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Tax Planning
Tax issues for businesses to consider before year ends

Some thoughts on business tax planning.

If you are a cash-basis calendar year taxpayer, consider paying any outstanding deductible expenses before the end of the year. This is based on the theory that due to the time value of money, taxes deferred are cheaper than taxes paid now. If you use a credit card, it still counts as paid this year. Do not do this if you expect your incremental tax rate to go up next year. On the personal side, if you itemize but don’t normally have enough medical to exceed the 10 percent (7.5 percent if you or your spouse are over 64) AGI limit and you have unusually high uninsured medical expenses this year, getting them paid off, even if you have to use credit, might benefit you. This approach is also often popular with your care providers.

Section 179 of the Internal Revenue Code allows an upfront depreciation deduction of most business equipment placed in service during the year. This is commonly known as the expensing election and this year the maximum that can be expensed has been raised to $500,000, of which $250,000 can be “qualified real property.” There is a phase-out of the expensing limit if you place in service too much qualifying equipment and that phase-out begins at $2 million this year. Also, the 50 percent bonus depreciation deduction has been extended through 2013.

The expensing election is severely limited for most passenger vehicles under 6,000 pounds gross vehicle weight. For most SUVs over 6,000 pounds GVW the expensing election limit is $25,000. Keep in mind, any amount of equipment purchases expensed can no longer be depreciated. Often clients ask if they should buy equipment to save taxes. The short answer is, not if the after-tax cost of the equipment does not exceed its economic benefit.

Next year the 50 percent bonus depreciation is eliminated and the expensing election is reduced to $25,000 for all qualified equipment, and the phase-out amount is lowered to $500,000.

If you are affected by these limits and you intended purchasing equipment in the near future, consider buying it before the end of the year. Another small reason to purchase equipment this year is that the sales tax rate in Kitsap County is going up to 8.7 percent effective Jan. 1, 2014. Again, if your tax bracket is low (we are still in a sluggish recovery) and you expect it to be higher in the future you may not want to do this, especially if your equipment is financed.

Small business retirement plans work well for many small businesses and should be considered as a way to defer taxable income. SEP and SIMPLE plans are easy to set up, have low overhead and don’t have Form 5500 filing requirements. Unfortunately, SIMPLE plans must be set up by Oct. 1. However, if you find yourself at the end of the year in a higher than expected tax bracket, a SEP can be set up and funded as late as the due date plus extensions of your tax return.

Be advised that the IRS has increased its audit activity relating to several business issues including hobby losses, the employee vs. contractor issue, and employee reimbursements. Also the IRS is focusing on reasonable compensation for 2 percent owners of S corporations and other “schemes for avoiding of payment of Social Security and Medicare taxes.” Perennial losses claimed on personal returns on schedules C and F (businesses and farms) are getting more attention. Remember, there has to be a reasonable profit potential. Be careful about unsubstantiated business expense reimbursements to employees. Giving cash for travel or a fixed amount to an employee for business use of their personal vehicle without substantiation will be treated as wages. Contractors that are defacto employees due to the facts and circumstances of their employment may be treated as such.

I feel I should say something about the Patient Protection and Affordable Care Act (Obamacare). I am sure most employers already know that the employer mandate to provide health insurance coverage to employees has been postponed until 2015 and that it does not apply to small employers with fewer than 101 employees. It does affect employers that do provide coverage. For employer-provided health benefits to not be treated as compensation and not be subject to payroll taxes and withholding, those benefits must be provided through a qualified health plan. The Affordable Care Act specifically says that the term “health plan” does not include benefits that are not subject to state insurance regulation. If you provide health insurance through a qualified health plan, your insurer will adjust the plan to meet the federal requirements and bill you accordingly. Or cancel your policy.

The Washington state insurance exchange website (www.wahealthplanfinder.org) has a section for small employers. I tried it for my practice and was told none were available. Maybe you will have better luck.

In closing I believe that given the current political situation, the law soon will be changed.

How, I don’t know; your guess is as good as mine.

Randy Biegenwald is a Certified Public Accountant

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