Last Minute Year End Planning

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United States CongressA little under a week ago, Congress, the Senate and the President signed the Tax Extender Bill. It’s retroactive to January 1, 2014 and expires December 31, 2014.

Yes, you read that right. This bill, passed at the end of December, 2014, and is retro active for an entire year and expires in a few days.

The Tax Extender Bill covered 55 different tax laws that had expired at the end of 2013. Congress attempted to make the changes permanent but then had a big fight with the President and he said he’s veto the law. So at the 11th hour, there was a compromise and the expiring laws were extended for just 2014. That extension was in exchange for an agreement to overhaul corporate tax law. I’m not sure that’s going to happen and that means we likely could have a big problem in 2015 for these bills.

There are seven important parts of the Tax Extender Bill for most small business owners.

bonus depreciationWe’ve got bonus depreciation back. That means if you buy new personal property for your business, you can immediately deduct 50%. The other important deduction you might have heard of is Section 179. This allows you to immediately expense personal property purchases for your business. That would include equipment, computers, cell phones, furniture and the like.

There are a few differences between the two. In order to get bonus depreciation, you have to buy new property. Section 179 doesn’t have the same restriction. Bonus depreciation can take your business into a loss. That’s a loss that you can then carryback to offset previous year’s income and get you a big refund. Or it’s a loss you can carryforward to future years. You have a choice. Plus that bonus depreciation can be used to offset other types of taxable income such as interest, dividends or capital gains. Section 179 cannot offset other income and you can’t carry it back. So bonus depreciation gets you a 50% write off with more flexibility. Section 179 gets you 100% write-off but you can only carryforward any excess. And there’s one more benefit of the bonus depreciation You can use it on new vehicles you use. That’s a big benefit.

As I mentioned, Section 179 was also extended. You can write off up to $500,000 of qualifying purchases. Prior to that, you can only write off $25,000.

vehicle write offI frequently get asked what vehicle qualifies. There are actually two different qualifications. If your vehicle is greater than 6000 GVWR, you get the partial Section 179 deduction. I’ve got two vehicles like that – my Range Rover and my husband’s Chevy 4×4. Both qualify. If you’re not sure, just ask when you buy the vehicle. They will have the specs and let you know. You can also get a vehicle that qualifies for 100% of the Section 179. Those are vehicles with long beds or utility vans. There is more to the description. If you are thinking about such a purchase, please let your CPA know right away. We can get you the details.

Remember to get the bonus depreciation, you need to buy a new asset. You can get the Section 179 if you buy a used asset. There is a limit on vehicles for the Section 179, but the bonus depreciation has a much bigger and flexible limit.

One thing to make mention of, though, is that this Tax Extender did not make these bills permanent. It only means that they are true through 12/31/14. On 1/1/15, we start this whole ridiculous discussion again.

So, for 2014, take advantage of what you can. Who knows what you can deduction next week.

tax_extender_billAnother benefit we got back from the Tax Extender bill is an exclusion from capital gains 100% of small biz stock sold by an individual. This is a little known huge tax advantage. Even without the Tax Extender bill giving us 100% exemption, there is almost always some kind of exemption. There are some things to note here. It is the sale of stock that get the exemption. If you sell your company assets out of the corporation, there is no exemption. You need to sell the stock.

The corporation needs to be a qualified small corporation. That means it’s a C Corporation and is compliant with the rules under code section 1202.

If you start a new corporation and want to make sure it qualifies under Section 1202, include an article that states the intention of the company is to qualify under this code section. If you think about it, this is quite possibly the best thing going for serial entrepreneurs. Build a business, sell it and never pay tax.

While we’re talking about C Corporations, let’s just go over the difference between C Corporations and S Corporations. All corporations begin life as a C Corporation. A C Corp pays tax itself. If you take money out of a C Corp, you take it out in salary which is income to you and a deduction for the corporation. Or you could take out a dividend which is taxable to you and not a deduction for the corporation. That’s the double taxation you might have heard about. It’s also possible to take a loan from the corporation for other business projects or investments.

An S Corporation is a flow through entity. That means that the S Corp doesn’t pay tax itself, the income or loss will instead flow through to you. There are some limitations on who can have an S Corporation. Only US individual taxpayers can be shareholders. In some circumstances a special type of trust can, but corporations, partnership or foreign owners can not own S Corps. You can’t have over 75 owners.

Generally, professionals will have S Corporations. If you’re planning to go public, you’ll have a C Corp. There are a lot more distinctions between the two types of corporations and I could go on and on. There is one more distinction and this is why this next tax extender is important.

If you have appreciating property, you never want to put it in a C Corporation. That’s because you can get hit with more than double tax when you sell. First, you’ll pay tax at the much higher ordinary tax rate when you sell. This is higher than the capital gains tax rate. Plus you have to pull the money out. If it’s the end of the corporation, that means a liquidating dividend – double taxation.

That’s the quick answer to why you should never put an appreciating asset inside a C corporation. But let’s say you have something that has appreciated. What now?

You can elect to be taxed as an S Corporation. And then not sell anything for a period of time. It used to be that period of time was 10 years. Now, with the tax extender, it’s 5 years.

work_opportunity_tax_creditThere is a credit for hiring vets that has been renewed. That’s the work opportunity tax credit.

The R & D tax credit has been renewed. This is one to work on now. Make sure your accounting identifies the costs established with R & D separate from other costs. That could include materials, salaries and special equipment.

Also renewed is the new markets tax credit. The purpose of this credit is to help financial institutes in low income areas.

There is an extra deduction available if you make a charitable contribution of qualifying food from a food inventory that your business has.

Obviously not all of these deductions are going to work for your business. Most important are probably the bonus depreciation and Section 179. They have been extended, but only for 2014.

Some other last minute tax deductions: charitable donations (cash and like-kind donations), pension contribution (but only if you have already set up your business pension account) and paying your kids. If your books aren’t caught up yet, now is the time to do that. The more you know, the more your business will grow.

Got questions? Give Richard a call at 888-592-4769. Make more, keep more, work less. It’s all part of being a good business owner.

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