If You Were My Client…End of Year Tax Strategies

By John Ellsworth, Esq November 23rd, 2012

Call your tax lawyer or CPA.  Why?  Because big federal tax changes that would kick in January 1 could boost your tax bill.

As I write this and the so-called “fiscal cliff” looms, it’s anyone’s guess exactly what 2013 taxes will be. In less than two months the Bush tax cuts expire.  Congress must decide what to do about this in the next six weeks; the problem is, right now Congress and the President are meeting behind closed doors. But here’s what we do know: Current tax rates will expire at year-end.  Higher taxes will likely be the case in 2013.  So here are some things you must consider now.

1. Cashing in.

If you want to sell your business (or some part of it) before potential tax hikes hit in 2013, see your tax professional without delay.

2.  Expensing Business Investments.

The amount of new equipment your business can expense under bonus depreciation rules and Section 179 has fallen in 2012. You were allowed to fully expense eligible property placed in service during 2011 under 100% bonus depreciation, but property placed in service in 2012 will qualify for only regular bonus depreciation, which allows you to deduct half of the cost of the property while the rest is depreciated using normal rules. This still provides an incentive for investment, especially because bonus depreciation is scheduled to expire altogether for property placed in service in. To qualify for bonus depreciation, property must generally have a useful life of 20 or fewer years under the modified accelerated cost recovery system (MACRS). The amount of business investment that you can expense under Section 179 has also fallen from $500,000 to $139,000 for tax years beginning in 2012 (with the phase-out dropping from $2 million to $560,000). As I write this, lawmakers were discussing adjustment to these expensing provisions for 2012 and 2013.  How this will wind up is anyone’s guess.  Bottom line is that if you can swing the expense, you’ll get some valuable tax breaks on equipment purchases made this year. Next year? Who knows. Stay tuned.

3. Accelerate key payouts and spending before the end of this year.

Potentially higher tax rates is reason to shift key expenses into this year, 2012. Specific strategies follow: 

  • If there will be a bonus in your company, make it happen in 2012—don’t wait. If Congress were to just let the Bush tax cuts expire, the top income tax rate will rise from 35% today to 39.6% in 2013.There is also a new 3.8% Medicare surtax (part of the Affordable Care Act or “Obamacare”) that kicks in next year for higher-income households. The surtax is only charged on net investment income. If you have none, no tax. If you do have net investment income, you still might not owe the extra 3.8% tax.   For highly compensated employees paying out a bonus this year guarantees they will pay a maximum rate of 35%. Pay it out in January and they could be hit with a higher tax bill.
  • Accelerate dividend payouts. If you pay yourself and shareholders an annual dividend, consider accelerating a 2013 payment into 2012. As most CFOs know, the current maximum tax rate on qualified dividends is 15%. Another expiring tax law would mean that come 2013 dividends will revert to the old (pre-Bush tax cut) system that taxed dividends as ordinary income. Again, that could be as much as 43.4% next year. This represents a huge increase in tax, so pay it now; your shareholders will thank you for it.

So what does this actually mean for tax planning?

There is definitely an important opportunity for year-end business tax planning. Interest rates are at near-historic lows, and the values of many assets have declined with the struggling economy — perfect conditions for property transfers. With the prospect of income tax increases also looming, taxpayers may also be tempted to accelerate tax into 2012 by deferring deductions and recognizing income. But a careful analysis of several factors should come first, and there are many reasons why accelerating tax is a bad idea.  See or call your tax professional today to pinpoint your own situation.

This entry was posted on Friday, November 23rd, 2012 at 3:29 pm and is filed under Avoiding Tax, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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