Business Good? Better Think About Tax Planning

Many businesses find they have experienced growth and record sales this year. While this is good news for business owners, it can mean even better news for Uncle Sam come tax season.

To help minimize the amount your business owes the IRS, start analyzing your financial statements and begin tax planning right now. If you put it off, you may find yourself in for a rude shock when you prepare your 2013 income tax return next year.

There were several tax law changes enacted this year will affect your individual tax bill if you are enjoying a higher than normal income, including:

• A 0.9 % Medicare tax on earned income above $200,000 for single filers or $250,000 for those married filing jointly is new for 2013. While this amount does not put a huge dent in your pocketbook, you may want to factor it in with other laws that have been passed and some deductions that have been allowed to expire. Every little bit hurts.
• A 3.8% Medicare surtax on net investment income for those with modified adjusted gross income higher than $200,000 for an individual or $250,000 for married-filing-jointly is also a new tax that is effective for the 2013 tax year. This could prove costly, but will apply only to investment income. It will not be levied against your income from self-employment activities.
• Coming back from the past is a phase-out of personal exemptions and itemized deductions, which is triggered when adjusted gross income exceeds $250,000 for individuals or $300,000 for couples filing jointly.
• The top marginal rate jumps to 39.6% if your income exceeds $400,000 for individuals and $450,000 if you are married filing joint. This is up from 35% for 2012, while the top tax rate on capital gains goes to 20% from 15%.

As a business owner, it is imperative that you review your financial statements and other taxable transactions with a tax professional in plenty of time before year end so that you can strategize and complete any necessary transactions before Dec. 31 in order to lower your tax bill.  In other words, you probably should have already had a session. As you can see from the new tax hits listed above, this is especially important if you find that your self-employment income has increased substantially.

Strategizing to lower your year-end tax bill should include consideration of purchasing new equipment, furniture, machinery, vehicles and other assets in order to take advantage of Section 179 expensing and bonus depreciation.

According to website section179.org, the following rules apply for 2013 for Section 179 expensing: Maximum deduction is $500,000 on capital assets up to $2,000,000. Business owners are allowed to deduct 50% bonus depreciation along with the regular annual depreciation deduction on new purchases.

Paying expenses by year end rather than in January will also lighten the tax bill. Delaying receipt of income is another strategy implemented by small business owners. However, the rules of constructive receipt apply. If you receive a check from a customer prior to year end, it must be counted as income for 2013 even if you wait until January to deposit it.