Look at available breaks now, and be ready to quickly implement strategies as the tax picture becomes clearer
Some valuable tax breaks for businesses expired at the end of 2011, and others are scheduled to expire at the end of this year. Flow-through businesses, which, at least for federal purposes, are subject to individual rather than corporate income tax rates, also face scheduled income tax rate hikes for 2013. But some of these breaks could be extended, as could current income tax rates — or rates might even be lowered. What will happen depends largely on the outcome of the Nov. 6 elections.
The two presidential candidates’ proposals for addressing many of these changes are significantly different. And there are some changes they haven’t specifically addressed. Plus, the candidates have different proposals for corporate tax reform. Whether the winner’s party controls the House, the Senate, or both chambers of Congress also will have a major impact on what tax law changes become a reality.
With all of this uncertainty, what should your business year end tax planning strategies entail? First, look at available tax breaks now. Second, be ready to quickly implement strategies as the tax picture becomes clearer after the election.
Take advantage of depreciation-related breaks
Many businesses may benefit from purchasing assets by Dec. 31 to take advantage of depreciation-related deductions that are scheduled to either disappear or become less favorable in 2013:
Bonus depreciation. For qualified assets acquired and placed in service through Dec. 31, 2012, this additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With a few exceptions, bonus depreciation is scheduled to disappear in 2013.
Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets, and it’s subject to different rules from those applying to bonus depreciation. On the plus side, used assets can qualify for Sec. 179 expensing. On the minus side, a couple of rules may make Sec. 179 expensing less beneficial to certain businesses:
• For 2012, expensing is subject to an annual limit of $139,000, and this limit is phased out dollar for dollar if purchases exceed $560,000 for the year. So larger businesses may not benefit.
• The election can’t reduce net income below zero. So for businesses that are having a bad year, it can’t be used to create or increase a net operating loss for tax purposes.
The expensing and asset purchase limits are scheduled to drop to $25,000 and $200,000, respectively, in 2013.
It’s important to keep in mind that bonus depreciation could be extended or even increased back to the 2011 level of 100%, and the higher Sec. 179 expensing limits also could be extended.
Regardless, these depreciation opportunities bring with them a challenge: determining whether the larger 2012 deductions will prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.
In some situations, future deductions could be more valuable. As mentioned, flow-through entities, such as partnerships, limited liability companies and S corporations, may face higher income tax rates in 2013 and thus could save more by deferring the deductions.
Consider hiring veterans
Veterans provide a valuable labor pool, full of highly trained, hard-working team players with strong leadership skills. There’s also a tax incentive to hire veterans this year: The VOW to Hire Heroes Act of 2011 extended the Work Opportunity credit through 2012 for employers that hire qualified veterans. It also expanded the credit by:
• Doubling the maximum credit — to $9,600 — for disabled veterans who’ve been unemployed for six months or more in the preceding year,
• Adding a credit of up to $5,600 for hiring nondisabled veterans who’ve been unemployed for six months or more in the preceding year, and
• Adding a credit of up to $2,400 for hiring nondisabled veterans who’ve been unemployed for four weeks or more, but less than six months, in the preceding year.
To be eligible for the credit, you must take certain actions before and shortly after you hire a qualified veteran. We can help you determine what you need to do to take advantage of the credit and keep you apprised as to whether this credit is extended beyond 2012.
Monitor possible revivals of expired tax breaks
Many valuable tax breaks for businesses expired at the end of 2011, but it’s likely Congress will revive at least some of them. Here are a few that may benefit your business if revived:
• The research tax credit,
• Accelerated depreciation for qualified leasehold improvement, restaurant and retail improvement property,
• The Work Opportunity credit for hiring workers from certain disadvantaged groups other than veterans, and
• Various energy-related tax incentives.
The research tax credit is particularly popular and has been extended many times in the past, so it may have the greatest chance of being revived and extended.
Be prepared to time income and deductions
Without congressional action, most ordinary income tax rates will go up in 2013, affecting flow-through businesses. President Obama has proposed retaining 2012 rates for only the middle and lower brackets — taxable income below $200,000 (singles), $225,000 (heads of households) or $250,000 (married filing jointly; $125,000 for separate filers). Gov. Romney has proposed reducing tax rates below 2012 levels for all taxpayers.
Projecting your business’s income for this year and next now will help you be prepared to time income and deductions to your advantage after it becomes clearer what will happen to tax rates in 2013.
If your rate will likely stay the same or go down, consider:
• Deferring income to next year to defer and possibly reduce tax. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services. But don’t let tax considerations get in the way of making sound business decisions.
• Accelerating deductible expenses into the current year. This also will defer tax. And if rates go down, it may save tax, because deductions provide more savings when rates are higher. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. But consider the alternative minimum tax (AMT) consequences first. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
Think twice about these strategies if you’re experiencing a low-income year. Their negative impact on your cash flow may not be worth the potential tax benefit.
If your rate will likely go up next year, consider taking the opposite approach. Accelerating income and deferring deductible expenses may save you more tax.
Given the current tax law uncertainty, it might be tempting to put off thinking about year end tax planning until the picture becomes clearer. But don’t wait. While there are some strategies you won’t want to implement until there’s more certainty, it’s important to determine now what breaks you may already be eligible for and which tax planning strategies you may want to implement before year end so that you can act quickly when things do become more certain. We’d be pleased to help you with assessing your potential tax savings opportunities.