Year end business tax tips

 

1. It May be Time to Shop

For companies planning on acquiring property in 2012 or 2013, there may be enhanced savings by making the acquisitions in 2012. Under current law scheduled to expire on Dec. 31, a company can take “bonus” depreciation of 50 percent of the cost for qualified property acquired and generally placed in service by year-end 2012. A company is also allowed, under certain circumstances, to expense up to $139,000 of qualified property in 2012—an amount that drops to $25,000 next year.

2. Put a Veteran to Work

 

Hiring a military veteran is hugely beneficial to small-business owners this year. As part of the Work Opportunity Tax Credit, any money paid to a qualified veteran (check list for qualifications) can be written off, dollar-for-dollar. The Work Opportunity Credit of up to $9,600 is still available for hiring an unemployed veteran, but in order to be eligible for the credit, you must have the qualified veteran start work before 2013.

 

3.  Accelerate billing and collections.

If you report income on a cash basis method of accounting, immediately sending out bills to increase collections before the end of the year may result in significant tax savings.  Choose your best or most loyal customers out of the bunch and call them to ask for payment right away. Tax brackets will go up at least 5 percent next year, so if you can get your clients to pay you this year, you’ll pay less in taxes.            Provide clients with an incentive to pay early by offering them a small discount, say, 1 to 2 percent.

4.  Pay Your Children

Does your 10-year-old file papers at your office a few times a week? If so, your child could get you a nice tax write-off.  If your child makes $5,250 or less in a calendar year, you get to deduct the entire amount and your child doesn’t need to claim the earnings. What’s better: you can take up to $5,000 of what they earned and put it into an IRA. Most parents will pay their child $250 and put the rest into a retirement fund that the child can access when they are old enough.

5. Startup Expenses

Did you know that you may write off the expenses you incur in the investigatory or startup phase of your business? Eligible expenses include planning, consulting with professionals, training employees and all other ordinary and necessary expenses incurred to get your business off the ground. This deduction works once the business is operational, so if you are still in startup mode on Dec. 31, you must defer the deduction to 2013. The IRS defines an operating business as one that has opened its doors or is accepting transactions.

 

You can deduct $5,000 of business startup expenses. If your total exceeds that, you may amortize the remainder over 180 months. There are special rules and limitations, so discuss this area with your tax professional.

6. Set up or Fund your Retirement Plan:

Your business needs working capital, but don’t forget about funding your future. Contributions made to retirement plans reduce your taxable income. For 2012, self-employed individuals can contribute $17,000 as a 401(k) deferral, plus 25% of net income. Check with your plan administrator for limits and deadlines for different types of plans.

7. Holiday Party!

Holiday festivities provided for your employees are 100% deductible. Parties for clients and associates are 50% deductible. But there are rules. You must have a business purpose and that consists of more than just promoting goodwill or networking and the expense cannot be lavish or extravagant.

8. Expense Account Reimbursements:

Gather together all those receipts for business expenditures you paid out of personal funds and have your business reimburse you before year end. If your business is operating as a C Corporation, be sure you have an accountable expense plan in place. Post your expenses to a spreadsheet and total by category of expense. Attach all receipts to provide bona fide back up documentation and then cut yourself a check and know that you have just reduced taxable income.

Fiscal Cliff Complicates Year-end Tax Planning

The “fiscal cliff” has made year-end financial planning especially daunting this year.

Uncertainty, the saying goes, breeds uncertainty. And it’s up in the air as to whether Congress will take action to head off a significant reduction in federal government spending and the expiration of Bush-era tax cuts that are scheduled to take effect January 1. Nor is there any clarity on what alternatives Congress might decide on.

However, income tax planning must go on, even in this uncertain tax environment. As a result, it is essential to know the customary year-end planning techniques that cut income taxes

It all starts with a tax projection of whether the taxpayer will be in a higher or lower tax bracket next year. Once their tax brackets for 2012 and 2013 are known, there are two basic income tax considerations.

• Should income be accelerated or deferred?

• Should deductions and credits be accelerated or deferred.

 

Capital gains: Take advantage of historically low taxes on long-term capital gains, which apply to stocks and other investments owned for at least a year.

Regardless of what tax bracket you’re in, many expect taxes on capital gains to rise. Currently, individuals with ordinary income above $35,350, or married couples with ordinary income above $70,700, pay 15 percent in capital gains taxes. Those below that level pay no capital gains taxes. Ordinary income includes all income except for income eligible for reduced tax rates, such as dividends and long-term capital gains.

