As 2013 draws to a close, there is still time to reduce your 2013 tax bill and plan ahead for 2014. This post highlights several potential tax-saving opportunities for you to consider. Please click here to meet with Paul to discuss specific strategies and issues.
Deferring Income into 2014
Deferring income to the next taxable year is a time-honored year-end planning tool. If you expect your AGI to be higher in 2013 than in 2014, or if you anticipate being in the same or a higher tax bracket in 2013 than in 2014, you may benefit by deferring income into 2014. Some ways to defer income include:
Use of Cash Method of Accounting: By using the cash method of accounting instead of the accrual method of accounting, you can generally put yourself in the best position for accelerating deductions and deferring income. There is still time to accomplish this strategy, because an automatic change to the cash method can be made by the due date of the return including extensions. The following three types of businesses can make an automatic change to the cash method: (1) small businesses with average annual gross receipts of $1 million or less (even those with inventories that are a material income producing factor); (2) certain C corporations with average annual gross receipts of $5 million or less in which inventories are not a material income producing factor; and (3) certain taxpayers with average annual gross receipts of $10 million or less. Provided inventories are not a material income producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts.
Delay Billing: Delay year-end billing to clients so that payments are not received until 2014.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.
Accelerating Income into 2013
You may benefit from accelerating income into 2013. For example, you may anticipate being in a higher tax bracket in 2014, or perhaps you need additional income in 2013 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2013 will be disadvantageous if you expect to be in the same or lower tax bracket for 2014.
If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2013. Also, see if some of your clients or customers are willing to pay for January 2014 goods or services in advance. Any income received using these steps will shift income from 2014 to 2013
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-AGI floor.
Equipment Purchases: If you purchase equipment, you may make a “Section 179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2013, you may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000) if the asset was placed in service during 2013. Note that for assets placed in service in 2013, taxpayers can expense 50% of their business equipment purchases under a provision giving taxpayers bonus depreciation, mitigating the need for the §179 election.
In 2014, the dollar amounts for §179 expensing are scheduled to be $25,000, with a phase-out amount of $200,000. Although there is a chance the 2014 figures will go up if Congress acts, it would be wise to place more assets in service in 2013 if you have yet to hit the $500,000 figure.
In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2013. In general, under the “half-year convention,” you may deduct six months’ worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.) A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $11,160 for 2013 (due to bonus depreciation rules), $11,360 in the case of vans and trucks (due to bonus depreciation rules). Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.
NOL Carryback Period: If your business suffers net operating losses for 2013, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2011. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years.
Bad Debts: You can accelerate deductions to 2013 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2013 year-end financial statements.
Home Office Deduction: Expenses attributable to using the home office as a business office are deductible under §280A if the home office is used regularly and exclusively: (1) as a taxpayer’s principal place of business for any trade or business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business.
Capitalization of Tangibles: Final regulations providing guidance on the application of §§162(a) and 263(a) to amounts paid to acquire, produce, or improve tangible property, expand the definition of materials and supplies to include property with an acquisition or production cost of $200 or less, clarify the application of the optional method of accounting for rotable and temporary spare parts, and simplify the application of the de minimis safe harbor to materials and supplies. The regulations generally apply to taxable years beginning on or after January 1, 2014. However, taxpayers generally may choose to apply the final regulations to tax years beginning on or after January 1, 2012, or generally may choose to apply the 2011 temporary regulations to tax years beginning on or after January 1, 2012, and before January 1, 2014. The taxpayer makes the de minimis safe harbor election annually by including a statement the tax return for the year elected.
Small Employer Pension Plan Startup Cost Credit: For 2013, certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Credit for Employee Health Insurance Expenses of Small Employers: For tax years beginning after 2009, eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,000 or less are eligible for the full credit. The credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,000. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $50,000 or more. The credit amount is 35% of certain contributions made to purchase health insurance. Beginning in 2014, the credit is only allowable if the health insurance is purchased through a SHOP Exchange and is only available for two consecutive taxable years.
Subnormal Goods: You should check for subnormal goods in your inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory as of the end of 2013, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day timeframe.
