At Potts & Company we are always trying to help you solve your goals. Here are a few ideas which may help you plan for your December 31 tax year-end. These ideas are made, except as indicated, as if provisions scheduled to change as the law now exists are allowed to expire. As you know, there is no way to predict what changes Congress may make. Also, some of these ideas have different results on your state income tax. We’ll be very happy to discuss any of these thoughts with you. Just call.
Deferring Income to 2013?
Deferring income to the next taxable year is a time-honored year-end plan. Generally, if you think you’ll be in a higher tax bracket next year, and you can delay income until 2013, you may benefit. Ways to do that may be:
- Use of Cash Method of Accounting: By using the cash method of accounting instead of the accrual method of accounting, you can generally put yourself in the best position for accelerating deductions and deferring income. Some businesses who are presently on the accrual method can change to the cash method. You’ll need help to see if you qualify but if you’re interested, let us know.
- Delay Billing: If you delay year-end billing to clients so that payments are not received until 2013. Date of receipt counts for a cash basis taxpayer.
- Accelerate deductions: Pay invoices for expenses now even though they aren’t due until 2013. Date of payment determines time of deductibility for businesses on the cash basis.
Accelerating Income into 2012?
This year-end is unusual due to uncertainty about how Congress may change the rules. It could be, particularly if you are a high income taxpayer, that you might actually benefit from accelerating income into 2012. For example, you may think the tax law will put you in a higher tax bracket in 2013. But realize that accelerating income into 2012 will be disadvantageous if you expect to be in the same or lower tax bracket for 2013.
If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2012. Also see if some of your clients or customers are willing to pay for January 2013 goods or services in advance. Any income received using these steps will shift income from 2013 to 2012.
Business Deductions you should be considering:
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents whether they itemize or not.
Equipment Purchases: If you purchase equipment, you may make a “Section 179 election,” which allows you to write off otherwise depreciable business property. For 2012, you may elect to expense up to $139,000 of equipment costs (with a phase-out if total purchases are excess of $560,000) if the asset was placed in service during 2012. (Unless changed, in 2013, the dollar amounts for Section 179 expensing are scheduled to be $25,000, with a phase-out amount of $200,000.)
Bonus Depreciation: Instead of Section 179, your business may be able to claim 50% bonus depreciation for assets placed in service in 2012. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. In 2013, unless extended, the bonus depreciation generally does not apply.
NOL Carryback Period: If your business suffers a net operating loss for 2012, you can generally apply the loss against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2010. If there is no income in the 2 prior years or if you think you will be in a higher bracket in the future, you may carry the loss forward for 20 years.
Bad Debts: You can accelerate deductions to 2012 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2012 year-end financial statements.
Other planning ideas:
Subnormal Goods: You should check for subnormal goods in your inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory as of the end of 2012, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day timeframe.
Small Employer Pension Plan Startup Cost Credit: For 2012, certain small business employers that did not have a pension plan for the preceding three years may claim an income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Credit for Employee Health Insurance Expenses of Small Employers: For taxable years beginning after 2009, eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,000 or less are eligible for the full credit. The credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,000. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $50,000 or more. The credit amount is 35% of certain contributions made to purchase health insurance.
Planning for 2013 Tax Increases and Potential Expiration of Tax Relief Provisions
Qualified Dividends: Qualified dividends received in 2012 are subject to rates similar to the capital gains rates. Therefore, qualified dividends are taxed at a maximum rate of 15%. Qualified dividends are typically dividends from domestic and certain foreign corporations. Unless Congress acts, all dividends will be treated as ordinary income beginning January 1, 2013.
Employer-Provided Child Care Credit: For 2012, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures. Note that this credit is scheduled to expire at the end of 2012, therefore, it would be wise to make any planned qualified child care expenditures in 2012 to take advantage of the credit.
Electronic Funds Transfer: A corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS’s Electronic Federal Tax Deposit System (EFTPS).
If you have any questions, please do not hesitate to call. We would be happy to meet with you at your convenience to discuss the strategies and requirements outlined above. There is still time to implement strategies to minimize your tax liability and plan for 2013.
Adapted from 2012 Year-End Tax Planning For Businesses published by the Bureau of National Affairs, Inc. in the Bloomberg BNA Tax and Accounting Center.