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Year End Tax Planning – Part Two – Business


Year-end tax considerations for businesses are not quite as up in the air as is the individual tax situation so let’s take a look at a few of them.

Will the 3.8% Net Investment Income Tax Come Into Play?
With respect to that 3.8% net investment income tax coming in 2013, don’t worry, the tax doesn’t apply to income from trades or businesses conducted by a sole proprietor, partnership, or S corporation. But income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax.  Additionally, gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as net investment income and, therefore, could cause the 3.8% tax to apply.

Considering Buying Equipment?
Current law allows you to ‘write-off’ (expense), up to $139,000 of qualifying property placed in service in the tax year. If you have already placed in service $560,000 of qualifying property this strategy will not work because for every dollar of qualifying assets that you place in service above this level you lose a dollar of ‘expensing’ benefit. If you haven’t exceeded the maximum yet, and you need the machine but do not have the cash, put the purchase on your credit card that will qualify it as having been purchased this year. You can also get substantial write-offs in 2012 from a purchase of a more than 6,000 pound vehicle that may be used in a trade or business.

Do you need to ‘shelter’ income or want to save for the future?
Setting up a retirement plan is fairly easy. The costs of a plan can be very minimal or they can get very expensive if you want ‘tailored or targeted’ plan design or a, so-called defined benefit plan, which has annual actuarial costs and other expense factors. Without going into details regarding selection or design factors let’s look at some of the basic choices for retirement plans other than an individual retirement account …

Plan Type:   Simple
Establish Date:  October 1st  
Fund By Date:  Due date return + Extension
Max. if <50 yrs. old:  $11,500 + 3% or 2%

Plan Type: 401 (K)
Establish Date:  December 31st
Fund By Date:  Due date return + Extension
Max. if <50 yrs. old:  $16,500 + 25%*

Plan Type: Defined Benefit
Establish Date: December 31st
Fund By Date: Due date return + Extension
Max. if <50 yrs. old:  Actuarially Determined

Plan Type: SEP
Establish Date:  Due date of return + Extension
Fund By Date: Due date of return + Extension
Max. if <50 yrs. old: $49,000 (25%* of comp)

[*Note that 25% is actually 20% because it is 25% of income ‘in respect of’ (after) the deduction so $100,000 of income minus $20,000 =’s $80,000.   $20/$80 is 25%]

Need Employees?
If you are thinking of hiring, consider hiring a veteran before year-end to qualify for a work opportunity credit. The credit, a dollar for dollar reduction in tax liability, can range from $2,400 to $9,600 depending on a variety of factors.

Are you a Corporation?
If you are incorporated, you may want to consider a stock redemption (buy-back) which may, depending on a multitude of factors, create a long-term capital gain or a dividend which will receive the favorable 15% tax rate if done this year. Remember, unless Congress acts, capital gains rates will be going up and that 3.8% net investment income tax could apply if you make more than $250,000 married, $125,000 married filing separately and $200,000 individually.

Are you a Partnerships or a S-Corporation?
When our ‘amount at risk’ in an activity is not sufficient to allow us to, possibly, take a loss from an activity, our loss will be ‘suspended’ until such time as we have sufficient amounts ‘at-risk’. If you might not be able to utilize a loss currently because you didn’t have sufficient amounts ‘at-risk’, consider adding capital, or, alternatively, if possible, add debt that you are ‘personally responsible for’ to the activity which, by definition, will increase your at-risk. That will allow you, then, to take the loss currently. Remember, though, if this is a passive activity, there are other hurdles to overcome in order to take a ‘passive loss’ currently.

Closing Thoughts
These are but a few of the year end considerations. For 2013 ‘larger’ small businesses who offer health care to their employees, or even those that do not offer health care to employees currently, will need to review provisions of the Patient Protection and Affordable Care Act to determine the tax impact of the Act on their benefit plans and what course of action might be most prudent to pursue with respect to benefit plan(s) design for the business.

I hope that your 2012 tax year was a good one for you, your family and your employees, and I hope that 2013 is even better for ALL!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA