End-of-Year Business Tax Planning Tips for 2012
With the end of 2012 quickly approaching, businesses should think about year-end tax planning and in doing so, keep in mind the fate of the tax extenders for this year and the tax hikes (actual and potential) looming in 2013. Beginning next year, a 3.8% Medicare surtax on investment income -- dividends, taxable interest, passive rents, annuities, royalties and capital gains -- goes into effect for upper-income individuals. Also, now that President Obama has been reelected, it's conceivable that income taxes on upper-incomers will rise in 2013.
SEE ALSO: 12 Smart Year-End Tax Moves for 2012
But no matter what lawmakers do with the tax extenders for this year or the Bush tax cuts for 2013, there are moves that you can make between now and December 31 that will save you and your business plenty of taxes.
Acquire Needed Business Assets
If you're thinking of buying assets for your business, then act quickly so you can expense them this year. In lieu of depreciation, businesses right now can claim an immediate write-off of up to $139,000 of the cost of new or used assets placed in service in 2012. The $139,000 ceiling is reduced dollar for dollar after more than $560,000 of assets are put into use this year. There's a fair chance that before year-end, lawmakers will act to increase the maximum write-off for this year to $500,000 and start the phaseout at $2 million. If Congress decides not to act, then next year businesses can expense only up to $25,000 of acquired assets.
Buying assets and placing them in service this year has another tax advantage: the ability to use bonus depreciation. This allows you to deduct 50% of the cost right away, with the remaining 50% recovered through regular deprecation. Bonus depreciation can be claimed only on new assets with useful lives of 20 years or less, including machinery, equipment, land improvements and single-purpose farm buildings such as chicken coops. Ditto for leasehold improvements made to the interiors of commercial buildings. This tax break ends after 2012 and probably won't be revived for next year, so you'd be wise to take advantage of it now.
Buy a Vehicle for Your Business
2012 remains a very good year to buy a business vehicle. The maximum deduction for cars acquired and placed in use in 2012 is $11,160. After December 31, the cap falls to a little more than $3,000. The tax benefit increases dramatically if you buy a new SUV with a loaded weight over 6,000 pounds and place it into service in 2012 -- up to $25,000 of the cost can be expensed, the balance is eligible for 50% bonus depreciation, and 20% of the remaining cost is recovered through normal depreciation. Assuming 100% business use, the total first-year write-off for a $60,000 new heavy SUV is $46,000 -- $25,000 expensing, $17,500 bonus depreciation and $3,500 regular depreciation. And, believe it or not, large pickup trucks fare even better. You can expense the full cost of a pickup with a loaded vehicle weight over 6,000 pounds that is put to use in your business in 2012 if the cargo bed is at least six feet long and separate from the cab.
But be careful about buying too many assets in the last quarter of 2012. It can cost you some depreciation deductions. If over 40% of your 2012 asset purchases are made after September, regular depreciation (not bonus depreciation or expensing) on all assets put in use in 2012 is determined on a quarterly basis. Therefore, assets acquired near year-end get only 1½ months of depreciation instead of six months' worth. This special limitation doesn't apply to buildings, where depreciation depends on the month put in use.
Shift Income and Expenses Between 2012 and 2013
Professionals can delay year-end billings, or alternatively, they can speed them up if they expect to be in a higher tax bracket in 2013. High-income professionals may want to accelerate billings to report income in 2012 to lock in the 35% top individual income tax rate. Those who will be in the same bracket or a lower bracket in 2013 can adopt the opposite strategy and delay their billings.
The same applies to bonus payments. Business owners can pay year-end bonuses in 2012 if they want the deduction sooner or they want to ensure that the bonuses are taxed at the 2012 rates. Or they can delay paying them so that recipients are not taxed until 2013. There are limits, however, to bonus deferral. Delaying payment of year-end bonuses does not work for a majority shareholder if the bonus amount is fixed during 2012 and the corporation has the cash to pay the bonus. In that case, the law treats the shareholder as constructively receiving the money in 2012. Also, accrual-method companies cannot deduct in 2012 bonuses that are deferred to 2013 if paid to a more-than-50% shareholder in a regular corporation or to an owner of any stake in an S corporation, personal service company or partnership.
Take Dividends in Lieu of Salary
Finally, consider having your corporation pay dividends instead of salary. This works out taxwise if the corporation is in a low tax bracket and the shareholder is in a high bracket. Although payment of dividends does not give rise to a corporate deduction, the owner's tax savings upon receipt of a dividend can exceed the benefit of the corporation's forgone deduction in some cases. This is due both to the 15% maximum dividend rate for 2012 and the fact that dividends are not subject to payroll tax. This tax tip does not work for personal service firms that pay a flat 35% tax or for S corporations. And remember, no matter what Congress and President Obama do with the Bush tax cuts for next year, the maximum tax rate on dividends received by high-incomers is going up in 2013 on account of the 3.8% Medicare surtax.
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