Business and Personal Year-End Planning

Business & Personal Year End Planning

BUSINESS YEAR-END PLANNING

This year-end provides unique opportunities for virtually every business to reassess their business plan with an eye toward maximizing tax savings in 2013 and, even, for 2014 and beyond. This year, shareholders and other business owners face a new landscape of tax rates for “higher income” individuals including  a 39.6 percent maximum income tax rate, a 20 percent maximum tax rate on capital gains and dividends, a 3.8 percent net investment income tax, and a 0.9 percent Medicare compensation surtax. New as well are requirements and opportunities surrounding the tax treatment of repairs, improvements, acquisition costs and other common business expenses.

Further, some of the usual tax breaks for businesses are coming to an end in 2013, if Congress does not renew them. 2013 may provide the last chance for businesses to take advantage of bonus depreciation, enhanced “section 179” expensing, and the work opportunity credit. Finally, although the “employer mandate” under the new health care reform law was recently postponed from 2014 to 2015, now is not too early to start planning to comply with rules that will be based on the number of employees on January 1, 2014.

Bonus depreciation

Bonus depreciation is scheduled to end in 2013. Bonus depreciation is for new property (i.e., property whose original use begins with the taxpayer) and includes tangible personal property, purchased computer software and qualifying leasehold improvement property. A taxpayer is entitled to the full, 50-percent bonus depreciation irrespective of when during the year the asset is purchased.

Code Section 179 Expensing

Until the end of the year, taxpayers can elect to expense up to $500,000 of qualifying property additions. Next year, that limit plunges to just $25,000.  So, if you know you will buying such property in 2014, consider doing it before the end of the 2013 year.

Section 179 property is generally defined as new or used depreciable tangible property that is purchased for use in the active conduct of a trade or business. Off-the-shelf computer software is also included for 2013, as is qualified real property (up to $250,000). Both of these latter types of property will no longer qualify for section 179 expensing at all after 2013.

Tax Credits

The 2012 Taxpayer Relief Act extends the Research Credit to apply to any amounts paid or incurred for qualified research and experimentation before January 1, 2014.

The Work Opportunity Credit for all targeted groups is extended through December 31, 2013. Therefore, the credit applies with respect to wages paid to persons who begin work for the employer before January 1, 2014.

Revised Repair/Capitalization Rules

The IRS recently issued long-awaited comprehensive final rules on the treatment of payments to acquire, produce or improve tangible property. In 2014, businesses must use these new rules in determining whether they can deduct their costs as repairs instead of  capitalizing the costs.  Businesses will benefit if certain procedures for treating expenses are put into place by January 1, 2014. Some businesses will be better off if they start applying the new rules retroactively to the 2012 and 2013 tax years. Many of these decisions require advance planning.

Pass-through Issues

Many business operations are not taxed at the entity level as corporations but, instead, pass through taxable profits and losses to their unincorporated owners or to their S corporation shareholders. Starting in 2013, these owners face new year-end planning challenges in the form of a higher individual tax rates and additional surtaxes on passive income by way of the net investment income surtax of 3.8 percent and the Additional Medicare Tax of 0.9 percent on compensation, both aimed at the “higher-income” taxpayers. Deferring some of this income, or harvesting losses to offset some of the income, are traditional year-end planning techniques that take on added value for the 2013 year-end tax year.

Based on all that is new and all that may be expiring in 2013, many businesses can benefit from a fresh assessment of how year-end tax planning can help reduce their overall tax liability for both 2013 and 2014.

PERSONAL YEAR-END PLANNING

As the end of the year gets closer, there is still time to think about  year-end tax planning to minimize your 2013 tax liability. New tax legislation has brought greater certainty to year-end planning, but has also created new challenges. The number of changes made to the tax rules and the opportunities these changes bring may seem overwhelming. This letter is intended to be a mile-high view of some key year-end tax planning strategies.

