Issue 4 – October 2012 Part 2
Following on from Part 1 – Year End Tax Planning For Individuals published earlier in October, this issue is Part 2 – Year End Tax Planning For Businesses.
The tax year end is less than three months away so there is not much time to put any planning points in to action. Remember that to have a tax effect many planning points need to be acted on before the end of the tax year.
When reading these tax planning points remember the overriding caveat to not allow the “tax tail wag the dog”. In other words if a planning point does not make commercial or personal sense for your circumstances then it is not right to act on it just for the tax savings.
Year end tax planning is more complicated this year due to the uncertainty over many tax issues that have not yet been addressed by Congress. As it currently stands none of the outstanding issues will be looked at until Congress reconvenes after the General Election. That will leave them about 6 weeks to sort them out before the end of 2012.
A host of reduced tax rates, credits, deductions, and other incentives (collectively called the “Bush-era” tax cuts) are scheduled to expire after December 31, 2012. To further complicate planning, over 50 tax extenders are up for renewal, either having expired at the end of 2011 or scheduled to expire after 2012. At the same time, the federal government will be under sequestration, which imposes across-the-board spending cuts after 2012.
In the rest of the newsletter I will address how to plan for these outstanding tax issues for your business.
If you have any topics or questions that you would like me to cover in the newsletter do not hesitate to call me on (480) 363-4808 or email me at firstname.lastname@example.org.
Enjoy the newsletter.
Mark Smith – October 2012
TOPICS IN THIS NEWSLETTER
Upcoming Dates For Your Diary
Expiring Incentives For Businesses
Year End Tax Planning For Businesses
UPCOMING DATES FOR YOUR DIARY
October 31, 2012 – Employers must file their third quarter Federal form 941 and State withholding and unemployment forms.
November 13, 2012 – Any employees with more than $20 of tips in October 2012 need to report these to you.
EXPIRING INCENTIVES FOR BUSINESSES
- 50% Bonus Depreciation.
- Starting in 2013 Section 179 Depreciation is limited to $25,000 and phase out begins after $200,000 of purchases. Currently these figures are $139,000 and $560,000 respectively.
- The current tax-favorable dividend tax rates (15 percent for taxpayers in the 25 percent bracket rate and above and zero percent for all other taxpayers) are scheduled to expire.
- The top individual income tax rate is due to become 39.6% in 2013 as against a top corporation tax rate of 35%.
Whilst there is some bipartisan support to prevent some or all of these tax increases, a year-end planning strategy that protects against “worst-case” situations may be wise to consider this year.
YEAR END TAX PLANNING FOR BUSINESSES
Many of the traditional tax planning techniques can still be used this year. These include deferring income to the following year and advancing deductions in to this year. However, in light of the potential tax increases next year you may wish to adapt these for your own personal circumstances and even consider advancing income into this year. They key is to run some numbers with your tax advisor to see what the potential impact of each planning point might be.
Here are some suggested planning ideas.
Business Structure – This is something that you should review at least once a year. Will there be a tax saving if you are taxed as an S-Corporation or as a C-Corporation? Should you set up your business as an LLC? As a general rule of thumb once your profits are more than $50,000 a year you may find that being taxed as an S-Corporation is beneficial. One thing to watch this year is that as it currently stands the top income tax rate in 2013 would be 39.6% against 35% for a corporation. So, the calculation might be skewed more towards the C-Corporation in future years. If you are going to change your tax status note that the general filing deadline to make the election for 2013 is March 15, 2013.
S-Corporation Year End Review – If you are taxed as an S-Corporation you should undertake an annual review with your tax advisor before the end of the year. Check that you are maximizing your self-employed tax savings by paying yourself only a reasonable salary. Not too much and not too little. If you do not have any health insurance coverage through an employer make sure you are maximizing your personal health insurance deductions by getting the S-Corporation to reimburse you for the premiums you pay yourself. Check with your tax advisor how to do this properly so that you get the deduction. Make sure you are operating properly an accountable expense plan so that you get the full deduction for expenses such as business mileage, travel costs and entertaining.
Dividends – If you are taxed as a C-Corporation consider if it would be beneficial to pay out dividends before the end of 2012. In the hands of the shareholders they may be taxed at the beneficial qualified dividend rate of 15% against a potential 39.6% if they are paid in 2013.
Capital Expenditure – If you are planning some capital expenditure to replace existing assets or as expansion of your business, check to see if it would be benefical to buy and put into use the new assets before the end of 2012. With the Bonus and Section 179 depreciation limits reducing in 2013 you may wish to take advantage of the higher limits in 2012. Offsetting this benefit is the potential for higher tax rates in 2013 which would give a higher benefit to depreciation deductions in that year. As in all tax planning you need to crunch the numbers to see what is best for you.
Start-Up Costs – If you are planning to start a business consider if it would be beneficial to get it up and running before the end of 2012. Up to $5,000 of your start-up costs incurred before you start can be deducted in the year that you start your business.
Retirement Plans – As a business owner there can be several retirement plan options available to you. Making contributions or setting up a plan before the end of 2012 may help your tax position. Some of the plans do not need to be set up until October 2013 to be effective as a deduction for 2012 so make sure you work closely with your financial advisor and tax advisor to see which one might be best for you.
Deductions – Depending on your accounting basis you may have an opportunity to advance or defer expenditure at the year end. Most small businesses use the cash basis which means you can deduct the expenditure when you make the payment. Traditionally year end tax planning has concentrated on advancing expenditure in order to reduce taxable profits. However, as we have seen earlier in this newsletter and in Part 1 this year may be different due the expiring “Bush tax cuts”. For some people it may make sense to delay paying for expenditure until next year so that they get more profits taxed this year at a lower tax rate. Run the numbers with your tax advisor to see what works best for you.
Business Income – Traditional year end tax planning would try to push income in to the next tax year. That can often be done by delaying sales until after the end of year or slowing down the collection of accounts receivable. However this year consider if the expiring “Bush tax cuts” would make it beneficial for you to try and push more sales through before the year end.
They key to year end tax planning this year is run the numbers for your own business circumstances based on the “Bush tax cuts” being extended and with them not. See what the difference is and remember don’t let the “tax tail wag the dog”.
In each newsletter I feature an advisor who you may find helpful for your business or personal needs. If any of my clients would like to be featured send me an email with your up to date details and suggested wording to describe your services.
For this issue I am featuring Andrea Brundage a professional organizer.
Name – Andrea Brundage
Firm – Simple Organized Solutions (S.O.S.)
Tel – 480-832-1085
Email – email@example.com
Web – www.sos-llc.com/
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Are you ready to make a positive change in your life?
Simple Organized Solutions (S.O.S.) is a professional organizing company that can help turn your chaos into calm. S.O.S. provides organizational services to business owners, homeowners, and winter visitors that are customized to meet each client’s needs.
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Home & Business Offices
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Assistance with financial record organization
Andrea Brundage is available for speaking engagements and workshops. Call (480) 832-1085 or visit www.sos-llc.com for more information. She can also be found on LinkedIn and Facebook.
Disclaimer – This newsletter does not constitute personal accounting or tax advice to the reader and is only offering general information. You should seek professional advice for your own situation as the most appropriate accounting or tax planning depends on your personal and unique circumstances.