Category Archives: Business

2014 Year-End Tax Planning Guide For Businesses: Discover 9 Proven Tax Planning Strategies

Year-End Tax Planning For Business

Business Year-End Tax Planning

The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year.  Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.

Last second tax law changes also must be considered.  It is also important to know that on December 19, 2014, the President passed the Tax Increase Prevention Act that extended many expired tax provisions some of which are discussed in more detail below.  Note that these tax breaks are only available through the end of  2014.  If any of these tax breaks are available to you, it would be prudent to take advantage of them before they expire.

Also keep in mind ordinary income tax rates for individuals can be as high as 35% to 39.6%  so members of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.

The following presents some year-end tax strategies that may prove helpful to  businesses of all shapes and sizes:

1. Accelerating or Deferring Income and Deductions as Part of a Year-end Tax Strategy

A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between current and later year(s).  (Historical note:  For those of you old enough to remember, there was an income averaging rule built into the tax code that actually corrected for the inequity that can result in big shifts in income from year to year.  That provision has long been abolished.)

So every year, businesses can take advantage of the traditional planning technique that involves alternatively deferring income or accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorship) should consider accelerating business income into the current year and deferring deductions until 2015 (and perhaps beyond) if they expect income to rise next year. Continue reading

2014 Year End Tax Planning Tips: Instantly Discover What You Can Do Now To Start Saving Taxes Before Year End With Proven Tax Attorney Strategies

Year End Tax Planning

As the year-end quickly approaches, there is still time to do year-end tax planning to generate significant tax savings.  As many of you know, changes to the tax laws in 2013 made many tax rates (subject to cost of living adjustments) and certain tax breaks permanent.  But some tax breaks expired in 2013 (discussed in more detail below) and Congress has not as yet revived them making year-end planning more complicated and frustrating.  The President and Congress have reinstated expired tax breaks for only the 2014 tax year, as discussed in more detail below.

Overview:

This 2014 tax year will again be challenging as taxpayers will have to deal with the following recent tax law changes:

  • Higher marginal income tax rates
  • Higher capital gain tax rates
  • Restoration of the phase out of itemized deductions and exemptions: If your adjusted gross income exceeds applicable thresholds, certain itemized deductions are reduced.  The applicable thresholds for 2014 are $254,200 for singles, $279,650 for head of household and $305,050 for joint filers
  • The new 3.8 % Medicare tax on unearned income, including interest, dividends and capital gains. etc.  For more details please read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income
  • The new 0.9% tax on earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly
  • Same Sex Couples:  The recent Supreme Court decision in Windsor may result in same-sex couples with dual income paying more income taxes filing jointly than if they were still able to file singly. For more details on the tax implications for same-sex couples please read Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips

It is important to know that this year-end tax guide only provides an overview of various tax strategies and some of the more important tax provisions and by no means covers all tax minimization techniques.  Each taxpayer situation is unique and as a result tax strategies and projections should be developed for each client for the greatest results.

Where To Begin:

As a starting point, it is essential to know the customary year-end planning techniques that can cut income taxes.  It all starts with a tax projection of whether you will be in a higher or lower tax bracket next year. In some cases it is imperative to project income and expenses for multiple years to smooth income out over time to avoid higher tax brackets over an extended period.  This type of planning is beyond the scope of this discussion and should be explored directly with tax counsel.

Once your tax bracket for this year and next year are known, there are two basic income tax planning considerations:

  • Should income be accelerated or deferred?
  • Should deductions and credits be accelerated or deferred?

However, life is never that simple.  Tax laws always make for some real guesswork.  As discussed below, when it comes to certain deductions that have Continue reading

Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks: A Must Read

2013 Year-End Tax Planning Guide For Small Businesses

The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year.  Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.

It is also important to know that the recent tax act known as ATRA has extended many tax breaks for 2013.  If any of these tax breaks are available, it would be prudent to take advantage of them before they expire.

Also keep in mind that ATRA increased ordinary income tax rates for individuals from 35% to 39.6% starting in 2013 so owners of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.

