $250,000 if you’re married filing jointly).

Currently, if your eligible medical expenses exceed 7.5% of your adjusted gross income (AGI), you can deduct the excess amount. But in 2013, the 2010 health care act increases this “floor” to 10% for taxpayers under age 65.

Eligible expenses can include health insurance premiums, medical and dental services and prescription drugs. Expenses that are reimbursed (or reimbursable) by insurance or paid through a tax-advantaged health care account (such as a Flexible Spending Account or a Health Savings Account) aren’teligible.

To potentially be able to deduct more health care costs, consider “bunching” nonurgent medical procedures and other controllable expenses into alternating years. For example, if your year-to-date medical expenses already exceed 7.5% of your projected 2012 AGI and you’re anticipating elective surgery or major dental work in early 2013, you could instead schedule it for this year. Or you could stock up on prescription meds (to the extent allowed) and buy new contact lenses or glasses before year end.

Bunching expenses into 2012 may be especially beneficial because of the scheduled floor increase. But keep in mind that, for alternative minimum tax purposes, the 10% floor already applies. Also, if tax rates go up in 2013 as scheduled, your deductions might be more powerful then. Finally, be aware that the floor increase could be repealed by Congress.

Veterans provide a valuable labor pool, full of highly trained, hard-working team players with strong leadership skills. There’s also a tax incentive: The VOW to Hire Heroes Act of 2011 extended the Work Opportunity credit through 2012 for employers that hire qualified veterans. It also expanded the credit by:

• Doubling the maximum credit — to $9,600 — for disabled veterans who’ve been unemployed for six months or more in the preceding year,
• Adding a credit of up to $5,600 for hiring nondisabled veterans who’ve been unemployed for six months or more in the preceding year, and
• Adding a credit of up to $2,400 for hiring nondisabled veterans who’ve been unemployed for four weeks or more, but less than six months, in the preceding year.

To be eligible for the credit, you must take certain actions before and shortly after you hire a qualified veteran. We can help you determine what you need to do.

Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. But before you donate, it’s critical to make sure the charity you’re considering is indeed a qualified charity — that it’s eligible to receive tax-deductible contributions.

The IRS’s recently launched online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. The previous source for this information was IRS Publication 78, which is incorporated in the new tool.

You can access EO Select Check athttp://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Finally, in an election year, it’s important to remember that political donations aren’t tax-deductible.

Coverdell Education Savings Accounts (ESAs), like 529 savings plans, offer a tax-smart way to fund education expenses:

• Contributions aren’t deductible for federal purposes, but plan assets can grow tax-deferred
• Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and may be tax-free for state purposes.
• You remain in control of the account — even after the child is of legal age.
• You can make rollovers to another qualifying family member.
• One major ESA advantage over a 529 plan is that tax-free distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. Many taxpayers have been taking advantage of this by using ESA funds to pay for such expenses as tutoring or private school tuition.

However, if Congress doesn’t extend this treatment, distributions used for precollege expenses will be taxable starting in 2013. So you can’t count on using tax-free ESA funds to pay these expenses next year — which essentially means as soon as the second half of the new school year.

Barring congressional action, ESAs will become less attractive in 2013 for an additional reason: The annual ESA contribution limit per beneficiary, currently $2,000, will go down to $500 for 2013. Contributions (both in 2012 and 2013) are further limited based on income.

Bringing family or friends along on a business trip and extending your stay can be an excellent way to fund a portion of your vacation costs and save taxes. But if you’re not careful, you could lose the tax benefits.

Generally, if the primary purpose of your trip is business, then expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:

• Air, taxi and rail fares,
• Baggage handling,
• Car use or rental,
• Lodging,
• Meals, and
• Tips.

Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you.

How do you determine if your trip is “primarily” for business? One factor is the number of days spent on business vs. pleasure. But some days that you might think are “pleasure” days might actually be “business” days for tax purposes. “Standby days,” for example, may be considered business days, even if you’re not engaged in business-related activities. You also may be able to deduct certain expenses on personal days if tacking the days onto your trip reduces the overall cost.

During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses. For example, no deduction is allowed for expenses relating to a convention, seminar or meeting held outside North America unless it’s reasonable for the meeting to be held there.