2012 Year-End Tax Planning for Businesses
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As 2012 draws to a close, there is still time to reduce your 2012 tax bill and plan ahead for 2013, highlights several potential tax-saving opportunities for business
- Deferring Income to 2013
Deferring income to the next taxable year is a time-honored year-end plan. If you expect your AGI to be higher in 2012 than in 2013, or if you anticipate being in the same or a higher tax bracket in 2012 than in 2013, you may benefit by deferring income into 2013.
- Accelerating Income into 2012
You may benefit from accelerating income into 2012. For example, you may anticipate being in a higher tax bracket in 2013, or perhaps you need additional income in 2012 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2012 will be disadvantageous if you expect to be in the same or lower tax bracket for 2013. If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2012. Also see if some of your clients or customers are willing to pay for January 2013 goods or services in advance. Any income received using these steps will shift income from 2013 to 2012.
- Business Deductions
Self-Employed Health Insurance Premiums
Equipment Purchases: If you purchase equipment, you may make a “Section 179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property.
NOL Carryback Period: If your business suffers net operating losses for 2012, you generally apply those losses against taxable income going back two tax years.
Bad Debts: You can accelerate deductions to 2012 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2012 year-end financial statements.
Home Office Deduction: Expenses attributable to using the home office as a business office are deductible under §280A if the home office is used regularly and exclusively: (1) as a taxpayer’s principal place of business for any trade or business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business.
- Business Credits
Small Employer Pension Plan Startup Cost Credit, Credit for Employee Health Insurance Expenses of Small Employers
Subnormal Goods: You should check for subnormal goods in your inventory. The inventory does not have to be sold within the 30-day timeframe.
- Planning for 2013 Tax Increases and Potential Expiration of Tax Relief Provisions
S Corporation Built-In Gains Tax:
An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation’s income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all gains that were built in at the time of the election if the gains are recognized during a special holding period. While for tax years beginning in 2009 and 2010, the special holding period was shortened from 10 years to seven years, it is shortened even more for tax years beginning in 2011, to five years. For taxable years beginning in 2012, the holding period reverts back to 10 years.
100% Exclusion of Gain Attributable to Certain Small Business Stock
The incentive for individuals to acquire qualified small business stock was higher before the end of 2011. An individual ordinarily may exclude 50% of the gain from qualified small business stock that is held for at least five years (subject to a cap). “Qualified small business stock” is stock of a corporation the assets of which do not exceed $50 million when the stock is issued. The 50% exclusion of gain was increased to 75% for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. The 2010 Small Business Jobs Act (SBJA) excluded 100% of the gain for qualified small business stock acquired or issued after September 27, 2010, and before January 1, 2011, and the 2010 TRA extended the 100% exclusion to qualified small business stock acquired before January 1, 2012. In addition, the alternative minimum tax preference item attributable to the sale is eliminated. For stock acquired after December 31, 2011, only 50% of the gain from the sale/exchange of qualified small business stock held for more than 5 years is excluded from gross income. For tax years beginning in 2012, the holding period is once again 10 years.
Qualified dividends received in 2012 are subject to rates similar to the capital gains rates. Therefore, qualified dividends are taxed at a maximum rate of 15%. Qualified dividends are typically dividends from domestic and certain foreign corporations. Unless Congress acts, all dividends will be treated as ordinary income beginning January 1, 2013.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property
The rule that the basis of an S corporation shareholder’s stock is decreased by charitable contributions of property by the S corporation in an amount equal to the shareholder’s pro rata share of the adjusted basis of the contributed property expired for contributions made in taxable years beginning after December 31, 2011.
Employer-Provided Child Care Credit
For 2012, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures. Note that this credit is scheduled to expire at the end of 2012, therefore, it would be wise to make any planned qualified child care expenditures in 2012 to take advantage of the credit.
Work Opportunity Credit
The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit against the wages paid. The credit is determined based on first-year wages paid for employees hired on or before December 31, 2011 (December 31, 2012, for qualified veterans).
Taxpayers can claim 50% bonus depreciation for assets placed in service in 2012. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. In 2013, the bonus depreciation generally does not apply.
Uncertain Tax Positions: The final Instructions for Schedule UTP state that a corporation must file Schedule UTP with its income tax return if it: (1) files Form 1120, Form 1120-F, From 1120-L, or Form 1120-PC; (2) has assets of $50,000,000 or more beginning with the 2012 tax year, and $10,000,000 or more beginning with the 2014 tax year (the threshold was $100,000,000 or more for tax years before 2012); (3) issued (or a related party issued) audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and (4) has one or more tax positions that must be reported on Schedule UTP. A taxpayer that files a protective Form 1120, 1120-F, 1120-L, or 1120-PC and satisfies the conditions set forth above also must file Schedule UTP.
Unique Reference Identification Number: For taxable years beginning in 2012, Forms 5471, 8858, and 8865 will be revised to contain a Unique Reference Identification number (URI) for each foreign entity with respect to which reporting is required. The URI will be used to track the foreign entity from year to year.
- Electronic Deposits
Electronic Funds Transfer: A corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS’s Electronic Federal Tax Deposit System (EFTPS).
If you have any questions, please do not hesitate to call. I would be happy to meet with you at your convenience to discuss the strategies and requirements outlined above. There is still time to implement these strategies to minimize your 2012 tax liability and plan for 2013.