Our Accounting Articles
Timing Business Income and Expenses to Your Tax Advantage
Typically, it’s better to defer tax. Here are two timing strategies that can help businesses do this:
- Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
- Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
But if you think you’ll be in a higher tax bracket next year, consider taking the opposite approach — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.
These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.
© 2014 Thomson Reuters/Tax & Accounting
BEWARE: AMT Triggers Could Boost Your Tax Bill
A fundamental tax planning strategy is to accelerate deductible expenses into the current year. This typically will defer — and in some cases permanently reduce — your taxes. But there are exceptions. One is if the additional deductions this year trigger the alternative minimum tax (AMT). This is a separate tax system that limits some deductions and doesn’t permit others. Here are some deductions that can be AMT triggers:
- State and local income tax deductions,
- Property tax deductions, and
- Miscellaneous itemized deductions subject to the 2% of adjusted gross income floor, such as investment expenses and unreimbursed employee business expenses.
But deductions aren’t the only things that can trigger the AMT. So can certain income-related items, such as:
- Incentive stock option exercises,
- Tax-exempt interest on certain private activity bonds, and
- Accelerated depreciation adjustments and related gain or loss differences when assets are sold.
Fortunately, with proper planning, you may be able to avoid the AMT, reduce its impact or even take advantage of its lower maximum rate. If you’re concerned about any of these triggers or would like to know what else might trigger the AMT, please contact us. We can help you determine the best strategies for your situation.
© 2014 Thomson Reuters/Tax & Accounting
Self-employed? Save More By Setting Up Your Own Retirement Plan
Set up your own retirement plan
If you’re self-employed, you may be able to set up a retirement plan that allows you to make much larger contributions than you could make as an employee. For example, the maximum 2014 employee contribution to a 401(k) plan is $17,500 — $23,000 if you’re age 50 or older. Look at how the limits for these two options available to the self-employed compare:
- Profit-sharing plan. The 2014 contribution limit is $52,000 — $57,500 if you’re age 50 or older and the plan includes a 401(k) arrangement.
- Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum future annual benefit toward which 2014 contributions can be made is generally $210,000. Depending on your age, you may be able to contribute more than you could to a profit-sharing plan.
You don’t even have to make your 2014 contributions this year. As long as you set up one of these plans by Dec. 31, 2014, you can make deductible 2014 contributions to it until the 2015 due date of your 2014 tax return. Additional rules and limits apply, so contact us to learn which plan would work better for you.
© 2014 Thomson Reuters/Tax & Accounting
Donating Appreciated Stock Can Offer Substantial Tax Benefits
Are you planning to make charitable donations before year end? Do you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit? Then consider donating it to charity rather than making a cash gift.
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it, you can both avoid the capital gains tax you’d pay if you sold the property and deduct its current fair market value.
Let’s say you donate $10,000 of stock that you paid $4,000 for, your ordinary-income tax rate is 33% and your long-term capital gains rate is 15%. If you sold the stock, you’d pay $900 in tax on the $6,000 gain. If you were also subject to the 3.8% net investment income tax (NIIT), you’d pay another $228 in NIIT. By instead donating the stock to charity, you save $4,428 in federal tax ($1,128 in capital gains tax and NIIT plus $3,300 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,300.
If you are charitably inclined or would like to minimize taxes related to your investment portfolio, we can help find the strategies that will best achieve your goals.
© 2014 Thomson Reuters/Tax & Accounting
Maximizing Depreciation Deductions in an Uncertain Tax Environment
For assets with a useful life of more than one year, businesses generally must depreciate the cost over a period of years. Special breaks are available in some circumstances, but uncertainty currently surrounds them:
Section 179 expensing. This allows you to deduct, rather than depreciate, the cost of purchasing eligible assets. Currently the expensing limit for 2014 is $25,000, and the break begins to phase out when total asset acquisitions for the year exceed $200,000. These amounts have dropped significantly from their 2013 levels. And the break allowing up to $250,000 of Sec. 179 expensing for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.
50% bonus depreciation. This additional first-year depreciation allowance expired Dec. 31, 2013, with a few exceptions.
Accelerated depreciation. This break allowing a shortened recovery period of 15 — rather than 39 — years for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.
Many expect Congress to revive some, if not all, of the expired enhancements and breaks after the midterm election in November. So keep an eye on the news. In the meantime, contact us for ideas on how you can maximize your 2014 depreciation deductions.
© 2014 Thomson Reuters/Tax & Accounting
Watch Out For The Wash Sale Rule!
If you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2014 tax liability.
But if you want to minimize the impact on your asset allocation, keep in mind the wash sale rule. It prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.
Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:
- Immediately buy securities of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
- Wait 31 days to repurchase the same security.
- Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss; then wait 31 days to sell the original portion.
For more ideas on saving taxes on your investments, please contact us.
© 2014 Thomson Reuters/Tax & Accounting