Because of the tax uncertainty, some investment advisers say it makes sense to look at selling stocks that have appreciated significantly before the end of the year to avoid a higher tax bill down the road.

Something else to consider: If you’re selling a stock and taking a gain on it, there are no negative tax implications if you turn around immediately and buy the stock again. That’s different than when you sell a stock for a loss. In that scenario, you can’t claim a loss if you buy the stock again within 30 days

Don’t run out and trigger capital losses to offset capital gains or ordinary income given that this year’s tax rates on both capital gains and ordinary income are likely to look like a bargain compared to the rates that take effect in 2013.

Charitable contributions : Because of the tax uncertainty it might make sense for families to speed up their charitable giving to the end of this year instead of next.

Roth IRA: If you’ve been contemplating converting your traditional IRA to a Roth IRA, the time may be ripe.  With traditional IRAs, you invest pre-tax dollars and pay taxes when you withdraw funds. With a Roth IRA, however, you invest after-tax dollars but pay no taxes when you withdraw funds.  Now could be a good time to convert to a Roth IRA. In future years, your tax rates are likely to be higher.  A conversion is not to be taken lightly, however, because you’ll have to pay taxes on the converted funds.

Income Acceleration:  For taxpayers who think that they will be in a higher tax bracket,  receive bonuses before January 1, 2013. If your employer allows you the choice, this may create some significant income tax savings. Also, be aware that certain high-income earners will pay an extra 0.9 percent in Social Security taxes on earned income above certain thresholds starting in 2013.

AMT - Certain deductions that can be helpful in keeping tax bills low are worthless if you are in the AMT. Among them are deductions you get for paying state income taxes, local property taxes or mortgage interest. In a year when you are going to be in the AMT, it’s best — if possible — to delay paying taxes and mortgages in December and pay them in January.

Get Medical and Dental work done:  Another health care act tax provision will make it more difficult to claim itemized medical deductions. For 2012 taxes, medical deductions must exceed 7.5 percent of adjusted gross income before they can be claimed. In 2013, the expenses must be more than 10 percent of AGI. If there is a chance of exceeding the 7.5 percent floor this year, the individual may want to accelerate into this year discretionary medical expenses, such as prescription glasses and sunglasses, and elective medical or dental procedures not covered by insurance.

Year end tax planning – It’s different this time

Traditional tax planning has often been summarized and oversimplified into one phrase: “defer income and accelerate deductions.” Well, in light of the changes scheduled to occur Jan. 1, as well as our politicians acting like lemmings ready to go over the “fiscal cliff,” that may not be the best advice.
Starting next year, and without legislative action, the 2001 and 2003 tax cuts will expire, and new
Medicare taxes enacted as part of health care reform will take effect.
The expiration will eliminate several benefits, including:
• Rate cuts across all income brackets
• The full repeal of the personal exemption and itemized deduction phase-out
• The top rate of 15 percent for capital gains and qualified dividends
• Marriage penalty relief and the $1,000 refundable child tax credit
In addition, there are Medicare tax changes and additions. First, the rate of the individual share of Medicare tax will increase from 1.45 percent to 2.35 percent on earned income above $200,000 for single, and $250,000 for joint filers. The 1.45 percent employer share will not change, creating a top rate of 3.8 percent on self-employment income. In addition, investment income such as capital gains, dividends and interest will be subject for the first time to a 3.8 percent Medicare tax to the extent income exceeds $200,000 (single) or $250,000 (joint).
Between rate increases and deduction decreases, the top combined rates on income jump to 24 percent for capital gains, 43 percent for dividends and interest, and more than 42 percent for earned income.
As we can see, it may not make the best sense to defer income into next year in light of these tax rate increases. Alternatively, it may make sense instead to defer deductions and actually accelerate income.
The easiest income to control is capital gains. You can trigger gain and pay tax on stock and other securities without changing position. There is no wash sale rule on capital gains, so stock can be sold and bought back immediately to recognize the gain. But if much of your net worth is tied up in one asset because you’re deferring the tax bill on a large gain, this might be a good time to reallocate that equity.
You may also be able to affect tax by timing how you exercise options. If you do not plan to hold incentive stock options (ISOs) long enough to qualify for capital gains treatment, you can exercise them and sell the stock before tax rates increase.
You can also consider a conversion from a 401(k) or traditional individual retirement account (IRA) to a Roth IRA now, while tax rates are low. Tax will be owed on the amount of the conversion now in exchange for no tax on future distributions if the conversion is made properly and certain other conditions are met.
You might also consider electing out of the deferral of gain available in an installment sale. Deferred income on most installment sales can be accelerated by pledging the installment note for a loan.
Caveats:
First, determine whether tax increases will apply to you. Tax increases are unlikely to affect any income below the income thresholds of $200,000 (single) or $250,000 (joint), and taxes may not increase at all.
Also, if you’re subject to the alternative minimum tax (AMT), you may not benefit from any acceleration in tax. In addition, economic considerations should always come before any tax-motivated sale. We strongly suggest discussing tax strategies within the context of your overall financial plan.
Lastly, let’s hope our political leaders prove our lemmings metaphor wrong and actually deliver some clarity to taxpayers in 2013.

