Quarterly Article Q

2012- QUARTER THREE

Year-End Tax Planning for Business Owners

            When it comes to year-end tax planning, business owners face the same uncertainties that confront all taxpayers.  Will tax rates rise?  Will the estate tax exemption be reduced?  Moreover, the same certainty also exists:  high-income taxpayers will owe a 3.8% surtax on investment income.
            Therefore, if you are planning on selling your company in the near future, you should consider closing the deal by December31 this year, if possible.  That would keep your income from the sale in 2012, when long-term capital gains are capped at 15%, and the 3.8% surtax won’t apply.

Review retirement plans

            The end of the year is also an excellent time to review your company’s retirement plan.  Some business owners find that they cannot make maximum contributions to their own company’s 401(k) plans.  That’s because such plans usually are subject to tests that prevent highly compensated employees (such as the company’s owners) from contributing much more, in aggregate, than other employees contribute.  Business owners who wish to contribute the maximum $22,500 this year, for participants 50 or older, may be limited to a much smaller contribution.
            If you are in such a situation, late 2012 is a good time to revise your plan for 2013.  Our office can explain the various qualified and nonqualified plan options available to increase the amount you can contribute to your retirement account and help determine which would be best for you and your business.

Accelerate equipment purchases

            Section 179 of the tax code allows purchasers to “expense” certain amounts of business equipment, meaning that you can take a full deduction in the first year the equipment is used in the business.  Typically, you must write off the cost of business equipment over several years, via depreciation.  Therefore, the Section 179 election provides faster deduction and improves the cash flow of profitable companies.
            In 2012, companies can deduct up to $139,000 of equipment purchases.  However, a phase-out takes effect, dollar for dollar, once 2012 purchases top $560,000.
           
            Example 1: ABC Corp. buys $130,000 of new and used equipment in 2012.  It can take a $130,000 deduction, under Section 179.
           
            Example 2: DEF Corp. buys $630,000 of new equipment in 2012.  Therefore, DEF is into the phase-out range by $70,000 ($630,000 minus $560,000). The $139,000 maximum is reduced by that $70,000, so DEF can take a $69,000 tax deduction this year.  Of its $630,000 in 2012 purchases, $561,000 ($630,000 minus the $69,000 deduction) must be depreciated.
                       

            Another tax code provision, the so-called “bonus depreciation,” allows companies to deduct 50% of most new equipment purchases placed in service in 2012.  In Example 2, DEF can take a further first year bonus depreciation deduction of $280,500 (50% of $561,000) and use multi-year depreciation on the remaining $280,500.
            Business owners should keep in mind that a company cannot claim a Section 179 deduction that would create or increase a reported business loss; however, any amount that cannot be deducted due to the limitation can be carried forward.  On the other hand, 50% bonus depreciation deductions can create or increase a new operating loss (NOL) for the current year.  Your company can carry back a 2012 NOL to 2011 and collect a refund of taxes already paid, if that was the case.

A matter of time

            Under current law, the Section 179 allowance will drop to $25,000 in 2013, and bonus depreciation will be sharply limited.  Therefore, companies should try to accelerate planned equipment purchases into 2012.  To qualify as a 2012 purchase, the equipment must be placed in service (used in your business) before year end.  Payment can be made in 2013, if that’s what you’ve arranged.
            Conversely, equipment for which you’ve paid in 2012 won’t qualify for this year’s tax treatment if it’s first used in 2013.

 

 

 

Previous Articles:

2012 Quarter Two- Home Office Deductions

2012 Quarter One- Taking Credits for Higher Education

2011 Quarter Four- Year End Tax Planning for Investors

2011 Quarter Three- Use Appreciated Assets for Charitable Donations

2011 Quarter Two- Easing the Burden of Estate Tax