As the end of the year approaches and the weather turns cooler, our thoughts turn to business tax planning, especially for professional service providers. With some of the new Obamacare taxes beginning in 2013, as well as tax increases from the American Tax Relief Act of 2012, it is not too late to minimize your 2013 tax burden. Here are some possible moves that may apply to your business.
§179 Expense Deduction and Bonus Depreciation
IRC Section 179 has provided businesses with the ability to accelerate depreciation deductions. The American Taxpayer Relief Act of 2012 extended the generous depreciation deductions that we had in tax year 2012. For tax year 2013, the maximum amount that can be expensed under IRC Section 179 is $500,000, with the investment limitation at $2 million. The IRC Section 179 deduction is completely phased out in a year that begins in 2012 or 2013 as a result of the investment limitation if the taxpayer places more than $2.5 million of section 179 property in service.
Additionally, 50% bonus depreciation is also available for tax year 2013. Note that bonus depreciation applies to new equipment only and must be placed in service by year end; however, IRC Section 179 applies for most new and used equipment purchases. When applying these provisions, IRC Section 179 is generally taken first, followed by bonus depreciation unless the business has no taxable profit in the given tax year. Moreover, a taxpayer will receive the greatest benefit from IRC Section 179 by expensing property which does not qualify for bonus depreciation.
Research and Development (R&D) Tax Credits and Other Credits
The R&D credit has been extended for all of 2013. Additionally, the work opportunity tax credit has been extended through 2013 for hiring certain types of workers, including Veterans. If you are considering hiring some new employees between now and the end of the year, you may consider hiring a qualifying veteran. The work opportunity credit for hiring veterans in 2013 range from $2,400 to $9,600, depending on a variety of factors.
If you have health insurance for your employees, you may be eligible to take a small business credit for the cost of this health insurance. An eligible small employer that maintains health insurance for its employees may claim a 35-percent tax credit for premiums it pays toward health coverage for its employees in tax years beginning in 2010 through 2013.
If you own an interest in a partnership or S corporation that is going to show a loss in 2013, you may need to increase your basis in the entity so that you can deduct the loss. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro rata share of an S corporation’s losses only to the extent of the total of his basis in his S corporation stock and debt owed to him by the S corporation.
Self-employed retirement plans
If you are self-employed and have not done so yet, consider setting up a self-employed retirement plan, such as a SEP-IRA, Simple IRA, Keogh Plan, solo defined benefit plan, or solo 401(k). These plans reduce your tax liability now while increasing your tax-deferred retirement savings for the future. For 2013, a self-employed individual could possibly contribute 20% of their net self-employment income to a defined contribution retirement account, up to a maximum of $51,000. Defined Benefit plans are not subject to the $51,000 limitation and can be designed to achieve much larger tax deductible contributions.
For those of you over 50, consider making catch-up contributions to your retirement savings accounts. For a 401(k) plan, the catch-up contribution is $5,500 for 2013 and for a SIMPLE plan it is $2,500 for 2013
Simplified Home Office Deduction
Beginning in 2013, taxpayers may deduct $5 per square foot of office space (limited to 300 square feet) annually for as much as $1,500 in deductions in computing deductible expenses for a home office in lieu of actual expenses. This will greatly reduce record keeping; however, if actual expenses are more, you can still use the old method to compute the home office deduction. Just be sure that when claiming this deduction, you are using a portion of your home exclusively for business purposes.
Interest on Business Loans and Business Credit Card Interest
Interest expense on a typical business loan from a bank is always a tax deductible expense. Interest expense incurred on a personal credit card is not deductible; however, if you have a business credit card and incur interest expense, this interest is deductible for tax purposes.
And don’t forget about gifting. Shifting income and future appreciation from investments to family members by means of gifting may be a tax-planning opportunity. For gift-tax purposes, the annual exclusion in 2013 has been increased from $13,000 to $14,000. Each year, this amount may be given to each of any number of recipients with no tax consequences.
These are just some of the year-end steps that can be taken to save taxes. Please contact your CSH representative to go over these ideas to minimize your 2013 tax liability.