Small Business Tax Help – Year End Fiscal Cliff
Here is an excellent article reposted here that appeared in the Orlando Finance Examinar.
There’s not much time left – so get on it on it before year end!!!
Fiscal Cliff – Things Businesses Can Do Before Year End
December 17, 2012
By: Craig Smalley
We have been discussing the fiscal cliff and how it affects individuals. However, the fiscal cliff also affects businesses. Because most small businesses report their income at the individual level, these tax hikes and phasing out of tax deductions will have a big impact on your bottom line.
If you are in business for yourself, you probably pay tax on the cash basis of accounting. What that means is that you claim income when you receive it, and you claim expenses when you pay them. However, if you make a purchase by year-end for which you finance (i.e. use a credit card), you can count those expenses on the day that you became liable to pay for them. That being said; the first thing you want to consider is buying items for your business today, that you will be using for the next three months or so. You can use your credit card to make these purchases to preserve your cash. Unless you are in retail, cash flow is horrible the last few months of the year. If you put these items on a credit card in December, wouldn’t have to pay for them until January. I am not saying go on a shopping spree and get yourself into debt. You need to make sure that you can pay off the entire balance of the card with the next bill that comes. If you have some cash, consider prepaying some expenses that you will have in January. You can prepay your rent, utilities, etc.
Are you in the market for some new equipment? Now is the time to buy. Without boring you to death, equipment over $500.00 is depreciated. Generally, what that means is that if you spend $1,000.00 on a computer in 2012, you will not be able to take an expense in full for 2012. Instead the cost of the computer is recovered (depreciated) over a period of time. For equipment you have to wait five years to recover the cost. For fixtures and furniture, you have to wait seven years. However, there is a little something in the tax code that will be reduced drastically in 2013. Code Sect. 179 of the Internal Revenue Code allows for a maximum deduction of up to $139,000.00 on equipment that you purchase in 2012. However, there is a caveat to this deduction. You have to have income to support the Sect. 179 deduction. For example, if you have net income (what you take in less your expenses) of $50,000.00, and you buy a piece of equipment for $60,000.00, you can only take a Sect. 179 deduction of $50,000.00. The remaining $10,000.00 will carry forward to the next year. If you have a net loss from your business, then you can’t use the Sect. 179 deduction. However, you can use “Bonus Depreciation.”
To muddy the waters some more, Congress enacted Bonus Depreciation. Generally, you can take up to 50% of “bonus deprecation” in the year that you purchase equipment. For example, let’s say you have a net loss of ($10,000.00), and you bought equipment worth $25,000.00. You could take depreciation of $12,500.00 on the equipment and end up with a net loss of ($22,500.00). If your business is a pass-thru or a sole proprietorship, you can use that loss to offset any other income that you may have. To use bonus depreciation, the equipment has to be new.
Section 179 doesn’t go away in 2013, but it is reduced dramatically to $25,000.00, unless Congress acts. However, bonus depreciation does go away.
If you are in a closely held business and you have Section 1244 stock (qualified small business stock), now is the time to pay a dividend. With the dividend rate set to go up in 2013, now is the time to take some of the profits and walk away.
These are just some things you can do before year end. As always, consult your tax advisor for specifics.
Craig Smalley, Orlando Finance Examiner
Craig Smalley is licensed by the Internal Revenue Service as an Enrolled Agent. He has been in practice in the Central Florida Area since 1994. Craig Smalley is a partner in the Accounting Firm Smalley & Company, P.L. He specializes in Corporate, S-Corporate, Limited Liability Company,…