It is hard to believe we are entering the fourth quarter of 2013. Before we know it, year-end will be upon us. Thus, it is time to take a quick look at some tax planning issues for 2013 and what may lie ahead for us in 2014.
For 2013, business owners need to remember that they can expense equipment purchases put into service prior to December 31 under Code Section 179. For 2013, this deduction applies to $500,000 of assets put in service during the tax year. This deduction will phase out dollar for dollar when total assets put into service in 2013 exceeds $2,000,000. This deduction applies to both new and used assets put into service. Absent a change in tax law by Congress, this deduction will decrease to about $25,000 next year and will start to phase-out at $200,000. Section 179 expensing is limited to taxable income so it cannot create a net operating loss.
Another tax deduction for business owners that may soon be gone is the 50% bonus depreciation. Generally, business owners elect Section 179 expensing first but an owner can choose to use bonus depreciation instead if they so desire. Bonus depreciation only applies to new equipment, but can also apply to leasehold improvements. Bonus depreciation is set to expire in 2014. Bonus depreciation is not limited to taxable income and can create a net operating loss that can be carried back to prior tax years for federal tax purposes.
S corporation owners should be conferring with their accountants as to the amount of reasonable compensation they should be taking and any excess profits should be taken as S corporation distributions of profits. The distributions of profits from an S corporation are not subject to the 3.8% medicare tax and avoid the traditional social security and medicare taxes. Depending on what reasonable compensation would be in your industry, taking less in salary and more in S corporation distributions could reduce your overall tax burden.
With respect to S corporations, President Obama’s 2014 budget proposals did not address subjecting S corporation distributions of profits to social security and medicare taxes. This continues to be a beneficial tax break for owners of S corporations and if you are considering incorporating your business, you should do so at the end of 2013 so the company is up and ready to go first thing in 2014. Alternatively, if you are operating as a C corporation, talk with your accountant or tax attorney to see if you would benefit from switching to an S corporation.
It does not look like tax rates are going to change next year so the old strategies of deferring income and accelerating deductions should be a good tax play for 2013. The caveat to this is if President Obama is able to convince Congress to enact some of his 2014 budget proposals. President Obama, in his 2014 budget, proposes the implementation of a Fair Share Tax modeled on Warren Buffett. Under this proposal, individual taxpayers with adjusted gross incomes in excess of $1,000,000 would pay a tax of 30% of their adjusted gross income less a charitable donation credit equal to 28% of their itemized charitable contributions allowed after the overall limitation on itemized deductions is calculated.
The next substantial change in tax law from President Obama’s proposed budget would be to limit tax deductions and other tax preferences. The proposed limit would apply to all itemized deductions, tax-exempt interest, foreign excluded income, retirement contributions, employer-sponsored health insurance and other above the line deductions. The proposed limit would set the tax rate at which affected taxpayers can reduce their tax liability to a maximum of 28%.
Some other proposed tax changes from President Obama’s proposed budget include: a temporary 10% tax credit for new jobs and wage increases; additional tax credits for investment in advanced energy manufacturing; provide for automatic enrollment in IRAs with a small employer tax credit; expand the child and dependent care tax credit; extending the exclusion from income for cancellation of certain home mortgage debt; and many other proposals. Some of the proposed changes in President Obama’s budget have been seen before and have not come into law yet. Hopefully, some of these proposals, again, do not make it into law.
Entering the fourth quarter of 2013, it is time to prepare for year end and start your tax planning. Meet with your accountants and tax attorneys before year end while there is still time to do some late planning. Being aware of your options and getting the proper advice can save you substantial amounts of money.