Expiring Tax Incentives

Some tax incentives are set to expire at the end of this year, unless extended by Congress. So, you might want to take advantage of them this year. For example, there are only a few weeks left to make a tax-free distribution by those age 70-1/2 or older from IRAs for charitable purposes. And, now is the time to take advantage of a tax credit for making certain energy efficient home improvements. Finally, you might want to accelerate into 2013 the purchase of big ticket items that you were going to make in 2014 to take advantage of the deductibility of the sales tax.

New Taxes and Rates

Not surprisingly, some individuals may be surprised that they owe additional taxes in 2013. Three new taxes are in effect for 2013: the Additional Medicare Tax, a revived 39.6 percent tax bracket for higher income individuals, and the 3.8-percent Net Investment Income surtax.

The Additional Medicare Tax of .9% applies to wages and self-employment income above $250,000 for married couples filing joint returns and $200,000 for single individuals.

The starting points for the 39.6 percent bracket for 2013 are $450,000 for married couples filing jointly and  $400,000 for single filers. Also revived for 2013 are the personal exemption phase outs and the limitation on itemized deductions for higher income individuals. Capital gains rates for individuals in this highest tax bracket increase to 20%, starting in 2013.

The new Net Investment Income surtax applies to individuals, estates and trusts that have certain investment income above $250,000 threshold for married couples filing jointly and $200,000 for single filers. However, qualified dividends received from domestic corporations and qualified foreign corporations continue to be taxed at the same rates that apply to capital gains.

A summary of the new 2013 rates in comparison to the 2012 rates is as follows:

Wages Long-term capital gains Qualified dividends Passive income Active income from general partnership Active income from S corp
2012 highest tax bracket

35%

15%

15%

35%

35%

35%

Medicare tax on earned income

1.45%

0%

0%

0%

2.90%

0%

2012 highest marginal tax rate

36.45%

15%

15%

35%

37.90%

35%

Expiration of tax cuts in 2013

4.60%

5%

5%

4.60%

4.60%

4.60%

2013 highest marginal income tax rate

41.05%

20%

20%

39.60%

42.50%

39.60%

Net investment income tax effective in 2013

0.90%

3.80%

3.80%

3.80%

0.90%

0%

2013 top total tax rate

41.95%

23.80%

23.80%

43.40%

43.40%

39.60%

Increase from 2012 to 2013

5.50%

8.80%

8.80%

8.40%

5.50%

4.60%

Planning for gifts

Gift-giving is often overlooked as a year-end planning strategy. For 2013, individuals can make tax-free gifts (no tax consequences for the giver or the recipient) of up to $14,000 to any individual. Married couples may “split” their gifts to each recipient, which effectively raises the tax-free gift to $28,000.

There are special rules for gifts made for medical care and education that can be a valuable component of a year-end tax strategy, especially for individuals who want to help a family member or friend. Monetary gifts given directly to a college to pay tuition or to a medical service provider have no tax consequences to the person making the gift and the person benefiting from education or medical care.

Traditional Tax Planning

Traditional year-end planning techniques nevertheless remain important for 2013. As always, tax planning requires a combination of multi-layered strategies, taking into account a variety of possible scenarios and outcomes. The deferral of income and the acceleration of deductions and credits  may be used to reduce an individual taxpayer’s income tax liability:

Income Deferral:
  • Defer billings and collections
  • Receive bonuses earned for 2013 in 2014
  • Sell appreciated assets in 2014
  • Offset tax losses against current gains (loss harvesting)
  • Postpone the redemption of U.S. Savings Bonds
  • Delay Roth conversions to 2014
  • Defer debt forgiveness income if possible
  • Minimize retirement distributions
  • Execute like-kind exchange transactions
Deductions/Credit Acceleration:
  • Bunch itemized deductions into 2013 in order to use the standard deduction into 2014
  • Accelerate deductible bill payments into 2013
  • Pay last state estimated tax installment in 2013 instead of 2014
  • Minimize the effect of  AGI limitations on deductions and credits
  • Maximize net investment interest deductions
  • Match passive activity income and losses

Every tax situation is different and requires a careful and comprehensive plan. We can assist you in aligning traditional year-end techniques with strategies for dealing with any unconventional issues that you may have. Please call your tax professional at our office for an appointment.