2010 year-end tax planning involves consideration of tax laws going into effect in 2011 as much it involves tax provisions effective this year. Some tax incentives that expired for businesses at the end of 2009 have been resurrected for 2010 (and 2011 in some cases), including bonus depreciation and small business expensing. However, with higher tax rates set for 2011, traditional planning techniques, such acceleration and deferral, may require more thought this year especially. This article explores some planning opportunities, challenges, and issues presented by year-end tax planning for 2010.
Accelerating income/deferring deductions
Every year, businesses can take advantage of a traditional planning technique that involves (or alternatively deferring income and accelerating deductions). However, business taxpayers such as passthrough entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2011 (and perhaps beyond) in light of the scheduled 2011 tax rate increases (the top two income tax brackets are set to rise from 33 and 35 percent to 36 and 39.6 percent respectively). Since pass-through entities generally pay tax at the individual income tax rate level, and those levels are expected to rise, this may be a significant factor affecting this year’s planning.
For example, limited liability companies, partnerships, and S corporations can avoid or minimize the impact of the scheduled 2011 rate increases by accelerating certain business transactions and thus income into 2010 (and deferring deductions until next year). For instance, if your business is planning to sell certain property, you may want to close the sale in 2010 to avoid the higher 2011 rates. Not only are the ordinary income tax rates scheduled to rise, but too are the capital gains rates. Thus, this strategy can generally help regardless of the type of income generated since rates in both categories are going to rise next year.
The strategy of accelerating income and deferring deductions may apply to a number of transactions affecting your business, including leasing, inventory, compensation and bonus practices, depreciation and expensing. Pass-through entities need to be particularly sensitive to the scheduled 2011 income tax rate increases and therefore plan accordingly.
Cash basis businesses that expect to be in the same or a higher tax bracket in 2011 should consider moves to shift income into 2010 by accelerating cash collections this year, and deferring deductions until next year. Thus, delay payment of certain expenses until next year, where possible, since deductions are allowed when the expenses are actually paid. If you have outstanding accounts receivable, collect on those payments due to your business in 2010.
Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate the shipment of products or provision of services into 2010 so that your business’s right to the income arises this year.
Take advantage of increased small business expensing
For 2010 and 2011, businesses can benefit from enhanced Code Sec. 179 small business expensing. Congress increased the amount of qualifying property that business that immediately expense to $500,000 (up from $250,000) for tax years beginning in 2010 and 2011. This amount is reduced dollar for dollar to the extent the cost of the qualifying property placed in service during the year exceeds $2 million (increased from $800,000). The increase in the expensing cap from $800,000 to $2 million for 2010 (and 2011) effectively opens up the availability of Code Sec. 179 expensing to many more businesses. If you have bought qualifying property – even computer software qualifies – or plan to buy property, consider doing so now to take advantage of the immediate tax benefit. You can also do so again in 2011, when tax rates are expected to be higher.
Also included in the definition of qualified Code Sec. 179 property (only temporarily though) is qualified real property, which is defined as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to expensing of up to $250,000 of the total cost of these properties. The dollar cap applies to the aggregate cost of qualified real property.
Bonus depreciation is not limited by the size of the business, unlike practical access to Code Sec. 179 “small business” expensing. Bonus depreciation allows taxpayers to immediately deduct 50-percent of the cost of qualifying property purchased and placed in service in 2010. Unlike Sec. 179 expensing, bonus depreciation is only available for 2010. Qualifying property must be purchased and placed into service on or before December 31, 2010.
Increased start-up expense deduction
New businesses can take advantage of the increased deduction for start-up expenditures. For 2010, the start-up expense deduction limit has been raised from $5,000 to $10,000. The phaseout threshold is also increased to $60,000 (up from $50,000). Thus, if you have incurred during 2010 costs relating to the creation of an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may be able to benefit from this increased deduction. Entrepreneurs can recover more small business tart-up expenses up-front, thereby increasing cash flow and providing other benefits.
Additional planning techniques
There are a number of other year-end tax planning strategies you may want to consider utilizing for 2010. These include potentially changing your accounting method to advance income or defer expenses (however, accounting method changes can have a binding elect on taxpayers for future years); accelerating installment sale proceeds or electing out of the installment method; electing slower depreciation methods, deferring payments of accrued bonuses; and determine if you can write-off any bad debts.
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