2012 Year-End Tax Planning Considerations

Consider your future income, capital gain and payroll taxes:

The current tax environment is very uncertain. One thing is certain, if Congress does not take action before the end of the year, tax rates are scheduled to go up for 2013. The tax increases include the following:

• The maximum marginal tax rate on long term capital gains will increase from 15% to 20%
• Qualified dividends increase from 15% to ordinary income rates (high of 39.6%)
• Marginal tax rates increase for ordinary income and the low 10% bracket will be eliminated
• Payroll taxes increase from 4.2% to 6.2% on employees resulting in an additional 2% in tax

It is possible that Congress will act and these tax increases will be averted. However, even if Congress does act, it is likely that high net worth individuals will still experience a tax increase next year.

Consider your exposure to the 3.8% Medicare surcharge tax:

On January 1, 2013, certain provisions of The Health Care and Education Reconciliation Act of 2010 (the “Act”), including imposition of a new 3.8% Medicare surcharge tax, go into effect. The Medicare surcharge tax applies as follows:

• The net investment income for high income taxpayers includes a 3.8% Medicare surtax on the lesser of two amounts: (1) their net investment income, or (2) the excess of the taxpayer’s modified adjusted gross income over a threshold amount
• The threshold amount is $200,000 for single filers or $250,000 for joint filers and $11,650 for irrevocable trusts and estates with discretionary distribution provisions
• Investment income is defined to include taxable interest and dividends, long and short term capital gains, annuity income, passive rental income, royalties, and passive activity income

Accelerating investment income in 2012 may be advantageous for you. The 3.8% Medicare surcharge tax is imposed on passive activities but not on income derived from an active business. Together with your accountant and financial planners, you may want to assess whether to sell assets and recognize gain, accelerating income this year to avoid the imposition of the 3.8% Medicare surcharge tax next year. Individuals may want to assess whether they are active or passive and explore opportunities of becoming active in their trade or business.

Consider the future of estate and gift taxation:

For the remainder of 2012, the combined gift and estate tax exemption is at $5,120,000 per person. The exemption significantly expands one’s ability to make lifetime gifts without incurring a gift tax. Time is running short to take advantage of the certainty of current law:

• A married couple can gift a total of $10,240,000 free of any gift tax
• Many states impose an estate tax, but far fewer impose a gift tax
• Even at this late date, if you want to make lifetime gifts of amounts above $1,000,000 there is time to effectively and completely make gifts of your assets, removing them from your estate for estate tax purposes
• Each person can make annual tax-free gifts of $13,000 per person, per recipient, as well as unlimited direct gifts for educational and medical expenses

Currently, this historically large exemption is scheduled to expire on December 31, 2012, with a return to a $1,000,000 exemption and a 55% federal tax rate on gifts over that amount. There is much speculation whether Congress will adopt an exemption over $1,000,000, but the fact is that no one knows and everyone is guessing. Where your legacy is concerned, don’t be caught short relying on speculation.