The following presents some year-end tax strategies that may prove helpful to small businesses and other businesses:

1. Accelerating or deferring income/deductions as part of a year-end tax strategy

A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and later year(s).  (Historical note:  For those of you old enough to remember, there was an income averaging rule built into the tax code.  That provision has long been abolished.)

So every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2014 (and perhaps beyond) if they expect income to rise next year or in the future.

The strategy of accelerating or deferring income and deductions may apply to a number of transactions affecting your business including but not limited to the following:

  • Selling property
  • Leasing
  • Inventory
  • Compensation and bonus practices
  • Depreciation and expense elections.

Cash Basis Small Businesses

Generally, a cash-basis taxpayer recognizes income when received and takes deductions when paid. Here are some more rules for cash basis taxpayers:

  • Income is generally taxable in the year received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. (This is the so-called the “constructive receipt” rule.)  Therefore, businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or something equivalent to cash.
  • However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax into the year or years in which payment occurs. Examples include:
    • Installment sales, on which gain is prorated and taxed based upon the years over which installment payments occur
    • Like-kind exchanges through which no gain occurs except to the extent other non-like-kind property (including cash) may change hands
    • Tax-free corporate reorganizations under Section 368 of the Internal Revenue Code.
  • Deductions, however, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deductible. Therefore, a supply bill does not become deductible in the year that the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill.
  • Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if delivered in due course a few days into a new calendar year).

Cash basis businesses that expect to be in a higher tax bracket in 2014 should shift income into 2013 by accelerating cash collections this year, and deferring the payment of deductible expenses until next year, where possible. In this situation, small businesses should try to collect outstanding accounts receivables before the end of 2013.

Accrual Basis Small Businesses

Basically, for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.  Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate shipment of products or provision of services into 2013 so that your business’s right to the income arises this year.

Taking the opposite approach:  If you will be in a lower tax bracket next year, an accrual basis taxpayer would delay delivering services or shipping products.

2. Tax Break For Small Business Expense Election Under Section 179

ATRA extended until the end of 2013 the enhanced Code Sec. 179 small business expense. Small businesses that purchase qualifying property can immediately expense up to $500,000 this year.  This amount is reduced dollar for dollar to the extent of the cost of the qualifying property placed in service during the year exceeds $2 million. If you plan to buy property (even computer software qualifies), consider doing so before year-end to take advantage of the immediate tax write-off.

Warning:  Remember that any asset must meet the “placed in service” requirements as well as being purchased before year-end.

Also included as qualified Code Sec. 179 property (only temporarily though) is “qualified” real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to an immediate write-off of up to $250,000 of the total cost of these properties.

Note, the Section 179 expense limit goes down to $25,000 and the phaseout threshold kicks in at $200,000 starting in 2014.  Also the qualified leasehold-improvement breaks end at the end of 2013.  If you are planning major asset purchases or property improvements over time, you may want to take advantage of this break before year-end.

Final note:  In addition to new property, Section 179 can be applied to used property.

3. Bonus deprecation

ATRA extended this additional first year depreciation allowance into 2013.  This bonus depreciation allows taxpayers to immediately deduct fifty percent (50%) of the cost of qualifying property purchased and placed in service in 2013. Qualifying property must be purchased and placed into service on or before December 31, 2013.

Qualifying property must be new tangible property (refurbished assets do not qualify) with a recovery period of 20 years or less, such as office furniture, equipment and company vehicles, off the shelf computer software and qualified leasehold improvements.

Note that bonus depreciation is not subject to any asset purchase limit like Section 179 property.

4. Accelerated Depreciation

ATRA has retained through 2013 the tax break that allows a shortened 15 year recovery period for qualified leasehold improvements, restaurant and retail improvement property.  Normally the recovery period for this type of property is 39 years so this is a huge tax break.

5. Increased start-up expense deduction

New businesses can take advantage of the increased deduction for start-up expenditures. This start-up expense deduction limit is $10,000. The phaseout threshold is $60,000. Thus, if you have incurred during 2013 start-up costs to create an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may benefit from this increased deduction. Entrepreneurs can recover more small business start-up expenses up-front, thereby increasing cash flow and providing other benefits.

6. Repair Regulations

The so-called “repair” regulations include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met.

