There are year-end business tax strategies that businesses and professionals can take advantage of before December 31, 2012. If your business takes advantage of these tax tips, some may lower your tax bill for 2012. 2012 is a special year due to the "fiscal cliff". We still don't know what is going to happen regarding taxes and tax legislation at the last minute in Washington.
Regardless, these tax tips will be helpful to you. Always check with your tax accountant at the end of the tax year.
The possible expiration of the Bush Tax Cuts is one big part of the "fiscal cliff." It is interesting to watch the drama play out - sort of like a game of chicken between the politicians. Who is going to blink first? The problem is that they are playing chicken with the lives and businesses of the American people. If the Bush Tax Cuts expire, then small business taxes will go up, but not as many businesses as you think will be affected. If only the portion of the tax cuts expire on businesses making over $250,000, the effect still won't be as bad as we hear. Check with your tax accountant on this one and don't believe everything you hear.More »
If you can claim any investment income in 2012 instead of 2013, you may want to do that. In 2013, a 3.8% surtax on investment income such as passive income (such as rental income), dividends, capital gains, royalties, annuities, and taxable interest goes into effect. Move any of that sort of income you can to 2012. Otherwise, you will be assessed the surcharge. This is only relevant to high income individuals.
If your business needs any assets, 2012 is the time to acquire them. If they cost $139,000 or less, you can acquire them, put them into service, and expense them immediately. After 2012, this section 179 deduction is scheduled to return to its original $25,000 deduction.
2012 is a very good year to buy a vehicle for your business. Chances are, 2013 will not be a good year to purchase a business vehicle so do it now. Here's the deal. If you buy and place a car for business use in service in 2012, you can deduct up to $11,160. The deduction, of course, depends on the cost of the car. The tax benefit goes up if you buy a new SUV that has a loaded weight of over 6,000 pounds in 2012. You can expense, in 2012, $25,000 of the cost. Of the remaining cost, 50% is eligible for bonus depreciation and 20% is eligible for normal depreciation.
The deal is even better for a large pick-up truck. If you buy a pick-up truck for your business with a loaded weight of over 6,000 pounds in 2012 and the cargo bed is six feet long and separate from the cab, you can expense the entire cost in 2012.
Check with your tax accountant. Some of these deals, if purchased in the last quarter of 2012, might cost you in depreciation deductions.
Even if you are the owner of the business and the only employee, you should establish a business retirement plan as it will lower your taxable income. The plans should be set up by December 31 and you, as an employer, should make your contribution by December 31. If the plan is already set up and it is an IRA plan, then you have until April 15, 2013 to make your contribution.Excellent plans to set up for a business are the 401(k), the SEP-IRA, the SIMPLE plan, and the Roth IRA. There are more, but these are the best and most common. For my own small business, I use the SEP-IRA as it is good for the self-employed.Contributions to your employees' and your own retirement plans are tax-deductible and will lower your taxable income and your tax liability for 2012. If you have to pay taxes, there is a formula you and your tax accountant can use to figure out what percentage of your tax liability can go to your retirement plan instead of to Uncle Sam.
Under current law, favorable tax rates for dividends are going to expire at the end of 2012. The highest dividend tax rate in 2012 for the higher income individuals is 15%. For lower income individuals, dividend tax rates are lower, with the lowest tax rate being zero. If Congress takes no action, dividend tax rates will go up in 2013 with tax rates for the highest earning individuals going to 39.6% and tax rates even for individuals earning lower incomes jumping up.
If your business firm has investors, explore offering them a special dividend before the end of the year. Check with your tax accountant to be sure your corporation is qualified to do this.
If you hire qualified veterans before the end of 2012, you will be eligible for the Work Opportunity Tax Credit (WOTC). This tax credit will not be available in 2013. The WOTC ranges from $2,400 to $9,600 for each veteran hired, depending on factors such as their length of service in the military to their service disability.
We don't yet know what is going to happen with the Bush tax cuts. If they all expire, businesses that function as sole proprietorships are going to be paying more taxes regardless of whether they make over $250,000 because they file business income as ordinary income. If the Bush tax cuts for those making over $250,000 expire, then your taxes will go up only if your income exceeds that level. That leaves you with the question of what to do about charitable deductions for 2012.
Why does it matter? It matters because, if the Bush tax cuts expire for all income levels, then you need to move all the charitable contributions to which you are entitled into 2013. If they do not expire for your income level, then you can take your charitable contributions as you always do.
Regardless, these tax tips will be helpful to you. Always check with your tax accountant at the end of the tax year.
