2013 Year-End Tax Planning for Businesses

I hope that you had the opportunity to read Elizabeth’s blog article, where she discussed tax planning strategies for individuals. In this blog, we will cover items pertaining to businesses. I am pleased that, compared to recent years, 2013 has much less uncertainty. We are able to implement many proven year-end policies and strategies to meet the needs and goals of your business.

Before we go into specific year-end tax planning details though, there is one major policy change that will affect almost any business, including Schedule C and Schedule E activities, commonly referred to as the Tangible Property Regulations. These are a new set of treasury regulations that have been provided by the IRS that go into effect next year, but include opportunities for business in 2013. These regulations will affect how businesses capitalize their long-term assets and expense costs and, in many cases, will require taxpayers to file adjustments to prior year activity. Please stay tuned for a blog post dedicated to these changes coming soon.

The following strategies are some of the opportunities and considerations that businesses should be thinking about as we approach the end of the year. Also note that at the end of this article, you will find a list of tax provisions that expire at the end of 2013.

It is generally, but not always, better to defer income and therefore, the associated tax on that income. Thus, if you use the cash method of accounting, you could defer billing for goods and services. If using the accrual method, you could delay shipping products or delivering services. However, if it’s likely that you will be in a higher tax bracket next year, doing the opposite — accelerating income and deferring deductible expenses — may save more tax.

Income taxation and owner liability are two of the main factors that differentiate one business structure from another. Partnerships, S corporations and Limited Liability Companies provide limited liability and flow through income to their owners, who pay tax on that income. With the increase in individual tax rates discussed in the previous article, the top individual tax rate is now higher than the top corporate tax rate. It is possible that a change in structure may be beneficial in reducing the tax for the individual and entity taken as a whole. An S corporation provides some opportunity for reducing the additional 3.8% Medicare tax on an individual’s net investment income. A partnership or an LLC taxed as a partnership can incorporate without tax consequences. A C corporation can convert to an S corporation, but be mindful of the built-in gains tax. For any conversion, however, many factors need to be considered to determine if it makes sense.

S corporation shareholder/employees can reduce their payroll taxes by keeping their salary lower and increasing their distributions of company income. The company income generally is not taxed at the corporate level and generally will not be subject to the Medicare tax on net investment income. Be sure to keep the salary at a reasonable level, however.

C corporation shareholder/employees may prefer to take more income as salary as opposed to dividends. Salary is deductible at the corporate level whereas dividends are not. Here again, all facts and circumstances should be considered to determine if the overall tax can be reduced. As with the S corporation, salary should be at a reasonable level.

The good news for businesses is that depreciation breaks are available through 2013. The additional 50% first-year bonus depreciation is available for qualifying assets acquired and placed into service in 2013. If you are eligible for full Section 179 expensing, this may provide a greater benefit because it can allow a 100% deduction on assets acquired. The Section 179 expensing is limited to $500,000 and is permitted for used property acquired, as well as new. Vehicles qualify but are subject to their own limits.

The research credit has been extended through 2013. The credit is for increases in a variety of research activities which intend to develop or enhance product performance, manufacturing processes or information technology. Because the credit is scheduled to expire at the end of 2013, this may be a good year to increase research activity to take advantage of the credit.

The following are the business tax provisions expiring at the end of 2013:

• Research and experimentation credit
• Work opportunity credit
• Increase in expensing to $500,000/$2 million and expanded definition of Code Sec. 179 property
• Bonus depreciation
• Exceptions under Subpart F for active financing income
• Look-through treatment of payments between controlled foreign corporations
• Special treatment of certain dividends of Regulated Investment Companies
• Employer wage credit for activated military reservists
• Special expensing rules for film and television production
• Special rules for qualified small business stock
• Reduction in S corporation recognition period for built-in gains tax
• Election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation
• Low-income housing credit rate
• Treatment of military basic housing allowances under low-income housing credit
• 15-year straight-line cost recovery for qualified leasehold, restaurant and retail improvements
• Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
• Modification of tax treatment of certain payments to controlling exempt organizations
• Accelerated depreciation for business property on Indian reservations
• Indian employment credit
• Seven-year recovery for motorsports entertainment complexes
• Credit for new energy-efficient homes
• Incentives for biodiesel, renewable diesel and alternative fuels
• Election to expense advance mine safety equipment
• Energy efficient appliance credit for manufacturers
• American Samoa economic development credit
• Gain rule for sales or dispositions implementing FERC or state electric restructuring policy
• Mine rescue team training credit

If you would like to get started on your year-end tax planning or have any questions pertaining to this article, please contact me at (805) 963-7811 or jsheffield@bpw.com.