Strategic business tax planning in the 4th quarter
The problem with tax planning is that it is always a multiyear process. This means that one must have a crystal ball to predict next year’s financial results. Many businesses are too busy making money to focus on tax planning for even this year, though it can make a difference in what is paid in which year.
For example, Section 179 of the U.S. Internal Revenue Code (IRC), also followed by Virginia in its tax laws, allows current year expensing of purchases of capital equipment, furniture, fixtures, automobiles, etc., instead of a multiyear depreciation deduction. For 2013, the dollar limit of purchases that can be expensed is $500,000, but in 2014, the limit returns to a much smaller $25,000. And this limit is phased out after yearly total purchases of $2 million in 2013 but only $200,000 in 2014. This must be taken into account when working with your capital budget. It may be worthwhile to accelerate planned purchases into 2013.
Another factor to consider is the Sec. 179 deduction for certain real estate leasehold improvements that disappear after 2013. Planning can get you this deduction in 2013 when it won’t be available in 2014.
Another hot button issue is that the 50 percent bonus depreciation is gone for general assets after 2013 — those with long construction periods or airplanes may still be eligible for this in 2014 only. One might use this instead of the Sec. 179 deduction when the deduction is limited by income or total purchases in a year. Again, accelerating planned purchases into 2013 is one tax planning strategy.
Since many businesses are taxed as sole proprietorships, partnerships or S corporations, the tax is paid at the individual owner level. This escapes the double taxation that results when taxed as a regular C corporation, but the strategy has its own tax perils. Beginning in 2013, there are additional tax brackets, raising the individual tax brackets to a maximum of 39.6 percent when taxable income is over $450,000 for a couple filing a joint return ($400,000 for a single return). Further, there are two additional taxes that come into play when adjusted gross income is over $250,000 for a couple filing a joint return ($200,000 for a single return). The additional taxes are a 3.8 percent tax on net investment income and a 0.9 percent tax on earned income (salary, wages and self-employment income).
The planning opportunity here is to either smooth out your income between years or to minimize your 2013 income to defer the tax to 2014. “Smoothing” income just makes the income from year to year even out to similar amounts, instead of generating a large amount of income one year that would be subject to the additional tax and having lower income the next yea. One way to smooth your income is to defer salary under an employer deferred compensation plan. Another way, if you or your company is on the cash basis, is to pay as many business expenses in the current year in order to lower your income subject to the additional tax.
For the additional tax on net investment income, working with your financial planner to combine capital gains and losses in the same year could keep you from paying that additional tax.
Further, there are general tax planning opportunities, such as setting up a qualified retirement plan (401(k), SEP, SIMPLE, etc.) some of which must be set up by the end of the year to be effective for the current year. And let’s not forget regular individual tax planning and estate tax planning for owners of businesses — these can be complicated areas and depend on family circumstances.
Tax planning takes time, budgets, and forecasts and, yes, even guesses, but sitting down with your tax adviser early in this last quarter of the year is worthwhile in the long run.
<i>Rita Schooley, CPA is a principal in Kemmerer Schooley Smith, CPAs in Centreville working with closely-held businesses and their owners as well as professionals, executives and other individuals with complex tax situations. She can be reached at [email protected] or 703-870-3699.
Disclaimer: This discussion is based on current law, which may change, and does not address anyone’s particular facts. Please see your tax adviser before making any tax planning maneuvers.</i>