Five tax planning opportunities in Obama’s re-election

FROM http://www.aspendailynews.com

While the presidential election may be complete, there is still significant uncertainty surrounding the future of tax policy. Although we know President Obama will serve a second term, we don’t know whether a divided Congress will reach an agreement on the fate of the soon-to-expire Bush tax cuts. And if congressional gridlock does in fact rule the next two months, the country faces its most dramatic tax law changes in decades when these cuts expire on Jan. 1, 2013.
In the absence of partisan agreement, tax rates will rise for every American in 2013. As a result, during the remaining days of 2012, tax planning takes on a heightened level of importance.
To that end, here are five planning ideas that may help you save significant tax dollars: 
1. Accelerate year-end bonuses into 2012. There is one axiom on which almost all tax planning opportunities are based: defer income, accelerate deductions. But in the waning months of 2012, high-income taxpayers will want to give strong consideration to taking a contrarian approach and accelerating income into the current year.
The maximum personal tax rate is currently 35 percent. With the expiration of the Bush tax cuts, this rate will rise to 39.6 percent in 2013. In addition, beginning next year taxpayers earning wage income in excess of $200,000 ($250,000 for married filing jointly) will pay an additional 0.9 percent Medicare tax on wages in excess of those thresholds.
Crunching the numbers, assuming you already reside in the highest tax bracket, accelerating a year-end bonus from January 2013 into December 2012 could save you up to 5.5 percent, (40.5 percent to 35 percent) in federal tax.
2. Accelerate corporate dividends into 2012. Currently, qualified dividends are taxed at a preferential 15 percent tax rate. Absent any further legislation, however, dividends will again be taxed at ordinary income rates as high as 39.6 percent in 2013. Tack on the additional 3.8 percent surtax imposed upon net investment income (primarily interest, dividends and capital gains) for taxpayers earning in excess of $200,000 ($250,000 for married filing jointly) that is slated to begin in 2013, and wealthy taxpayers will experience a near-tripling in their dividend rate, from 15 percent to 43.4 percent.
As a result, owners of corporations should consider accelerating any planned 2013 dividends into 2012 to take advantage of the lower rates.
3. Sell your business. The sale of corporate stock, an interest in a partnership, or the assets of a sole proprietorship generally results in capital gains. As does the sale of real estate, except to the extent the gain is attributable to previous depreciation deductions.
At the moment, the tax rate applied to these gains — provided the assets have been held longer than one year — is 15 percent. If the Bush tax cuts expire, this rate will rise to 20 percent, and beginning in 2013, the additional 3.8 percent surtax on net investment income discussed above may apply as well, raising the maximum rate on long-term capital gains for some taxpayers to a high of 23.8 percent.
Quite obviously, this increased tax could become prohibitive. To illustrate, imagine you own real estate valued at $1.2 million that you purchased years ago for a minimal investment. For simplicity’s sake, assume a sale of the property generates $1 million of long-term capital gain. In 2012, this gain would generate a federal income tax bill of $150,000, leaving you with $1,050,000 of after-tax cash.
Wait until January, however, and the tax rate on this same $1 million gain may well be 23.8 percent, leaving you with a $238,000 federal tax bill and only $962,000 of after-tax cash, a decrease of a rather substantial $88,000.
4. Elect out of the installment method. Should you sell your business or real estate in 2012 for a string of payments, at least one of which is to be received in a future year, you may be tempted to report the gain on the installment method. Under this method, you would be permitted to defer portions of the underlying gain until the related payments are subsequently received. But as previously highlighted, 2012 might not be the time to seek deferral.
The downside of the installment method is that you do not “lock in” to the tax rates in place during the year of sale for use against all future gain recognition. Instead, you are at the mercy of Congress, and if the tax rates rise during subsequent years, any gain recognized during those years is subject to the increased rates.
Consequently, if you sell an asset during 2012, you should consider electing out of the installment method and recognizing the full amount of gain on your 2012 tax return. This will allow you to pay tax at the current 15 percent rate, rather than at a potential 23.8 percent rate in 2013. 
Fortunately, you don’t have to make that decision in the next two months, as the election to opt out of the installment method is made upon the filing of a tax return. This means taxpayers have until October 2013 — assuming a timely extension is filed — to take in the fate of the Bush tax cuts before making any decisions. 
5. Die. I’m joking, of course, but if you haven’t been consulting with a competent estate tax attorney, it’s not the worst idea in the world. If you have a sizable estate, that estate is currently subject to a $5,120,000 lifetime exemption and a 35 percent tax rate. Should Congress fail to act by year-end, those amounts are set to return to $1,000,000 and 55 percent, respectively. So if you really want to provide for future generations, you may have to take one for the team before New Year’s Day. The family will miss you, but extra cash can heal a lot of pain.

