As the end of the year quickly approaches, it is important for businesses to take time to make some tax planning decisions that have the potential to lower their tax liability.
One of the key strategies is to determine the need to accelerate or defer income/deductions between tax years. The goal should be to “even” out income between each year in order to maintain a consistent tax bracket. Some of the ways this can be accomplished is through buying or selling property, accelerating depreciation and monitoring inventory levels.
Small businesses might find it easier to take advantage of the “de minimis safe harbor election,” or “repair” regulations, which enable taxpayers to expense rather than capitalize property purchases. An entity with Audited Financial Statements (AFS) can deduct/expense the cost of a unit of property up to $5,000. Those without an AFS can deduct up to $500.
A frequently missed consideration is the tax effect of holding on to obsolete assets. Personal property tax is paid on all income producing tangible personal property, including equipment and inventory. A good rule of thumb is to review all assets on hand prior to Dec. 31 in order to identify assets that should be removed. Those identified should be written off to reduce the overall tax liability.
The uncertainty of the status of expired tax provisions will make it difficult for businesses to make year-end tax-related decisions. A few of the provisions that expired 12/31/13 are:
- Research and Development Tax Credit, which provided a general business tax credit for companies incurring R&D expenses.
- The Work Opportunity Tax Credit, which provided credits for hiring employees that fit a certain targeted criteria.
- Bonus Depreciation, which allowed an expense for taking 50% of the cost of assets newly placed in service.
- Section 179 Expensing, which allowed for taking up to a $500,000 deduction for assets placed in service. For 2014, the maximum expensing amount is $25,000.
Congress will be addressing the extension of these provisions over the next two months. However, failure by Congress to extend the provisions by 12/31/14 could delay the start of the tax filing season as the IRS will need time to complete the necessary programing of its systems.
Other considerations might be:
- Sale/disposition of capital assets to offset taxable capital gains.
- Pre-payment of AP or deferral of customer receipts.
- Know when to recognize a debt-cancellation event.
While this list is not a comprehensive guide for year-end tax planning, it should serve as a means by which to begin the necessary conversations. Take advantage of the next two months by planning an internal discussion followed by a more in-depth conversation with your tax CPA.