1. Expiration of the Bush Tax Cuts and their Effect
The possible expiration of the Bush Tax Cuts is one big part of the "fiscal cliff." It is interesting to watch the drama play out - sort of like a game of chicken between the politicians. Who is going to blink first? The problem is that they are playing chicken with the lives and businesses of the American people. If the Bush Tax Cuts expire, then small business taxes will go up, but not as many businesses as you think will be affected. If only the portion of the tax cuts expire on businesses making over $250,000, the effect still won't be as bad as we hear. Check with your tax accountant on this one and don't believe everything you hear.More »
2. Medicare surtax on investment income
If you can claim any investment income in 2012 instead of 2013, you may want to do that. In 2013, a 3.8% surtax on investment income such as passive income (such as rental income), dividends, capital gains, royalties, annuities, and taxable interest goes into effect. Move any of that sort of income you can to 2012. Otherwise, you will be assessed the surcharge. This is only relevant to high income individuals.
3. Acquire Business Assets During 2012
If your business needs any assets, 2012 is the time to acquire them. If they cost $139,000 or less, you can acquire them, put them into service, and expense them immediately. After 2012, this section 179 deduction is scheduled to return to its original $25,000 deduction.
4. Buy a Business Vehicle Before the End of 2012
2012 is a very good year to buy a vehicle for your business. Chances are, 2013 will not be a good year to purchase a business vehicle so do it now. Here's the deal. If you buy and place a car for business use in service in 2012, you can deduct up to $11,160. The deduction, of course, depends on the cost of the car. The tax benefit goes up if you buy a new SUV that has a loaded weight of over 6,000 pounds in 2012. You can expense, in 2012, $25,000 of the cost. Of the remaining cost, 50% is eligible for bonus depreciation and 20% is eligible for normal depreciation.
The deal is even better for a large pick-up truck. If you buy a pick-up truck for your business with a loaded weight of over 6,000 pounds in 2012 and the cargo bed is six feet long and separate from the cab, you can expense the entire cost in 2012.
Check with your tax accountant. Some of these deals, if purchased in the last quarter of 2012, might cost you in depreciation deductions.
5. Set up a Retirement Plan for your Business and Employees
Even if you are the owner of the business and the only employee, you should establish a business retirement plan as it will lower your taxable income. The plans should be set up by December 31 and you, as an employer, should make your contribution by December 31. If the plan is already set up and it is an IRA plan, then you have until April 15, 2013 to make your contribution.Excellent plans to set up for a business are the 401(k), the SEP-IRA, the SIMPLE plan, and the Roth IRA. There are more, but these are the best and most common. For my own small business, I use the SEP-IRA as it is good for the self-employed.Contributions to your employees' and your own retirement plans are tax-deductible and will lower your taxable income and your tax liability for 2012. If you have to pay taxes, there is a formula you and your tax accountant can use to figure out what percentage of your tax liability can go to your retirement plan instead of to Uncle Sam.
6. Plan a Special Dividend for your Shareholders Before Year-End 2012
Under current law, favorable tax rates for dividends are going to expire at the end of 2012. The highest dividend tax rate in 2012 for the higher income individuals is 15%. For lower income individuals, dividend tax rates are lower, with the lowest tax rate being zero. If Congress takes no action, dividend tax rates will go up in 2013 with tax rates for the highest earning individuals going to 39.6% and tax rates even for individuals earning lower incomes jumping up.
If your business firm has investors, explore offering them a special dividend before the end of the year. Check with your tax accountant to be sure your corporation is qualified to do this.
7. Hire Qualified Veterans Before Year-End 2012
If you hire qualified veterans before the end of 2012, you will be eligible for the Work Opportunity Tax Credit (WOTC). This tax credit will not be available in 2013. The WOTC ranges from $2,400 to $9,600 for each veteran hired, depending on factors such as their length of service in the military to their service disability.
8. What to do about Charitable Contributions
We don't yet know what is going to happen with the Bush tax cuts. If they all expire, businesses that function as sole proprietorships are going to be paying more taxes regardless of whether they make over $250,000 because they file business income as ordinary income. If the Bush tax cuts for those making over $250,000 expire, then your taxes will go up only if your income exceeds that level. That leaves you with the question of what to do about charitable deductions for 2012.
Why does it matter? It matters because, if the Bush tax cuts expire for all income levels, then you need to move all the charitable contributions to which you are entitled into 2013. If they do not expire for your income level, then you can take your charitable contributions as you always do.