By: Bruce Legawiec, CPA, Partner
Many businesses have enjoyed a more profitable year in 2013. This is good news, but this then results in some tax filing issues. Some post year end strategies to consider are as follows:
- Section 179 deduction- if your business purchased new equipment in 2013 an election can be made to take a deduction of up to $500,000 to reduce income. Also, certain "qualified" real estate qualifies for a $250,000 deduction.
- Contributions to retirement plans - the beauty of most retirement plans, including IRA accounts, is that the contribution can be made after year end. "Qualified" retirement plan contributions can be made by the filing date of the return, including extensions, but IRA contributions must be made by April 15.
- Remember to file an extension - if tax is owed but you don't have the cash to pay the tax it is still critical to file an extension. If an extension is not filed, a penalty may apply of up to 25% of the tax due.
New tax proposals - President Obama released his budget proposal for 2015 and House, Ways and Means Chair Dave Camp has released the proposed "Tax Reform Act of 2014." While there are many differences, here are some similarities. This "may" provide some insight as to what to expect.
- Reduction for C corporation tax rates. Obama proposal is 28% and Camp is 25%. The current maximum rate is 38%.
- Permanently extend the Section 179 expense deduction for small business. Obama proposal is $500,000 deduction while Camp is limited to $250,000. Section 179 deduction limit for 2014 is currently limited to $25,000.
- Self-employment tax to be expanded. Many business (S corporations and LLC's) pay a reduced amount of self-employment tax via various wage strategies. Both proposals would expand the determination as to what is considered self-employment income and thus resulting in more SE tax.
- Significant change to 1031 like-kind exchanges. This has been a popular way to defer tax on the sale of real estate. Obama proposal would limit the deferral to $1 million of gain, where the Camp proposal totally eliminates the deferral.
- Reduction in the value of itemized deductions for high income taxpayers. A criticism of the current tax system is that the high income taxpayers (35% and 39.6% tax brackets) get a larger dollar value tax reduction than a lower tax bracket taxpayer. Obama would limit the benefit to 28% and Camp would set the limit at 25%.
To quote Arthur Godfrey, "I am proud to be paying taxes in the United States. The only thing this is.... I could be just as proud for half the money." Don't pay more than you legally have to, take advantage of tax saving strategies.
Bruce Legawiec is a certified public accountant with Osborne Rincon CPA's in La Quinta. He can be reached at (760) 777-9805 or blegawiec@osbornerincon.com.