The holiday season is a hectic time for many business owners. But don’t let this busy season make you forget some key business tasks: By taking certain steps by December 31, you might be able to significantly reduce your 2013 tax bill.
This is a particularly important year for entrepreneurs to review their tax-saving opportunities. That's because a few major tax breaks for business owners are slated to expire or shrink dramatically in 2014 unless Congress moves to extend them (which may be a stretch given all the political gridlock these days).
Moreover, top earners have most likely seen their tax rates rise in 2013, meaning that any tax deductions, credits or other tax breaks could generate larger savings than they have in years past.
If you're looking to save, here are seven 2013 tax-saving opportunities to consider for your business:
1. Take advantage of the Section 179 expensing rules. Section 179 lets businesses write off 100 percent of certain types of equipment as expenses (up to the annual limit) rather than depreciating them over many years. Unless Congress takes action, however, the Section 179 deduction limit will fall significantly from the 2013 limit of $500,000 to just $25,000 in 2014. That means businesses planning to make new or used capital purchases—whether computers, office equipment, software or real estate—in the near future will likely want to make those purchases before year-end rather than wait until 2014, says Vinay Navani, a shareholder at Wilkin & Guttenplan PC, a certified public accounting firm in East Brunswick, New Jersey.
Keep in mind, however, that the IRS requires that businesses put the equipment to use in the tax year the deduction is taken. "Just because I’ve ordered a server from Dell and it’s on a UPS truck somewhere, it doesn’t count,” Navani says. The server must be used by the business by December 31 in order to qualify for a 2013 Section 179 equipment expense deduction.
2. Claim 50 percent bonus depreciation. Another accelerated depreciation tax break allows business owners to deduct up to 50 percent of the cost of qualified new equipment in the year they purchase it—on top of the standard depreciation schedule laid out by the IRS. This deduction is scheduled to expire completely in 2014, unless Congress keeps it alive.
Businesses can’t claim both Section 179 and bonus depreciation on the same purchases, and a Section 179 deduction is usually preferable because it allows a 100 percent write-off on eligible purchases. Some equipment purchases, however, aren’t eligible for Section 179 deductions, so it’s best to consult your tax advisor on which types of purchases qualify for which deductions.
3. Maximize 2013 expense deductions. If your business uses the cash method of accounting as opposed to the accrual method, you may want to consider making some purchases before the end of the year, even if you don’t acquire or use the purchased items until 2014, Navani says. For example, this might include prepaying for a trade show or conference you plan to attend in early 2014, stocking up on office supplies or buying something on a credit card that will arrive in January.
Of course, you need to be careful with this: The IRS frowns upon businesses that overly stock up on items in order to inflate their deductions, Navani says. Also, if you think your business income will rise in 2014, your expense deductions may be worth more if you wait until next year.
4. Defer income. In a similar fashion, businesses that use the cash accounting method may be able to delay some of their income until 2014—meaning they won’t have to pay taxes on that income until they file their return in 2015. But businesses have to weigh the option to delay income with “business realities,” Navani says. “If a customer is willing to write me a check today," he notes, "I’m going to take that money today.”
That said, businesses with some flexibility on timing their invoices may want to hold off until after January 1 rather than bill customers in late December. And if you already have a check in hand, you have to count it for 2013—waiting to deposit it doesn’t matter.
5. Consider contributing to a small-business retirement plan. Contributing to a tax-deferred retirement plan for small-business owners, such as a solo 401(k), a SEP-IRA or a Simple IRA, can provide valuable tax savings. For example, a business owner in the 28 percent tax bracket could save $280 in taxes for every $1,000 they contribute to their retirement plan. And certain types of retirement plans allow business owners to defer more than $50,000 a year.
Carol Markman, a CPA and tax partner at MayerMeinberg LLP in Syosset, New York, says some types of plans must be established by the end of the calendar year, but they allow tax-deferred contributions until the business files its tax return for the year—which may be as late as December 15 of the following year. Each plan carries its own contribution limits and rules so it's important to compare plans in advance and find one that best suits your personal and business needs. Also remember that IRS discrimination rules require that business owners who make retirement plan contributions for themselves must also make them for any employees.
6. Consider giving your employees a bonus—if you’re incorporated. One common way businesses reward their employees—and generate tax savings—is by handing out year-end bonuses. Any bonuses over $25 per employee, however, must be counted in the employees' 2013 income, and therefore, you must pay employment taxes on them. Moreover, sole proprietors and LLCs aren't allowed to deduct employee bonuses as business expenses, and S corps and C corps must follow specific IRS rules.
7. Donate to charity. Businesses can get tax deductions for donations they make to qualified nonprofit charitable organizations. This can be an attractive way for entrepreneurs to make a difference in their community as well as reap tax savings. Instead of giving cash, many businesses choose to make “in kind” donations of their products. Boston Brewing, maker of Sam Adams beer, for example, is well known for giving out “beer donations.”
“If the business has extra inventory, they can donate some of the inventory to charity,” Markman suggests. Any donations must be made by December 31 in order to qualify for a 2013 charitable deduction. “You can’t get a deduction for thinking you want to make a charitable contribution,” Markman notes. “You actually have to get out your checkbook.”
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Photo: Cassandra Hubbart