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Tax strategy is nearly always complex for small business owners. But this year, with a presidential election looming and the Bush-era tax cuts set to expire unless agreements can be reached before Jan. 1, yearend tax planning presents a historic challenge. “We’re in an uncharted place right now” in terms of uncertainty, says Louis Balbirer, director of tax services for accounting firm Kaufman, Rossin & Co. in Fort Lauderdale. In nearly two decades of work with entrepreneurs on tax compliance and planning, he says, “I can’t remember ever having confronted a situation like this.”
Now is the time to meet with your tax expert and make invoicing, purchasing, and giving decisions for the fourth quarter that can help predict your business and personal tax liability for 2012, says Melissa Labant, director of taxation for the American Institute of CPAs.“Having someone help you now will allow you to accurately calculate your estimated payments, avoid penalties, and give you an idea what to expect come April of next year so you can do cash-flow planning,” she says. “Do not sit and wait until the election.”
Despite the uncertainty, planning is indeed possible. “We’re coming up with Plan A if this happens in the next few months, and Plan B if that happens,” Balbirer says. “A lot of the typical advice we usually give won’t apply to some scenarios.” For instance, business owners are often advised to defer fourth-quarter income into the following calendar year to delay tax liability. But if tax rates rise in 2013, it might be better to recognize the income in 2012 and defer deductions to 2013 when they could have more impact.
Here is a preliminary checklist of topics for your tax meeting:
1. Capital expenditures. In 2010 and 2011, businesses were allowed to expense as much as $500,000 in equipment and property on one year’s tax return, rather than the standard practice of depreciating such assets over time. The maximum Section 179 (named after the IRS tax code’s corresponding section number) expense that can be claimed in 2012 is $139,000, a number that will drop to $25,000 in 2013 if no changes are made. “For a small business trying to decide whether to buy a large printing press, say, the ability to write it all off in one year is significant,” Labant says. “Going from $500,000 to $25,000 in a couple of years is a huge drop.” The deduction also gets phased out over expenditure thresholds that drop from $2 million in 2010 to $200,000 in 2013.
2. Capital gains and dividend income tax. If no compromise can be reached to extend the Bush tax cuts of 2001 and 2003, the maximum capital gain rate for 2013 will increase from 15 percent to 20 percent. Higher-income individuals (adjusted gross income of $200,000 for single filers, $250,000 for joint filers) will add a 3.8 percent Medicare contribution tax on net investment income that begins in tax year 2013 as part of the Patient Protection and Affordable Care Act, aka Obamacare. Also included in that net investment income subject to Medicare contribution tax is qualified dividend income, which is taxed at lower, long-term capital gain rates but will be taxed as ordinary income starting in 2013.
3. Bonus depreciation. The tax compromise of 2010 allowed business owners to take 100 percent bonus depreciation, instead of standard depreciation, for purchases of tangible assets (such as furniture, vehicles, and equipment) made in 2011. That meant the entire cost of a particular asset could be written off with no limit on its cost. In 2012, as it stands now, bonus depreciation is reduced to 50 percent; it disappears entirely in 2013, meaning that the cost can only be recovered by depreciating it over years. “Business owners should make any major equipment or vehicle purchases in 2012 to take advantage of current laws,” CPA John Graziano in Bayonne, N.J., advises in an e-mail.
4. Self-employment tax. Self-employed people, including sole proprietors, partnerships, and limited liability companies, paid self-employment tax on earned income at a rate of 13.3 percent in 2011 and 2012 under tax compromise legislation passed in 2010. As of January 2013, barring any congressional intervention, that figure goes back up to 15.3 percent.
5. Personal exemptions. In 2013, “higher-income taxpayers will see a phase-out of their personal exemptions ($3,800 per exemption) when incomes exceed [about] $261,650 for married joint and $174,450 for individuals,” Graziano writes. In addition, the required minimum threshold to claim medical and dental expenses as itemized deductions will increase from 7.5 percent to 10 percent of adjusted gross income in 2013 for those younger than 65. And the child tax credit is scheduled to decrease from $1,000 per child to $500 in 2013, according to Graziano.
This list will just get you started: Changes to the alternative-minimum tax, which applies to upper- and some middle-income taxpayers, are possible, as are increased income tax rates across the board if the Bush cuts are allowed to expire. Start planning now.