As the fourth quarter begins, now is the time for businesses to ensure that they have taken advantage of the best available tax planning strategies for the year, particularly those scheduled for elimination or reduction after 2012. Here is a list of the top five.
Expense 100% of certain assets in 2012, before the allowance is diminished. Section 179 of the Internal Revenue Code (the “Code”) allows businesses to expense (i.e., deduct 100% of the cost of) certain business property in the 2012 tax year, up to a limit of $139,000. The property that is subject to expensing is new or used tangible personal property and off-the-shelf software placed in service by the business in 2012 (“Section 179 Property”). The expensing allowance is subject to a phase-out relating to the total cost of Section 179 Property put in service during 2012 and it is limited to the amount of taxable income received by the business during the 2012 tax year. Nonetheless, the expensing allowance does provide an attractive tax benefit in appropriate circumstances. The benefit can be maximized by taking advantage of it in 2012, as the limit is set to drop to $25,000 (subject to an inflation allowance) at the end of the year.
Take the 50% bonus depreciation in 2012, while it is still available. Code Section 168(k) allows businesses to deduct 50% of the cost of certain assets in the 2012 tax year. This essentially accelerates depreciation by allowing 50% of the cost to be deducted in the first year of depreciation. The property that is subject to the bonus depreciation allowance is depreciable property with recovery periods of less than 20 years, off-the-shelf computer software, and interior improvements to leased business premises. The property must be bought and placed in service in the business in 2012 in order to be eligible for the bonus depreciation allowance. This provision is set to expire at the end of the year.
Review and document bad debts. In the current economic climate, bad debts owed to a business can be substantial. Fortunately, the harm of certain bad debts to accrual-basis taxpayers can be mitigated by deducting them under Code Section 166 in the tax year in which they become wholly or partially worthless. In order to take the bad-debt deduction, a business must be able to establish that it was owed a debt under a valid and enforceable obligation and that the debt has become partially or wholly worthless. Due to the importance of having documentary evidence of the existence and validity of bad debt and the efforts the business has taken to collect them, it is a good idea to review your bad debts as the end of the year approaches and verify that you have appropriate documentation or take action to obtain it.
Revisit your business’s tax classification. For tax purposes, your business is classified as a sole proprietorship, a partnership, a C corporation, or an S corporation, depending on how the business is formed and whether it makes certain elections. Each classification is subject to different laws governing how businesses, or their owners, are taxed, and each has its own benefits and drawbacks. The classification that is the best fit for a business at one point in its life may not be at other points; another classification may be better. Fortunately, businesses are not locked into their original classifications based on the circumstances that existed when they were formed, and it is possible for businesses to change their classification by submitting certain filings to the IRS or by engaging in certain types of transactions. Revisiting your business’s tax classification with your tax advisors from time to time helps ensure that your business is being taxed in the most advantageous manner. Because the beginning of a tax year is often the optimal time for a change in classification to take effect, it is important to engage in the review sufficiently in advance of the new year to allow for timely filings, structuring and consummating any necessary transactions.
Take advantage of deductions for retirement plan contributions. Making contributions to tax-favored retirement savings vehicles can yield more than one benefit. They can help business owners save for their own retirement in a tax-efficient manner while simultaneously resulting in a deduction for the contributing business. There are a number of tax-favored retirement plans, each of which has its own characteristics, but which allow the contributing business to take a deduction for at least some of the contributions. The plans include qualified plans, such as 401(k) and profit-sharing plans, as well as simplified employee pensions, and SIMPLE IRAs. Maximizing contributions to provide for the maximum allowable deduction can help reduce your business’s taxable income for the year while simultaneously providing for retirement security in a tax-efficient way.
For more information please contact Jeremy T. Garner at 410-583-2400 or firstname.lastname@example.org.