written by Brenda Logsdon
This is part two of the Year-End Tax Planning for Businesses series. Click here to view part one.
Because of the uncertainty of the tax rates and allowable deductions for 2013, there are many opportunities to consider before the end of 2012. Below are few suggestions to study:
Small Employer Pension Plan Startup Cost Credit: For 2012, employers who have no more than 100 employees that did not have any type of retirement plan for the preceding three years, will be entitled to a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for their employees. The maximum credit is $500 per year and applies to 50% of the qualified administrative expenses for each of the first three plan years.
Credit for Employee Health Insurance Expenses of Small Employers: Eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 10 or fewer full-time employees and an average annual per-employee wage of $25,000 or less are eligible for the full credit.
The credit amount begins to phase out for employers with either 11 full- time equivalents or if the average annual employee wage is more than $25,000. The credit is phased out completely if the employer has 25 or more full-time equivalents or if the average annual employee wage is $50,000 or more.
Work Opportunity Credit: In prior years, the work opportunity credit was an incentive provided to employers to hire individuals that were unemployable or had difficulty obtaining employment. For 2012, the tax credit is only available for hired employees that are qualified veterans. The work opportunity for hiring veterans ranges from $2,400 to $9,600, depending on various factors such as the length of unemployment and whether he has a service connected disability. The work opportunity credit will not be available for 2013 unless Congress enacts legislation to extend.
Other Planning Opportunities
Qualified Dividends: Qualified dividends are taxed as capital gains in 2012 and, taxed at a maximum rate of 15% in 2012 Beginning in 2013, qualified dividends will be considered as ordinary income subject to the 39.6% maximum ordinary income tax rate for individuals. In addition, if the taxpayer’s adjusted gross income exceeds $200,000 ($250,000 for married filing jointly) all investment income, including qualified dividends, will be subject to an additional tax of 3.8%.
If your business is incorporated you might consider a stock redemption or payment of a qualified dividend (earnings while taxed as a C corporation) in order to have the redemption or dividend taxed as a capital gain. These rules are quite complex, but depending on your circumstances, the stock redemption or dividend may be very beneficial for income tax planning and estate planning. A professional should be consulted in executing any pre 2013 corporate distributions.
S Corporation Built-In Gains Tax: An S corporation generally is not subject to income tax. The S corporation’s income or loss is passed through to its shareholders, who are taxed on their pro-rata shares of the S corporation’s income. However, if a C corporation, that has earnings and profits, elects to become an S corporation, the S corporation is taxed on its built-in gains. A built-in gain is the appreciation of an asset on the date of the S election and the tax generally applies for a 10 year period after the date of the S election.
100% Exclusion of Gain Attributable to Certain Small Business Stock: As originally enacted, an individual could exclude 50% of the gain from qualified small business stock that was held for at least five years (subject to a cap). “Qualified small business stock” is stock of a corporation which is taxed as a C corporation and its assets 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 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 was 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.
Increase Your Basis in S Corporation Stock: If you have incurred losses in your S corporation which have been suspended because you have no basis in the stock, consider making a loan to the corporation. An S shareholder can deduct his pro rata share of an S corporation’s losses only to the extent of his basis in the S corporation stock plus debt owed to him by the S corporation.
Please contact us if you have any questions about these planning ideas.