The wise taxpayer may have to consider more than one tax strategy as we come to the end of 2012. Running the numbers under two or more scenarios may be the necessary for a year filled with significant tax uncertainty. Much of the tax uncertainty is due to:
- Many popular business tax breaks that either expired or were scaled back after 2011.
- The expiration of the Bush-Era tax cuts after 2012.
- Other business tax breaks scheduled to expire or to be scaled back after 2012.
- The scheduled increase after 2012 of the tax rates on dividends and capital gains.
- The new “Medicare Surtaxes” starting in 2013 that will apply to many higher-income employees, self-employed individuals, and business owners.
- And the uncertainty as to whether, or for how long, any of these expired or expiring business tax breaks will be extended.
It is possible that before the end of 2012 Congress will address these tax uncertainties but it is quite probable that it will be early 2013 before any legislation is passed. The planning ideas in this article are based on the current tax law and to prepare the business owner if the tax laws change.
Review options for accelerating income into 2012
Intentionally raising taxable income in the current year is contrary to the long-standing general guidelines to tax planning. But, with rates scheduled to increase, what has worked in years past may not produce the best tax outcome for the future.
- Consider a payroll bonus and take advantage of the current reduced rate of 4.2% for the employee portion of social security tax, which expires on December 31, 2012. The bonus can also be used to increase your retirement plan contribution.
- Owners of closely-held “C” Corporations may consider:
- Having the corporation redeem all or a portion of the shareholder’s stock
- Having the corporation paying the shareholder a dividend
- S Corporations that were previously C Corporations (converted S corporations) that have accumulated “earnings & profits” (E&P) from C corporation years should consider distributing the E&P as a dividend by the end of 2012. Maximum qualified dividend rates are still at 15% in 2012.
- Consider converting your traditional IRA to a Roth in 2012.
- Don’t forget to include income you may overlook:
- *Taxable capital gains distributed by mutual funds.
- * A 2010 Roth Conversion. If you opted to spread the tax over two years, you’ll need to include the second half on your 2012 income tax return.
Utilize expiring tax breaks
- Bonus depreciation, which lets you write off 50% of the cost of assets purchased in your business in 2012, expires at the end of December 2012.
- Section 179 depreciation deduction, the maximum amount you can expense for 2012 is $139,000 of the cost of qualifiying property placed in service for that tax year. The maximum amount for 2013 is $25,000.
- Consider purchasing a new passenger automobile, truck and or a heavy SUV (those built on a truck chassis and rated at more than 6,000 pounds gross loaded vehicle weight). Favorable depreciation and expensing rules expire at the end of December 2012. Next year, the rules may not be as generous.
- Consider hiring a veteran if you are planning on adding to your payroll. The work opportunity tax credit (WOTC) will not be available after 2012. The WOTC for hiring qualified veterans ranges from $2,400 to $9,600, depending on a number of factors.
- Employer provided educational assistance tax-free fringe expires at the end of 2012.
- Consider establishing a new retirement plan for 2012. Qualified retirement plans (profit sharing, 401k, or defined benefit plan) generally must adopt the plan no later than December 31, 2012. If establishing a SEP, you have till the due date of the tax return to adopt the plan. SIMPLE plans must have been established no later than October 1, 2012. A business credit for up to $500 of the cost of starting up a qualified retirement plan is available.
- Consider providing health coverage for your employees. A maximum tax credit of 35% of the premiums paid by the employer is available in 2012. To be eligible for the credit, the employer generally must contribute at least 50% of the total premium. Determination of the amount of the credit is determined based on the number of full-time equivalent employees and the average annual wages.
This article contains many planning ideas based on current tax law with varying effective dates and numerous limitations and exceptions. Scheduled changes to the tax law could be changed and/or reversed by Congress. As a business owner you cannot properly evaluate a particular planning strategy without calculating the overall tax liability on both your business and you personally with and without the strategy. In addition, this article only contains federal income tax planning, state income tax consequences should also be considered. Do not apply this general information to your specific situation without additional details, please seek the advice of your CPA before implementing any tax planning strategy.
Circular 230 Disclaimer: Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code of applicable state of local tax law provisions, or 2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Roxane L. Gabrielson, MBA, CPA, CVA is a manager at PKS & Company, P.A. with offices in Salisbury and Ocean City, MD and Lewes, DE. Roxane has over 20 years of public accounting experience including tax planning and preparation, management advisory services, advising potential business buyers and sellers on business values, valuation of businesses, tax consequences and financing.