Guest Post by John R. Wheeler, CPA, CFP®
(learn more about John at the end of this post).
Year-end is fast approaching for most small business owners that use a December 31st year-end. We assume that there are many tax law changes on the horizon and they will impact individuals and small businesses. We do not tax plan in a vacuum, therefore you must coordinate your year-end tax strategies with your personal tax situation. Most small businesses are what we call pass-thru entities, which means that the net taxable income of the business is passed through to the business owners who then include their respective share of the business income or loss on their personal tax returns. This is not intended to be a discussion of which business entity is the best for you nor is it a discussion where we will separate the tax strategies by business type. That being said, the following are some useful year-end tax strategies and tips that generally apply to most small businesses.
Tips to Note
1. Depreciation is usually a significant item to small businesses, in particular when making the decision to buy furniture and equipment before the end of the year. Section 179 expensing deduction has been enhanced the past few years and for 2012 the annual limit is $139,000, which means that for most furniture and equipment bought in 2012 you can expense the first $139,000 of purchases (other conditions apply). Please note that the Section 179 annual limit decreases to $25,000 in 2013 unless Congress makes a change to the limit.
2. Bonus depreciation has been available for the last few years and for 2012 there is 50% bonus depreciation, which allows you to deduct depreciation up to 50% of the cost of certain new furniture and equipment purchases (other conditions apply). The Bonus deprecation can be coordinated with the Section 179 deduction. However, under current tax law, Bonus deprecation is only allowed for furniture and equipment placed in service before January 1, 2013.
I never suggest that business owners buy depreciable assets for the sake of deprecation, however if you need new furniture and equipment, you must have the asset in service by December 31st in order to take advantage of the Section 179 and Bonus deductions. Therefore, some advance planning may be needed.
3. Timing is everything! Most small businesses operate on the cash-basis, and therefore recognize income when received and expenses when paid. Therefore, timing is everything at the end of the year. You do not have to claim income that is not received, or that you do not control over by the end of the tax year. Also, you can deduct expenses that are paid for by the end of year, as well as, expenses charged on credit cards. As you can imagine, there can be quite a swing in net income depending on when items of income or expense occur.
4. Take Advantage of Retirement Plans Don’t miss out on the opportunity to take advantage of retirement plans and other fringe benefits by the end of the year. Some decisions must be made by the end of the year, and others actually can be deferred until the due date of the business tax returns. The most prevalent is that of retirement plans, which provide a great opportunity for small business owners, especially those without non-family employees. The biggest bang for the buck is typically a 401K plan, but these plans must be established by December 31st in order to be effective for a given tax year. At the maximum, an individual that is at least 50 years old can contribute up to $55,500 annually…WOW! Other plans available are SEP and SIMPLE plans, which have their own requirements for when the plans must be set up, how much can be contributed and who must be covered.
5. Business Entity Selection The most popular form of small business entity is an S-Corporation. S-corp owner-employees must review their compensation for the year to ensure that they have met the IRS guidelines for reasonable compensation and they must include any eligible health insurance premiums on their W-2 in order for the health insurance premiums to be deducted as self-employed health insurance. One little known fact is that Medicare premiums paid can also be deducted as self-employed health insurance premiums. There are specific rules that dictate what premiums qualify for this deduction and it is suggested that the S-corp. reimburse the owner-employee for the premiums paid.
Most important :
Small business owners must take the time to plan for their tax obligations before the end of the year. No one likes to be surprised when they are handed their tax returns and there’s an unexpected balance due!
The above recommendations are general in nature and should not be used for your specific tax planning without the consultation of a professional tax advisor.
Wheeler & Company CPA’s, PC
John R. Wheeler is not affiliated with FSC Securities Corporation or Preferred Financial Strategies, Inc.