Year-End Tax Planning for Business Owners
As mentioned previously, recent tax legislation contains several provisions that impose extra tax on high-income taxpayers, including those with income over $200,000. Often, such taxpayers are business owners. According to the National Federation of Independent Business, over 75% of all small businesses in the U.S. are taxed at the owner’s individual rate. Many small companies are structured as S corporations, limited liability companies (LLCs), and other pass-through entities. With them, company profits are reported on the owner’s tax return, so the owner may owe various additional taxes.
Business owners in that situation may want to reduce business profits that flow through to their own tax return. One way to do so is to use Section 179 of the tax code, which lets businesses take a first year “expensing” deduction for equipment placed in service. The tax law that was passed early in 2013 set the expensing limit for this year at $500,000, with a dollar-for-dollar phaseout beginning at $2 million.
Example 1: ABC LLC buys $200,000 worth of equipment in December 2013, bringing the yearly total to $250,000. ABC can take a $250,000 expensing deduction, reducing the income that the LLC owners will report. Suppose, though, that ABC buys a total of $2.1 million worth of equipment in 2013. ABC will be $100,000 over the phaseout base, so the company’s first year deduction will be reduced from the maximum $500,000 to $400,000.
For 2014, the Section 179 deduction is now scheduled to drop to no more than $25,000, with a phaseout range starting at $200,000 of equipment purchases. Congress might increase those amounts, but for now it seems like loading up on equipment purchases in late 2013 will be a savvy move.
Companies may take first- year expensing deductions under Section 179 for purchases of new or used equipment. Either way, the equipment must be placed in service by December 31 to qualify for a 2013 tax deduction. The day that you make the payment doesn’t matter, for the purpose of this tax benefit, so you can actually pay for the equipment in 2014.
Other expenses Besides purchasing equipment, business owners can take other steps at year-end to reduce company income and their 2013 tax bill. If you regularly pay bonuses to employees, you can pay them in December. Your company might be able to prepay state income tax and real estate property tax due early in 2014. You also might have the business make a charitable contribution by donating outdated equipment, including vehicles, or supplies to a school or another nonprofit organization that can use such items.
Retirement readiness You also should check into your company’s retirement plan, to see if it’s ideal for your own personal purposes. If your company doesn’t have a plan, you may still have time to set one up.
In 2013, the ceiling for contri- butions to a defined contribution plan is $51,000 per participant. Among defined contribution plans, profit sharing plans are popular. A profit sharing plan can include a Section 401(k) cash or deferred arrangement that allows employees to defer some of their salary while deferring income tax as well. The maximum $51,000 contribution, for high-income participants, can come from the employer and employee combined. Company contributions generally are tax-deductible.
Types of profit sharing plans include “age-weighted” and “new comparability” plans. These types of plans can be structured so that profit sharing contributions go largely to older, highly compensated employees, including owner-employees.
Example 2: DEF Co. has two co-owners in their late 50s and late 40s, respectively. The company’s three other employees are younger, with relatively low salaries. A new comparability profit sharing plan might call for over $25,000 going to each owner’s account one year while the other three employees receive company contributions under $2,000 apiece.
For any of these plans, you should consider the costs as well as the benefits.