It is time to look at year-end moves that your business can make to save taxes, now that we are in the final quarter of 2012. Actions taken between now and the end of the year can save you and your company a boatload of taxes.
At the end of 2012, many of the existing laws for estate taxes expire and revert back to what existed before the changes enacted by President Bush. This means that many people will be subject to income taxes at much higher rates than currently exist.
Some quick tips include:
- Purchase business equipment this year to take advantage of expiring tax breaks for bonus depreciation and expensing
- Buy a new heavy SUV by the end of the year
- Shift income and expense
- Consider selling securities
For the first two items, business owners must beware of buying too many assets in the last quarter.
If you are purchasing assets, you need to place them in service by December 31 in order to qualify for the tax breaks. There are two major loopholes available:
50% bonus depreciation
Firms can write off half of the cost of qualifying assets put in service this year, even for assets bought in late December. Bonus depreciation is available on new assets with useful lives of 20 years or less… machines, equipment, land improvements and farm structures such as chicken coops. Leasehold improvements made to the interiors of commercial realty are eligible, too. Bonus depreciation is scheduled to end after 2012, and probably won’t be revived.
Right now, businesses can expense up to $139,000 of assets put in use in 2012 and the ability to take expensing in lieu of depreciation phases out dollar for dollar once over $560,000 of assets are placed in service. There is a good chance that lawmakers will act
to raise the 2012 maximum write-off to $500,000 and start the phaseout at $2 million.
Buy an SUV
It really pays to put a new heavy SUV in service before the end of 2012:
You can deduct much of the cost this year. Say your business pays $60,000 for a new SUV with a loaded gross weight over 6,000 pounds and puts it in use in December. First, the firm can expense $25,000. Half of the remaining $35,000 cost…$17,500… qualifies for 50% bonus depreciation. The firm can take 20% of the $17,500 balance… $3,500…as regular depreciation. If the vehicle is used 100% of the time for business, the total first-year write-off is $46,000. Used SUVs don’t get bonus depreciation.
You can fully write off new pickups with loaded weights over 6,000 pounds. Ditto for used heavy pickup trucks if the cargo bed is at least six feet in length. For lighter vehicles, the maximum deduction in the first year is $11,060.
Beware of the Fourth Quarter Trap!
Buying too many assets in the last quarter can cost you some write-offs on property that isn’t eligible for bonus depreciation. If you make more than 40% of your 2012 asset purchases after September, regular depreciation on all assets put in use in 2012 is figured on a quarterly basis. So assets you buy in late 2012 get 11⁄2 months of depreciation instead of six months’ worth. This rule does not apply to buildings.
Business owners can shift income and expenses between 2012 and 2013.
High-income professionals may want to speed up billings to report income in 2012. That will lock in the 35% top rate. If Obama wins in November, it is conceivable that rates on upper-incomers will rise in 2013. Those who will be in the same bracket or a lower tax bracket in 2013 can adopt the opposite strategy and delay their billings.
Similarly, owners may want to ensure year-end bonuses are taxed in 2012 rather than in 2013. There will be time after the elections to implement a strategy.
Deductions for accrual method firms are limited. They can’t deduct in 2012 bonuses that are deferred to 2013 by owners of more than 50% of regular corporations or by owners of any interest in an S corporation, personal service firm or partnership.
Firms can shift expenses from one year to another to tweak their income. However, the Revenue Service will balk if there is too much distortion of earnings.
And weigh taking dividends in lieu of salary. This pays off if the corporation is in a low tax bracket and the owner is in a high bracket. The owner’s tax savings due to the 15% top rate on dividends plus the payroll tax savings on the dividend can exceed the extra tax the corporation pays because the dividend isn’t deductible. This won’t work for S firms. Or for personal service firms…they pay a flat 35% tax. No matter who is elected president, the maximum tax rate on dividends received by high-incomers is going up next year on account of the 3.8% Medicare surtax.
Both Presidential candidates are talking about raising the tax on capital gains so it makes sense to review your portfolio.
Consider selling stocks that have gains but not much more room to grow. The gains on these sales can either be offset with current losses, carryover losses, or be subjet to lower capital gains rates this year.