Written by Brenda Logsdon
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:
Deferring Income to 2013
If you expect your taxable income to be lower in 2013 than it will be in 2012, it might be to your advantage to defer income into 2013. If you anticipate that you will be in the same or a lower tax bracket in 2013 than in 2012, year-end tax planning would assist you to determine if the deferral would be advantageous.
You may consider changing to the cash method of accounting if you are currently using the accrual method. An automatic change to the cash method can be made by the due date of the income tax return including extensions.
The following three types of businesses can make an automatic change to the cash method: (1) small businesses with gross receipts of $1 million or less; (2) C corporations with gross receipts of $5 million or less in which inventories are not a material income producing factor; (3) certain taxpayers with average annual gross receipts of $10 million or less.
Sole proprietors, limited liability companies, partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts, as long as inventories are not a material income producing factor.
And also consider delaying year-end billing to clients or customers so that payments will be received after 2012.
Accelerating Income into 2012
Generally, it is not good tax planning to accelerate income, but it may be beneficial for 2012. Since tax rates are scheduled to increase in 2013, you might be in a higher tax bracket in 2013, or need additional income in 2012 to take advantage of offsetting deductions or credits that will not be available in future tax years.
If you are on the cash method of accounting, collecting fees earlier will allow you to accelerate income into 2012. Consider sending out billing and invoices earlier than you normally send them. Also try to collect all billings before year end and try to take advantage of clients or customers that are willing to prepay for goods or services that would otherwise be paid in January 2013.
Year-end tax planning will help to estimate where your tax brackets might be for 2012 and 2013 to determine if accelerating income into 2012 would be advantageous.
Equipment Purchases: Put new business equipment and machinery in service before year-end to qualify for the 50% bonus depreciation allowable for new equipment. The 50% bonus depreciation is scheduled to expire after 2012 unless Congress enacts legislation to extend it. You may make a “Section 179 election,” which allows you to expense otherwise depreciable business property and the election can be made for new or used equipment.
In general, under the “half-year convention,” you may deduct six months’ worth of depreciation for equipment that is placed in service on or before the last day of the tax year. If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.
A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits (i.e., a vehicle rated over 6,000 lbs.). Doing so would not subject the purchase to the statutory dollar limit, $11,160 for 2012, $11,360 in the case of vans and trucks.
Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 lbs.) the expensing amount is limited to $25,000. But there is no limitation if the SUV is rated for over 6,000 lbs. and is built on a truck chassis. Thus, if the SUV is used 100% for business, you would be able to deduct the entire purchase price.
NOL Carryback Period: If your business incurs net operating losses for 2012, you generally can carry those losses back two tax years. Thus, for example, the loss could be used to reduce taxable income and thus generate tax refunds for 2009 and 2010. Certain “eligible losses” can be carried back three years and farming losses can be carried back five years.
Bad Debts: You can accelerate deductions to 2012 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, and writing those off, you should be allowed a bad debt deduction.
We will publish the second part of the series later this week. Please contact us if you have any questions about these planning ideas.