This year end provides unique opportunities for virtually every business to reassess their business plan with an eye toward maximizing tax savings for the 2013 tax year and beyond. In considering which steps to take in year-end tax planning, please keep in mind that the goal is to minimize taxes overall for 2013 and 2014 which may mean taking into account expectations for next year as well. We have compiled a checklist of actions that can help you save tax dollars if you act before year-end, but only if they also make economic sense for your particular business.
- Buy new business equipment and machinery and place it in service before December 31, 2013 to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance generally won’t be available for property placed in service after December 31, 2013. Vehicles have special rules in which there are also bonus depreciation allowances for new (not used) vehicles placed in service during 2013.
- Purchase fixed assets qualifying for the $500,000 Section 179 business property expensing option (both new and used assets qualify). The maximum amount you can expense for a tax year beginning in 2013 is $500,000 of the cost of qualifying property placed in service for that tax year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2013 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). If Congress does not act, the Section 179 expensing amount is scheduled to fall to just $25,000 starting in 2014, and the overall investment limitation is scheduled to fall to $200,000. Note that at tax return time, you can choose not to use expensing (or bonus depreciation) for 2013 assets. This is something to consider if you expect income to be higher in future years than in 2013.
- Since tax rates for 2014 for the various brackets will be the same as those for 2013 (except for inflation adjustments), please consider the following if you anticipate staying in the same bracket: 1) Defer revenue until after December 31st. 2) Accelerate expenses by either paying them (cash basis) or accruing them (accrual basis) prior to December 31st. Please consider applying the opposite strategy if your income will be higher next year.
- Consider setting up a self-employed retirement plan if you are self-employed and haven’t done so yet.
- Review your company’s employee benefit offerings for better or more tax advantageous ways to reward employees.
- Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.
- Pay any accrued expenses to cash basis related parties before December 31, 2013. An accrual basis business can deduct those expenses in the current year only if paid by the end of the year.
- For an accrual basis taxpayer, pay accrued compensation, including vacation pay and bonuses, to unrelated individuals within two and one-half months after year end in order to deduct the compensation this year. Amounts paid later than that become subject to the deferred compensation rules.
- Dispose of obsolete inventory before year-end. You can deduct the inventory you get rid of, but not by merely booking a reserve on your financial statements.
- As a cash basis taxpayer, consider using a credit card to prepay expenses that generate deductions for this year.
- Ensure that loans to or from the company are properly documented and charge an appropriate rate of interest.
These are just some of the year-end steps that can be taken to save taxes. Please contact us to tailor a particular plan that will work best for you. We may be reached at (239) 433-5554 or visit www.markham-norton.com