Introduction
The leaves are turning, the temperatures are falling, and Christmas is only a couple months away. It is that time of year again! Many people don’t want to think about it, but (if you plan properly) the happiest time of the year is just around the corner. The actions you take in these final months of 2013 can have a big effect on your taxes. This advisory will identify some key strategies that should be implemented prior to the end of the year to effectively limit your tax liability.
Beefing Up Section 179 Deductions
Of most importance is Section 179, advanced depreciation. In 2013, the maximum Section 179 deduction is $500,000, Investing now allows you to utilize this valuable enhanced deduction. In 2014, the deduction drops to $25,000. Don’t wait; purchase equipment and have it delivered and in use before the end of the year.
Deferring Income
As with any other tax year, the more taxable income your company earns in 2013, the more taxes you and your company will pay. Therefore, it is logical to defer any ordinary income you can until next year. This is especially true if you or your business will be in a lower tax bracket this year as a result of your tax planning.
For business tax planning, send out monthly billing later in the month of December. Because it takes, on average, 25 days to receive payment, any payments received after January 1, 2014 are credited and recognized as income in 2014, provided your business is on the cash method of accounting.
For individuals, if you are to receive a bonus, defer it until next year. (BE CAREFUL – if you have a retirement plan that is based on a percentage of your gross pay for the year, you do not want to reduce your retirement contribution because of your deferred bonus.)
Accelerating Deductions
We all hate paying bills, but now is the best time to pay them. Even if you wait to pay a given bill on December 31, you can still deduct the payment in 2013. For business tax planning, buy supplies in December and stock up for the next few months. In addition, the IRS will allow you to deduct the expense if you have charged the item and not yet paid for it as long as you are on the accrual method of reporting. For example, use your company credit card to purchase supplies for January, deduct the expense now, and pay the bill in January.
Individuals, remember to recognize any capital losses that you may have before year end. You are allowed to offset capital gains each year with any losses you incurred, and if the loss isn’t fully utilized this year, it can be carried forward to offset future gains to the extent of $3,000 per year. Pay your investment expenses early, including any mortgage interest, real estate taxes, and any state and local taxes.
Bonus Depreciation
In January 2013, bonus depreciation became limited to 50% of the qualifying, original use property. On January 1, 2014, bonus depreciation largely disappears. What will remain for 2014 are items of long production property only.
Charitable Contributions
Businesses and individuals can make and deduct charitable contributions. Individuals have large deductible limits, generally around 50%. C corporations are generally limited to 10% of profits. Make an early contribution to your favorite charity. This contribution can include personal property such as clothing and furniture, but remember to keep receipts for future proof of your generosity. Additionally, if the charitable deduction (of noncash items) for the year totals $5000 or more (including C corporations) a qualified appraisal must be made and attached to the tax return. Utilizing your credit card can be advantageous here as well, as more charities are accepting credit card donations. Also – If you are considering beginning estate planning, keep in mind that you have until December 31 to take advantage of 2013’s gift exemption of $14,000.
Conclusion
By utilizing these year-end tax strategies, you can reduce your tax liability for the year. Lowering taxable income by deferring income, accelerating deductions, giving to charity, and utilizing tax credits, results in lower tax liability. These methods work not only this year, but also year-to-year.
The Center routinely examines tax situations and engages in tax planning, business succession, and estate planning.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors