Faced with expiring Bush-era tax cuts, new Medicare taxes on investments and wages, and disappearing tax extenders, how are taxpayers supposed to plan for year-end 2012—and beyond?
Small businesses, whether formed as corporations, pass-through entities or sole proprietorships, see obfuscation surrounding income tax rates, long-term capital gains rates, qualified dividends rates, and availability of extant deductions and exemptions. “More than any other recent year, what taxpayers do for their year-end planning has to do with what they think will happen in Washington,” notes CPA Beth Ebersole, a shareholder with Sarasota-based Kerkering Barberio & Co.
Here are five tax tips that might make year-end reckoning easier for small businesses. (That being said, designing tax or financial strategies should be done in conjunction with a financial planner and CPA.)
1. Cap Gains
A Time to Harvest
Many small business owners are balefully eyeing the repeal of favorable long-term capital gains rates at year end. The current zero percent and 15 percent rates will become 10 percent and 20 percent respectively in 2013. Add to that the new 3.8 percent Medicare surtax, which will be added to net investment income exceeding $250,000 for married couples filing jointly or $200,000 for singles, and some are in for a financial jolt.
Businesses may consider harvesting capital gains this year. Appreciated assets could be sold and immediately reinvested in the same or similar assets, creating a new, higher-cost base by which future appreciations will be calculated. However, warns Sarasota CPA Ingrid Nutter, the value of the tax savings should be weighed against the loss of tax deferral. In other words, by paying the tax now, the possibility of earning greater returns with that capital, even after paying the higher tax, is lost. Still, she says, “If one is currently in the zero percent long-term capital-gains bracket in 2012, it’s a no-brainer.”
Offer a Plan
If a small business does not currently offer a pension plan to its employees, it should consider implementing one, says Nutter. It will be able to deduct the contribution and, as an added incentive, some businesses may be eligible for a credit when setting up the plan. Meanwhile, employers and employees will benefit from tax-deferred savings.
A number of tax-favored retirement plans allow the business to take a deduction for at least some of the contributions. These tax-favored plans include 401(k)s and profit-sharing plans, as well as simplified employee pensions, and SIMPLE IRAs. “The optimal plan will differ depending on the number and age of employees, the stability of available funding and other factors,” Nutter says. Some plans must be in place by year end, so quick action may be required.
3. HealthCare Conundrums
Credit or Deduct
The Small Business Health Care Tax Credit, which is part of the 2010 Affordable Care Act (ACA), rewards small companies shouldering at least half of their workers’ qualified health insurance premiums. The credit applies to companies with 25 or fewer full-time employees receiving average salaries of $50,000 or less. The maximum deduction for years 2010-2013 is 35 percent, and for small tax-exempt employers, such as charities, 25 percent. Those rates are slated to increase to 50 percent and 35 percent, respectively, Jan. 1, 2014.
Unfortunately, for self-employed entrepreneurs, who make up the vast majority of small businesses, as well as owners of corporations, partners in a partnership, and sole proprietors, no tax credit is forthcoming, says the IRS. Treated as self-employed persons for health insurance purposes, small-business owners are eligible for the Self-Employed Health Insurance Deduction rather than the credit.
4. Acquisition Mode
Many favorable tax provisions are expiring with little hope of revival, including the first-year 50 percent bonus depreciation, which makes 2012 a good time to buy equipment. Property subject to the 50 percent allowance is new or used tangible property, such as off-the-shelf computer software, furniture and interior improvements to leased business premises. Equipment eligible for the bonus depreciation must be used, and not merely purchased, by year end to be eligible. Additionally, businesses will be able to deduct purchases of these items up to $139,000, an amount scheduled to decrease to $25,000 in 2013.
5. Against the Grain
Increase Taxable Income
Savvy taxpayers have generally aimed to reduce taxable income and increase deductions, but with taxes set to inflate next year, many are looking to do just the opposite this year. High-income professionals, for example, may want to accelerate billings this year to report as much income as possible in 2012, ensuring the top individual 35 percent rate. Alternatively, those who feel the Bush-era tax cuts will be extended may want to delay billings and report the income in 2013.
This fluid approach to income is also applicable to corporations with lower tax brackets than their owners. In such a scenario, it might be worth taking dividends this year rather than salary, especially since the tax on dividends for high-income individuals will increase in 2013. Even though dividends are not deductible at the corporate level, the owner will be taxed at the current 15 percent dividend rate rather than the 35 percent rate.