The IRS with their issuance of final regulations relaxed many of the requirements contained in the earlier temporary regulations.  For example, the final regulations removed the ceiling requirements on deductions and now allows the de minimis rule for businesses that do not generate financial statement (applicable financial statements (AFS)).  This allows many small businesses to take advantage of these tax breaks.

The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property purchases. For example, a business could deduct hundreds of lap-top computers or scanners costing $500 or less each year.

Bottom Line:  The modified safe harbor may be easier for certain small businesses than the Section 179 deduction and 100% bonus depreciation. Most importantly, the regulations now allow taxpayers that do not prepare financial statements to use de minimis safe harbor.  This provides a great benefit for many small businesses that do not normally generate these statements as part of their regular business operations.

7. Compensation arrangements

Timing of Compensation:

In a regular C corporation, compensation paid to employees reduces the taxable income of such corporation.  Ideally, compensation should be used to eliminate taxable income at the corporate level or at least minimize such income.  It is imperative that the total compensation paid is “reasonable” in light of the services performed and industry norms. For more insights into the reasonable compensation issue please read Reasonable Compensation:A Favorite Issue For IRS Auditors.

Use of Retirement Plans:

Corporate retirement plans such as profit sharing, money purchase pension, and defined benefit plans can generate large tax deductions for the entity.  These plans are quite useful when compensation has already reached the highest level of reasonableness.

Important Points:

  • These corporate retirement plans must be drafted and signed before year-end to get tax deductions for that year.
  • These plans can generate a deduction even though the plan is not funded until after year-end, so long as funded by the due date (or the extended due date) of the corporate or entity return.  This gives the small business owner some after the taxable year-end planning flexibility.
  • For profit sharing, money purchase pension and other defined contribution plans, an employer can contribute up to $51,000 per participant.  For participants age 50 and older this amount can be $56,500 because of the catch-up contribution rules.
  • For defined benefit plans, the plan retirement amount and funding are determined by various actuarial computations.  The maximum future benefit can be $205,000 per year upon retirement.  Depending on the age of a participant this can result in a very large contribution each year and one far in excess of the amounts available under the defined contribution plans discussed immediately above.
  • There are various limits and rules specific to each of these plans and the particular make-up of the employees and their ages bear heavily in the proper choice of plan and the design of any plan chosen.

Additionally, and maybe more importantly, when compensation paid to owners is approaching their own:

additional taxes can be saved by making contributions to such plans instead of paying more compensation to the owner.  This can produce a double benefit:  huge income tax savings  and having money being put into a retirement plan to grow tax-free for the benefit of the small business owner.

Use of 2 ½ Month Bonus Rule:

Particularly relevant to employers at year-end is an annual bonus rule. Bonuses paid within a brief period after the end of the employer’s tax year are deductible in that tax year. Compensation is generally considered paid within a brief period of time if it is paid within two and one-half months of the end of the employer’s tax year.

Compensation and K-1 Distributions

Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a significant difference to a business owner’s overall tax liability for the year.  For example, for an S corporation, payment of salaries are subject to social security taxes while K-1 income is not subject to this tax.  The strategy here would be to pay less in salary and have more income reported on the Form K-1.  However, taxpayers can be in trouble here if they get greedy.  The IRS is policing this area to make sure that the salary paid is reasonable.  Therefore,   a reasonable salary must be carefully determined and supportable in a tax audit.

Deferring payments of accrued bonuses

In certain situations, it may be preferable to simply ask that your employer pay your bonus in the following year where you expect that your tax bracket will be lower.

8. Other Tax Planning Strategies and Ideas

Here are a number of other year-end tax planning strategies you may want to consider, depending on your particular tax and business situation:

  • Accelerating installment sale proceeds or electing out of the installment method;
  • Elect slower depreciation methods;
  • Determine if you can write-off any bad debts;
  • Consider changing your accounting method to advance income or defer expenses.  This one needs careful consideration, however, as accounting method changes can have a binding effect on taxpayers for many future years;
  • Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other;
  • Cost Segregation Study:  For those who have purchased, constructed or rehabilitated a building this year, a cost segregation workup may save taxes.  It identifies property components and related costs that can be depreciated faster than the building itself, generating larger deductions.  For example, breaking out costs for fixtures, security equipment, landscaping and parking lots may generate larger tax deductions.  Be careful to take into account the impact of the alternative minimum tax and to consider states that do not follow the federal tax rules.

