Why your business needs it more than ever
From sun-setting Bush-era tax incentives to stalled requirements under the new Federal healthcare legislation, 2013 is arguably one of the toughest years for business owners to talk to their CPA’s about year-end tax planning. By no coincidence, it is also one of the most important years to do planning.
The concept of year-end tax planning is fairly straight forward. Cash-basis businesses can manage income by prepaying or deferring payment of business expenses to secure the deduction in the year they anticipate higher tax rates.
Concerned about cash flow but need the deduction? A credit card secures the deduction when the charge is made. However, merely purchasing an item “on account” is not considered payment for tax purposes if you are a cash-basis taxpayer.
The following is a quick rundown on some of the important areas you should be discussing with your accountant before the end of the year:
New costs under the Affordable Care Act
While debate over the new healthcare act will likely continue for years, it is unlikely there will be an immediate rollback of the existing revenue enhancements already set into motion. The new 3.8 percent Medicare tax on net investment income is an example of such. This tax applies to individuals, estates and trusts above certain thresholds. For business owners making $250,000 filing jointly, or $200,000 for single filers, this tax could take a significant bite out of any anticipated net investment income. Of course, employers will also be grappling with a myriad of tough budget issues now that the cost of providing benefits has become more complex and expensive.
Rising rates of capital gains
If you missed the opportunity last fall to liquidate stock holdings or investment property at the old 15 percent capital gains tax rate, doing so this year may carry a tax of up to 20 percent for joint filers earning over $450,000 (or $400,000 for single filers). Higher earners will also pay a new Medicare 3.8 percent surtax, yielding a 23.8 percent tax on investment income. This rate also applies to gains from the sale of your primary home if your gain exceeds the exemption amount of $500,000 for married joint filers. An alternative solution may be to gift stock or other property to your family, since up to $14,000 of said property can be gifted each year without counting against your lifetime exclusion.
Pease limitation cuts deductions for wealthy taxpayers
First introduced in 1990 by then Congressman Donald Pease, this legislation has resurfaced under the 2012 American Taxpayer Relief Act. The revamped Pease legislation creates a phase-out for “wealthy” taxpayers who might want to take advantage of typical deductions, such as mortgage interest. The limitation for 2013 will affect joint-filing taxpayers with adjusted gross incomes over $300,000 ($250,000 for single filers). Small business owners in particular may find themselves subject to this limitation, which will be the lesser of either 3 percent of the adjusted gross income above the applicable amount or 80 percent of the amount of the itemized deductions otherwise allowable for the taxable year.
Tax breaks: say goodbye to these old friends
While politicians continue to debate the re-engineering of the Federal tax code, existing tax breaks stand to sunset for companies and individual taxpayers. Expiring provisions include:
Reduction of the IRS section 179 deduction
To spark growth in orders for capital equipment, IRS Section 179 is a tax code that permits business owners to deduct the full value (up to the limits) of qualifying equipment purchases made during the year. The 2012 American Taxpayer Relief Act (ATRA) extended the Section 179 deduction to permit businesses purchasing qualifying items such as machinery, computers and equipment to deduct up to $500,000 in qualifying purchases. There is a cap of $2,000,000 in total purchases. Above this amount the deduction phases in a dollar-for-dollar exclusion. This is the year for businesses considering a significant capital purchase to make it happen.
The ATRA also provided an extension for bonus depreciation of 50 percent to allow businesses to write off 50 percent of qualifying assets in the first year. Equipment must be new and some businesses that experience a loss may be able to carry forward the loss to future years when they have a profit.
Credits For Research and Development
The Research & Experimentation Tax Credit (or R&D Tax Credit) was created to stimulate the economy by encouraging companies to invest in research within the United States. Expiring at the end of the 2013, companies may qualify for the R&D credit in three ways: when they engage in research and development to invent or improve products; when they pay for research and development services to improve qualifying products; or, when they engage in energy-related research and development activities.
The IRS has scrutinized companies that apply for these credits. As a result, a standard practice for substantiating this credit involves the issuance of an R&D study with the application for the credit. Your CPA may be able to either perform the study or recommend a professional with the skills to prepare this important document.
The work opportunity tax credit is expiring
If you have been fortunate enough to have hired new employees this year, don’t forget to take advantage of The Work Opportunity Tax Credit. This (WOTC) credit is a Federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment.
The government hopes that the WOTC will help elevate those currently dependent on government subsidy to become self-sufficient. For their part in the effort, participating employers can earn tax credit ranging from $1,200 to $9,600, depending on the employee hired.
Home office deduction
Starting in 2013, taxpayers who use their home for business are allowed to compute their deduction using a simplified method. In lieu of actual expenses such as electricity, depreciation, etc., they may compute their qualifying home office deduction at $5 per square foot, up to $1,500 annually.
Items on your individual 1040 to sunset
There are several tax deductions for individuals that will end after this year. Here are some of the most significant items to review when doing your year-end tax planning.
Teacher out of pocket expenses deduction
The current $250 deduction will expire on 12/31/13. According to a 2010 study by the National School Supply and Equipment Association, teachers spent an average of $356 a year out of their own pockets for supplies and resources needed in their classroom during the 2009/10 season. Nationally, that is $1.33 Billion—and that does not take into account out of pocket investments teacher spend on program materials (books, software, programs, etc.) This is estimated to be as much as $900 per teacher.
Mortgage insurance premiums deduction
Individual taxpayers with an Adjustable Gross Income (AGI) of less than $100,000 have been able to treat any home mortgage insurance premiums they paid as part of their mortgage interest paid and qualify for a larger deduction. The deduction is phased out between $100,000 and $110,000 AGI, and will expire completely on December 31, 2013.
Homeowners got a break this year when legislation extended the energy credits until December 31, 2013. Credits of up to $500 are available as incentives for the purchase of energy efficient appliances such as furnaces and water heaters, as well as windows, storm doors and roofing.
State and local sales tax deduction
This will be the last tax season that individual taxpayers will be able to choose to deduct either state and local income taxes paid, or state and local sales taxes paid.
Qualified principal residence indebtedness exclusion
Did you have a debt forgiven this year on your primary residence due to financial decline or reduced property value? Up to $2 million ($1 million for married, filing separately) worth of debt can be excluded for tax purposes this year. The exclusion goes away after 12/31/2013.
Plan now or pay later
A difficult economic year for some businesses has been made more challenging with the help of government. Many tax incentives disappearing coupled with new taxes here or on the horizon make it essential for businesses to do tax planning before the year’s end to minimize their tax exposure and maximize incentives that may be available. Plan now or pay more later.
Kenneth A. Hofsommer, CPA, is Director/Owner of Hunter Group CPA LLC, which is dedicated to serving the needs of closely held and family-owned businesses that classify themselves as either small or middle-market enterprises. The firm’s clients are in varied industries, however the firm has particular expertise in manufacturing, distribution, real estate management, wholesale, healthcare and professional services industries. For more information please visit www.thehuntergroup.com.