Planning for 2014 Tax Increases and Potential Expiration of Tax Relief Provisions
S Corporation Built-In Gains Tax: An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation’s income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all gains that were built in at the time of the election if the gains are recognized during a special holding period. For tax years beginning in 2009 and 2010, the special holding period was shortened from 10 years to seven years. It is shortened even more for tax years beginning in 2011, 2012 and 2013 to five years. Absent Congressional action, it appears that the special holding period will revert to 10 years in 2014. Therefore, it may be advisable for S corporations to dispose of their built-in gain property before the end of 2013.
100% Exclusion of Gain Attributable to Certain Small Business Stock: The incentive for individuals to acquire qualified small business stock is higher before the end of 2013. An individual ordinarily may exclude 50% of the gain from qualified small business stock that is held for at least five years (subject to a cap). “Qualified small business stock” is stock of a corporation the assets of which do not exceed $50 million when the stock is issued. The 50% exclusion of gain was increased to 75% for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. The 2010 Small Business Jobs Act (SBJA) excluded 100% of the gain for qualified small business stock acquired or issued after September 27, 2010, and the American Taxpayer Relief Act of 2012 (2012 ATRA) extended the 100% exclusion to qualified small business stock acquired before January 1, 2014. In addition, the alternative minimum tax preference item attributable to the sale is eliminated. For stock acquired after December 31, 2014, only 50% of the gain from the sale/exchange of qualified small business stock held for more than 5 years is excluded from gross income (assuming no further Congressional action).
Qualifying Dividends: Qualified dividends received in 2011 and 2012 are subject to rates similar to the capital gains rates. For taxable years beginning on or after January 1, 2013, the 2012 ATRA made permanent the capital gain treatment of qualified dividend income for taxpayers below the newly reinstated 39.6% tax bracket, but raised the top capital gain rate for taxpayers in the 39.6% bracket to 20%. Qualified dividends are typically dividends from domestic and certain foreign corporations.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property: The rule that the basis of an S corporation shareholder’s stock is decreased by charitable contributions of property by the S corporation in an amount equal to the shareholder’s pro rata share of the adjusted basis of the contributed property expired for contributions made in taxable years beginning after December 31, 2011. The 2012 ATRA extended the special basis-adjustment rule (in part retroactively) through 2012 and 2013, to contributions made on or before December 31, 2013.
Employer-Provided Child Care Credit: For 2013, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures. Legislation in early 2013 made this credit permanent.
Employer Wage Credit for Employees in the Military: Some employers continue to pay all or a portion of the wages of employees who are called to active military service. If the employer has fewer than 50 employees and has a written plan for providing such differential wage payments, the employer is eligible for a credit. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. The credit expires after 2013.
Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit against the wages paid. The credit is determined based on first-year wages paid for employees hired on or before December 31, 2013.
Bonus Depreciation: Taxpayers can claim 50% bonus depreciation for assets placed in service in 2013. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. In 2014, bonus depreciation generally does not apply.
Health Care Planning
SHOP Exchanges: Beginning in 2014, the Small Business Health Options Program begins to allow certain small businesses to obtain health insurance for their employees through an exchange. The program is designed for employers with 50 or fewer full-time equivalent employees. Coverage must be offered to all full-time employees working 30 or more hours per week. Each state will offer its own SHOP marketplace. Self-employed persons with no employees cannot use the SHOP Exchange.
Uncertain Tax Positions: The final Instructions for Schedule UTP state that a corporation must file Schedule UTP with its income tax return if it: (1) files Form 1120, Form 1120-F, From 1120-L, or Form 1120-PC; (2) has assets of $50,000,000 or more beginning with the 2012 tax year, and $10,000,000 or more beginning with the 2014 tax year (the threshold was $100,000,000 or more for tax years before 2012); (3) issued (or a related party issued) audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and (4) has one or more tax positions that must be reported on Schedule UTP. A taxpayer that files a protective Form 1120, 1120-F, 1120-L, or 1120-PC and satisfies the conditions set forth above also must file Schedule UTP.
Unique Reference Identification Number: Forms 5471, 8858, and 8865 now contain a Unique Reference Identification number (URI) for each foreign entity with respect to which reporting is required. The URI will be used to track the foreign entity from year to year.
Electronic Funds Transfer: As of January 1, 2011, a corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS’s Electronic Federal Tax Deposit System (EFTPS).
If you have any questions, please do not hesitate to contact me by clicking here. I would be happy to meet with you at your convenience to discuss the strategies and requirements outlined above. There is still time to implement these strategies to minimize your 2013 tax liability and plan for 2014.