Tools for small businesses: Time for a year-end tax check-up

Small business owners, if you haven’t already done so, now is the time to conduct a year-end tax check-up. With just over a week until the election and about two months until 2013, many tax law changes are still up in the air. Several provisions are set to expire while other new provisions are scheduled to go into effect. What makes tax planning especially challenging this year is not knowing whether Congress will act on these scheduled changes.Here are a few to consider.

Qualified Dividends

The qualified dividend rate is set to expire in 2013. That means that a qualified dividend that will be taxed at a federal income tax rate of 15% this year, will be taxed at the taxpayer’s highest marginal income tax rate. That top rate is scheduled to be 39.6% in 2013.  In addition the dividendmay be subject to the additional 3.8% Medicare surtax on high income earners for a combined rate of 43.4% before considering the state income tax implications.If you have a closely held C corporation or an S corporation with earnings and profits, strongly consider declaring and paying a dividend before the end of the year.

Business Structure

It may be time for new and existing small businesses torethink choice of entity. Electing S corporation may benefit your business if the following discussed changes go into effect:
• Increase of Medicare taxes on high income earners
• Increase in the tax on self-employment earnings in excess of $250,000, which could include income from businesses organized as partnerships or LLCs treated as partnerships for federal income tax purposes

Business Asset Expensing

Another taxpayer favorable provision scheduled to be reduced is the Section 179 deduction, which will be reduced from $139,000 in 2012 to $25,000 in 2013 if Congress doesn’t act. Purchases of tangible personal property (including software) that are used at least 50% for business may qualify for the Section 179 and be currently expensed.

Additionally, the current 50% bonus depreciation provision is only effective through the end of 2012.  Qualifying property must be purchased and used this year and meet one of the following eligibility requirements:

• Modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less
• Water utility property
• Off-the-shelf computer software
• Qualified leasehold property

Original use of the qualifying property must begin with the taxpayer claiming the bonus depreciation.  Although income tax rates are scheduled to rise, the current opportunity to expense purchases of fixed assets may still outweigh the benefit of deductions over time.

To learn more about how the proposed 2013 tax changes could affect your small business, speak to a financial professional.

Louis Balbirer, CPA, MST, is a director of tax services with Kaufman Rossin, one of the top CPA firms in the country.  He has 20 years of experience providing tax and accounting services to clients. Louis can be reached at lbalbirer@kaufmanrossin.com.

Read about this year-end tax check-up article at miamiherald blog.