Year End Tax planning with uncertainty
This year, as with recent prior years, businesses as well as individual taxpayers are in an uncertain position as far as tax law goes. Congress has yet to extend several expired tax provisions and it appears that won’t even be considered until after the November elections. This puts us in a horrible position for planning.
With that backdrop in mind, what are some steps you can take before the end of the year to put your business and yourself as an individual taxpayer in a better tax position?
Expensing Equipment Purchases:
One favorite deduction for businesses in the past has been the section 179 deduction. This deduction allows a business owner to elect to expense the full purchase price of a piece of qualifying equipment in the year of purchase (even if you finance the equipment over time). In the past year the maximum amount that could be expensed in one year was $500,000. This limit has varied from year to year but has been in excess of $100,000 for at least a decade now. At this point howeve,r for 2014 the maximum amount that you may elect to expense is set at $25,000. This is one of the items we are waiting for Congress to act upon.
So my advice to businesses who cannot wait until the very last moments of the calendar year to purchase equipment is to go ahead with the purchase if you are in need of the equipment this year. If it’s possible though to wait until we know what Congress is doing with the tax extenders, then wait and see if the purchase will make sense for you in 2014 or if that is a better purchase for 2015.
Part of that decision has nothing to do with tax law. Considering the business profit for this year versus your anticipated profits for 2015 will also provide guidance on this decision. If you know your current year has had unexpected profit and next year will be a more typical year then the purchase in the current year makes more sense.
Maximize retirement plan contributions:
Anything your business can do to provide pre-tax deductions to your employees is a terrific tax saving tool for the employees as well as the owner employees. If employees and owner employees maximize their retirement plan deferrals this can increase the employer matching contribution which is an excellent deduction. This varies greatly depending upon the type of plan your business offers so care must be taken to follow the plan terms.
These are not necessarily year-end strategies, but while we’re on the subject of pre-tax employee benefits, you should know that other pretax deductions include dependent care plans, flexible spending arrangements, healthcare section 125 plans and others. When these are offered as well as an accountable plan for employee expense reimbursements, these tools also provide a nice tax benefit to employees and owner employees.
Year end bonuses:
Business owners and managers frequently look at paying bonuses to employees at the end of the year. Bonuses can be an excellent incentive to employees and it could make terrific business and tax sense to pay these bonuses in years when you have additional profits. However, to be most effective bonuses need to be part of an incentive package and not just paid at the whim of the owner or manager. A bonus incentive plan should have clear measures that an employee can accomplish to be rewarded a bonus. These measures can be based on individual performance or the group performance or even on increases in overall company profit.
If your business is so inclined, this is a great time of year to consider your favorite charities and how you can best support them. The tax law provides deductions both for businesses and individuals for charitable giving. How that deduction is calculated is based on the entity form of your business, the business income or personal adjusted gross income and the type of charity to which you contribute.
For cash basis businesses:
If your business reports on the cash basis then you have some opportunity for increasing expense deductions. The strategy here is to pay all of your accounts payable by year-end. This strategy can be especially helpful if this is a year where you have unexpected profits.
If your business owns capital assets or business property subject to depreciation that is held for a year or more, it’s time to review those assets and determine if you might want to sell them by year end. This can produce cash flow and for Federal tax purposes be taxed at lower capital gains rate of up to a maximum of 20%. Mapping out a strategy for selling such assets can produce capital losses and gains that could offset each other. This produces cash flow with little to no tax impact at all.
Even in times of tax uncertainty you can still take action. These are just of few of the action items that could be helpful for your business. As with all tax and investment ideas, please consult your CPA and financial advisor before implementing any of these strategies to insure that they will produce the desired result with your particular set of circumstances.
– Terri L. Davis