Final Thoughts:

The above are not intended as a comprehensive list of year-end tax planning tools for small businesses.  The point here is that each business has its own unique tax and business situation.  A case by case analysis to determine which tax planning tools will minimize taxes is the best course of action for small businesses.

If I have missed something or if there is a strategy you want me to explore or explain more fully, please leave a comment below.  I would be glad to help.

For an analysis of what deferral or acceleration planning at year-end may work best for you and your business, please do not hesitate to contact me.

Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

 

New Inheritance Tax Exemption For Family Businesses In Pennsylvania

Family Business Transfers

Pennsylvania Inheritance Tax Break For Family Businesses

Pennsylvania has just created a new tax break for transfers of businesses to certain family members.  This new inheritance tax law applies to estates of some one who dies on or after July 1, 2013.

Qualification For Inheritance Tax Exemption:

To qualify for this Qualified Family Owned Business exemption under new Section 9111(t), the following criteria must be met:

  • Type of Organization that qualifies can be either:
    • A proprietorship or
    • Entity

    engaged in a trade or business;

  • The entity or proprietorship had a Net Book Value of Less Than $5,000,000 at the date of death;
  • The entity or proprietorship had been in existence for 5 years at the date of death;
  • The entity or proprietorship had less than 50 employees at the date of death;
  • The entity or proprietorship must be wholly owned by the decedent and other qualified family members (defined as qualified transferees as defined below).
  • The transfer of ownership must be to qualified transferee in most cases individual family members under Section 9111(t)(5).  A “qualified transferee” is the decedent’s spouse, lineal descendent, sibling (and the sibling’s lineal descendants) and ancestors (and the ancestor’s siblings). The exemption is lost if the business does not continue to be owned by a “qualified transferee” for seven years after the death of the decedent;
  • Where the transfer of an interest into an entity took place within one year prior to death, such transfer must have been the result of a legitimate business purpose;
  • Family Ownership after death must continue for 7 years.  If this period of ownership is not met then inheritance taxes will have to be paid when ownership ceases. This is the so-called recapture tax and must be reported if this ownership period is not met.  Important Compliance Point: This requires annual certification to the Department of Revenue that the family-owned business interest qualifies for the exemption, as well as notification to the Department of Revenue within 30 days of any failure to qualify;
  • Any expenses or debts related to or incurred in connection with this exemption are not allowed under new Section 9130 (5).

Entities Engaged In Investment Activities Do Not Qualify For This New Exemption:

This tax break is not available to entities with a principal purpose of “management of investments or income producing assets” held by such entity.  Section 9111(t)(5). The principal purpose of an entity cannot be simply managing its own investments.

Estate Planning Implications:

A cursory look at the new law appears to show that transfers to trusts would not be eligible for exemption.  Those attempting to do estate planning where they own an active business in Pennsylvania may have a very difficult choice to make.  They can either give the business outright to children to save inheritance taxes or they must give up this exemption if  family issues, financial reasons or federal estate tax considerations dictate the use of trusts.  For more insights into these estate planning implications please read Estate Planning 2013: Now What? A Must Read For Everyone.

Final Thoughts:

Since this law is so new and some of its terms may not be fully understood or defined, more guidance will probably be forthcoming from the Pennsylvania Department of Revenue.  Stay tuned.

Hurricane Sandy: Tax Deductions For Casualty Losses

Hurricane_Sandy_Marine_hoists_in_Staten_Island,_N.Y.My last post talked about when we can trash tax and other important records. Well, Hurricane Sandy brought a whole new meaning to the concept of trashing records and a whole lot more.

Experts estimate that Hurricane Sandy has caused $50 billion of damage.  Eqecat Inc., a financial advisory firm out of Oakland, California predicts that insurance will cover $10 to $20 billion of such losses.  Storm victims will be on the hook for the other $30 billion of losses.