Three Reasons Oct. 15 is the Second Most Important Day for Taxes

April 15 has a pretty good chance of remaining the No. 1 day for taxes, but Oct. 15 is likely a close second. Three reasons Oct. 15 is important for taxpayers: (1) extension filers must submit their returns to avoid a monthly 5-percent, late-filing penalty on balance due, (2) Fresh Start participants must pay taxes due to avoid further penalties and interest because their six-month grace period ends and (3) the 2013 filing season starts in 100 days so now is a good time to assess the impact of life changes on 2012 taxes.
October really is the new April for taxes. Taxpayers used to believe the only day they had to worry about was the April filing deadline, but more people are realizing how paying attention to their tax situation year-round can put more money in their wallet.

1. Extension to file deadline is Oct. 15 - returning clients eligible for special discount

On average, more than 10 million taxpayers applied for a tax filing extension each of the past few years - even though approximately 66 percent of them were due a refund.
One reason taxpayers put off filing is to make sure they have all the paperwork needed to file an accurate return. Rushing to file at the last minute can also result in missing out on claiming tax credits and deductions to which they may be entitled, which can lead to overpayment of taxes. Not claiming all the deductions and credits to which they are entitled, picking the wrong filing status, not filing at all and assorted other missteps cause taxpayers to forfeit $1 billion in refunds annually.

2. Fresh Start participants face payment deadline Oct. 15

This year, the IRS introduced Fresh Start Penalty Relief allowing a six-month payment grace period for those unemployed for 30 consecutive days and self-employed taxpayers who lost at least 25 percent of business income in 2011 due to the economy - in addition to meeting other qualifications.
Those who met the qualifications will not face failure-to-pay penalties if their 2011 taxes, interest and any other penalties due are paid by Oct. 15. Those who can't pay in full by the extended deadline will have to pay penalties on the amount not paid by Oct. 15. The failure-to-pay penalty is 0.5 percent of the unpaid taxes for each month after the due date (cannot exceed 25 percent of unpaid taxes). The "meter" on interest for the taxes due started April 15.

3. Oct. 15 signals 100-day countdown to e-file, means still time to impact 2012

Even with e-file starting in 100 days on Jan. 22, there is still time for taxpayers to review their 2012 tax situation and make changes that might improve it. Also, because the start of the filing season has been delayed this year, people who typically get their tax returns in January may have to prepare themselves for a later arrival in February.
"Sitting down with a tax professional in October to look at last year's return and estimate next year's return can help taxpayers develop a financial strategy to be more prepared during these uncertain times," Rice said.

Commonly Missed Federal Income Tax Deductions

Following are some of the most commonly missed deductions on federal income tax returns.

Charitable Contributions of Physical Items

Contributions given to a charitable organization are a common deduction on federal income tax returns. Many people know they can deduct the amount of any cash contributions made to such organizations. But they overlook deducting the value of other types of contributions to charitable organizations.

If you have donated clothing, furniture, baby toys, or any other item that is in good working condition, you can deduct the fair market value of that item on your federal income tax return.

Are you unsure how much an item you want to donate is worth? If so, some organizations publish guidelines to help you determine the fair market value.

Certain Costs Related to Refinancing

With many homeowners seeing the lowest mortgage interest rates they have seen in their lifetime, there has been an abundance of refinancing of homes. Some homeowners have been able to take advantage of the low interest rates to refinance their homes multiple times.

If you paid points related to your refinancing, you can deduct a portion of those points on your federal income tax return. You can calculate the amount of your deduction by dividing the number of months of your loan in the current year by the total number of months of your loan term, and then multiple that fraction by the amount you paid in points.

In addition, if you refinance and have points from a previous mortgage that you have not finished deducting, you can deduct the full amount of the remaining point cost.

Expenses as a Teacher

If you are a teacher of grades kindergarten through 12, or an office aide or principal in an elementary, middle, or high school, you can deduct up to $250 in expenses on suppliers you use for teaching that are not paid for by the school.

Energy Efficiency Upgrades to Your Home

The federal government has generally been supportive of providing an incentive for homeowners to improve the energy efficiency of their homes. Therefore, they offer federal income tax deductions on various energy efficiency improvements. These deductions can include a portion of expenses for insulation, high-seer air conditioning and heating equipment, solar panels, and energy efficient windows.

Casualty Losses

If your home was damaged due to any act of nature, including but not limited to tornadoes, hurricanes, floods, and forest fires, where the area was declared a federal disaster area, then your losses from the disasters can be deducted on your federal income tax.