For many business owners, tax planning doesn’t pop up on their radar until early in the spring, when they start preparing to file their tax return. But waiting that long to think about tax planning can be a big mistake.
There are some year-end tax planning moves you can make before December 31 that could end up saving you money when you file your 2014 tax return next spring. But don’t delay — now is the time to sit down with your accountant or CPA and figure out what year-end tax moves make sense for you to make in the coming weeks.
Here are five areas to take a close look at as you think about your year-end tax-planning strategies:
1. Income and expense timing - The traditional year-end tax strategy for cash-based businesses is to defer income into the following year and accelerate deductible expenses into the current year. Doing so will reduce your business income this year, and thus your 2014 tax bill.
The best way to do this is to defer some of your billing and collections efforts in December so that you don’t receive payment until January. This will effectively shift some of your 2014 income into 2015. It’s probably not feasible from a cash flow standpoint to defer all of your December income to January, but crunch some numbers to determine how much you can defer and still meet your December business expenses.
Note: If you receive payments in December, you are considered to be in constructive receipt of the cash and should pay taxes on it this year, even if you don’t deposit checks until January.
On the expense side, if there are any deductible purchases you plan to make early next year, accelerate these purchases into this year if you can in order to take the deduction in 2014. These could include computers, telecommunications and other equipment, office furniture and general office supplies.
2. Maintenance and repair expenses - Final repair and maintenance regulations issued by the IRS last year apply to tax years beginning on or after January 1, 2014. The regulations provide clarification to help businesses distinguish between repairs and improvements in determining whether they can expense and deduct expenditures related to tangible property or must capitalize and depreciate them.
Costs that are expensed can generally be deducted when they are incurred, but those that are capitalized must be depreciated and deducted over a period of years. According to the regulations, expenditures related to incidental repairs and routine maintenance can be expensed and deducted in the current tax year. But those related to acquiring, producing and improving tangible property must be capitalized and depreciated.
The regulations contain a safe harbor for businesses (a qualifying small taxpayer) with gross receipts up to $10 million. They also contain de minimis safe harbors of $5,000 for businesses that prepare applicable financial statements (generally statements that are audited) and $500 for businesses with written expense policies in place at the beginning of the tax year. Consult with your CPA or tax accountant for the definition of applicable financial statements.
3. Retirement plan and charitable contributions - One of the best personal year-end tax moves is making an additional contribution to your 401(k) retirement savings plan. Funds you contribute to your 401(k) before December 31 will reduce your 2014 taxable income and thus your tax bill next April. The 2014 401(k) contribution limit is $17,500, or $23,000 if you are 50 years of age or over.
Keep in mind that if you have a traditional IRA or a SEP-IRA, you have until April 15 (or the due date of your return, including extensions, for a SEP-IRA) to make a tax-deductible contribution for 2014. Similarly, if you are planning to make any charitable contributions early next year, make these before December 31 if you can in order to accelerate the deduction into 2014.
4. Equipment depreciation - Many businesses have taken advantage of generous write-offs for the purchase of tangible business property the past few years due to bonus depreciation and high Section 179 depreciation limits that reached $500,000 last year. But bonus depreciation ended at the beginning of this year, and the Section 179 deduction was reduced to its original limit of just $25,000.
If you have not yet bought tangible business property totaling $25,000 this year, consider purchasing such equipment before December 31 if you’ll need it anytime soon. Almost any type of business equipment qualifies for the Section 179 deduction, including machinery, computers, software, office furniture, vehicles and other tangible goods.
5. New ACA taxes - High earners may now be subject to two new taxes imposed by the Affordable Care Act (ACA). The first is the Net Investment Income Tax (NIIT), a 3.8% flat tax that is assessed on most types of investment income (e.g., interest, dividends, capital gains, royalties). The second is the additional Medicare tax, a 0.9% flat tax that is assessed on earned income, including self-employment income.
Both of these are additional taxes that are added to the amount of ordinary income tax that is due. They will hit you in April if your 2014 adjusted gross income exceeds $200,000 (or $250,000 if you are married and file jointly).
One planning strategy is to try to get your 2014 AGI below these thresholds by deferring some income into next year, as described above. To avoid the NIIT, you could possibly shift income-producing investments into tax-deferred IRAs or 401(k)s. Also, interest earned on tax-exempt municipal bonds is not subject to the NIIT, so consider replacing taxable bonds in your portfolio with these.
Be sure to consult with your CPA, accountant or tax advisor for more detailed guidance on which year-end tax strategies are right for you.
|City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.|