A couple of points to keep in mind before talking about the casualty loss tax implications:

  • If your house is damaged from this disaster, contact local building authorities to see if the home is inhabitable,
  • Establish an insurance claim, but don’t settle immediately,
  • Make temporary repairs and take other remedial action to prevent further damage to homes and belongings, and
  • Take photos of the damages.

With so many lives in complete turmoil, many of us on the East coast  crushed by Sandy’s wrath are not thinking of  claiming a casualty loss for tax purposes. However, knowing about how taxpayers can claim tax deductions under casualty loss provisions of the Internal Revenue Code is essential in dealing with insurance companies.  While memories are fresh and evidence is still available, now is the time to develop, document and support such casualty losses.

To aid those affected by this devastation readers should look at my article entitled Casualty Losses For Hurricane Sandy.  This article details  the tax qualification rules for being eligible for casualty losses.  It is a must read for anyone devastated by Sandy.

Can I Trash It Now? Tax Record Retention Guidelines

Papers, papers and still more papers.  When can I destroy these documents?

There are no hard and fast rules in this area.  The following offers some general guidance to carefully consider when determining any destruction of documents.

Against the urge to purge, remember that maintaining documents and records is often essential if a tax audit by the IRS, state or local taxing authority occurs.  Be aware that it is the burden of the taxpayer to provide sufficient proof and support for any tax position taken on a tax return.  Prematurely disposing of relevant documentation and proof supporting a tax deduction or tax position could have a disastrous tax impact.

Tax rules offer some guidance as to minimum document retention periods. It is imperative to keep records such as receipts, canceled checks, and other documents that support an item of income or a deduction, or a credit appearing on a return until the statute of limitations expires for that return. Here are some of the key statute of limitation rules for federal tax returns:

  • For most returns the statute of limitations is 3 years from the date you filed the return. However, the following are some very important exceptions to this 3 year statute of limitation.
  • There is no period of limitations to assess tax when a return is fraudulent or when no return is filed.
  • If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed.
  • For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later.
  • For filing a claim for a loss from worthless securities the time to make the claim is 7 years from the date the return was due.
  • If you are an employer, you must keep all of your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

Additionally, it is often imperative to check state and local statute of limitation rules before destroying files and records.

Keep in mind that documents may need to be retained and preserved for legal reasons other than taxation, such as, insurance claims or facilitating the transfer of  assets in the case of deceased family member.  Documents like death certificates, estate tax closing letters should be kept indefinitely.

For more detailed guidance on how long to keep specific documents and other document retention considerations and safeguards, please read my article Record Retention For Individuals .

For more detailed guidelines for record retention rules and other protective housekeeping measures for businesses see Record Retention Guidance For Business: A Conservative and Basic Approach.

A discussion with your tax attorney and tax accountant may be a prudent and conservative course of action before destroying any documents or files.

Philadelphia Now Allows A Tax Credit for Hiring Veterans

Philadelphia Tax Breaks Involving Veterans

Philadelphia Tax Breaks Involving Veterans

Philadelphia has recently amended its Business Privilege Tax (business income and receipts tax)  to allow a credit for employment of veterans of the Armed Forces.  This new Philadelphia tax law defines a “veteran” as a person who has received an honorable discharge, served a minimum of six months in active full-time duty within the past 10 years and has met the qualifications under the federal Vow to Hire Heroes Act of 2011. The period of eligibility for hired veterans is between July 1, 2012, and June 30, 2014.

The law requires that the veteran’s compensation is to other employees in the same position or, if a similar position does not exist, at an average hourly rate of at least 150% of the federal minimum wage.

The business will receive a credit of $2,000 for a full-time position, multiplied by the percentage of the tax year that the veteran worked for the business or $1,000 for a part-time position, multiplied by the percentage of the tax year that the veteran worked for the business.

The credit is available for a total of 24 months of employment, and the total amount of credit a business may receive for a full-time employee over all tax years is $4,000. For a part-time employee for the 24 months of employment, the total credit allowable for the business is $2,000.

This new law is the result of Bill No. 120491, City of Philadelphia, effective June 27, 2012