Year-End Tax Planning – Part II

By Steve Barlotta, CPA

Part II of our year-end tax planning letter will focus on small business owners. The good news is there’s still time to implement some strategies in the next few weeks. As we discussed in our first tax planning letter, there are a myriad of new tax increases and limitations on deductions that went into effect for 2013. In this environment, it is imperative that a small business owner be proactive in maximizing their deductions and minimizing potential tax liabilities.

Many of the tax-planning strategies of a small business centers around depreciation. There are different rules depending on what type of asset is purchased. But the bottom line is if used effectively depreciation planning can help you maximize your deductions for the current year and years to follow.

Section 179 Depreciation
In 2013, the maximum Section 179 depreciation deduction for certain new or used assets is $500,000. This $500,000 limit applies to new or used assets like office furniture, computer and software, machinery and equipment, and qualifying “heavy” vehicles that are over 6,000 pounds and used over 50% for business.

Until recently, real property expenses were ineligible for the Section 179 deduction. For 2013, a business can utilize the Section 179 deduction up to $250,000 on the following types of real property expenditures: interiors of retail buildings, restaurant buildings, and interiors of leased nonresidential buildings.

Even though they are limited, there are Section 179 deductions available for vehicles that can really add up for a small business. For those “heavy” vehicles over 6,000 pounds that don’t qualify for the full Section 179 write-off, an immediate $25,000 deduction is allowed. This limitation would apply to vehicles like heavy SUVs. For trucks, vans and SUVs lighter than 6,000 pounds, the maximum write-off is $11,360. The deduction is further limited to $11,160 for passenger vehicles.

Remember that a Section 179 deduction cannot create or increase a business tax loss. So before considering any Section 179 deduction, you should have a handle on your current net income. At the present date, the Section 179 dollar limitation for 2014 will be reduced from its current amount of $500,000 to $25,000. If I had to guess, I think Congress will extend the current amount or increase it substantially from the planned $25,000 limit for 2014.

50% Bonus Depreciation
Even though bonus depreciation is scheduled to end in 2013, there’s still a good chance that Congress will renew this feature for 2014. Keep in mind that bonus depreciation is over and above the available Section 179 deduction discussed above. Under this election, a business is entitled to the full 50% bonus depreciation regardless of when during the year the asset was purchased. The rules haven’t changed since last year; it is only available for new property like equipment, software and certain qualified leasehold improvements. Unlike the section 179 deduction, there is no cap or business income limitation on 50% bonus depreciation deductions. So, bonus depreciation write-offs can be used to create a net operating loss in 2013 for your business.

Defer Income & Accelerate Expenses
If you expect your 2014 business net income to be comparable or lower than 2013, consider deferring income into next year and accelerating expenses into this year. But, if you expect income to increase significantly next year and be in a higher tax bracket in 2014, you might want to take the opposite approach; accelerate income into 2013 and postpone deductible expenditures until next year.

Most small businesses use the cash-basis of accounting for tax purposes. This gives them the flexibility to manage their 2013 and 2014 net income in order to minimize taxes over that two year period. If your business uses the cash-basis and expects net income will be taxed at the same or lower rate next year, here are some year-end suggestions that will help mitigate the tax bite in 2013:

• Prepay some expenses that are due in 2014. Some examples: prepay your office insurance for the first six months of next year, prepay the first three months of your office rent or vehicle lease.
• Charge business expenses on your credit card in late December. Even though the credit card bill won’t actually be paid until 2014, you can still claim a deduction for 2013.
• If your business was planning on purchasing an asset like a computer or office furniture in the first quarter of 2014, consider buying it in December. These items can be charged on your credit card as well.
• In terms of income, plan on billing your customers in late December. This will defer the income until 2014 because you won’t get paid until early next year. Under the cash-basis, businesses don’t have to report income until it is constructively received.