Tax reform was one of the most contentious topics in this year's election, with both personal and corporate income tax rates under scrutiny. While leaders in both parties agreed that corporate rates should be reduced from the current high of 35 percent, they differed on how to do so without further widening the budget deficit. Should foreign income continue to be taxed, and if so, how? Should deductible expenses be reduced or eliminated, and if so, which ones?
And what will be the overall economic impact when nine out of 10 businesses don't even pay corporate income taxes? Indeed, according to the Senate Finance Committee, 95 percent of all U.S. businesses are structured as "pass-through" entities, which means their income is reported on owners' personal income tax returns.
Regardless of whether you pay corporate or personal income tax on your business income, you probably know that time is of the essence when it comes to tax reform. If Congress doesn't act by Dec. 31, the nation will face the ominously and now infamously named "fiscal cliff" – the series of impending tax code and budgetary spending changes that some economists say will propel us into another protracted recession.
So what should a business owner do? Wait for Congress to act or plan now for the looming cliff? Perhaps a good move might be to plan ahead while remaining flexible enough to address last-minute changes. Following are some strategies you might want to consider.
Typically, the advice for business owners at the end of any year is to defer income to the following year to help reduce the organization's current income tax obligation. However, because individual income tax rates are scheduled to rise in 2013, this year may call for a reverse strategy. If your organization is taxed as a pass-through entity and your accounting method permits it, you may want to consider accelerating revenue into 2012 to take advantage of the current lower rates.
Similarly, owners of C corporations may want to consider cashing in on appreciated stock or paying themselves in dividends to take advantage of lower capital gains and dividend rates slated to expire at the end of the year.
Another rule-reversal move would be to consider deferring deductions and capital losses until 2013 to maximize your company's tax profile in a higher-rate environment.
There is one case where you may not want to defer deductions: If you think you'll need new office furniture or equipment in 2013, you may want to make that purchase in 2012. That's because two special provisions enacted several years ago to help spur business investment will expire at year's end.
In 2012, businesses can deduct up to $139,000 of the cost of qualified property, up to a maximum total property purchase of $560,000. (Total property purchases above that ceiling will reduce the amount of the allowable deduction.) The second provision is a special first-year bonus depreciation allowance of 50 percent of the cost of the equipment, which is not subject to the $560,000 limit. In 2013, the $139,000 and $560,000 Section 179 property-expensing limits are scheduled to plummet to $25,000 and $200,000, respectively, while the 50 percent bonus depreciation allowance will be eliminated.
Vehicle purchases also receive favorable tax treatment until the end of 2012. This is particularly true for heavy sport-utility vehicles and pickups with a gross vehicle weight rating in excess of 6,000 pounds.
Note that property must be placed into service, not merely purchased, by the end of 2012 in order to qualify.
In 2011, the Vow to Hire Heroes Act extended the Work Opportunity Tax Credit to encourage employers to hire unemployed veterans. The credit, which also expires at the end of this year, ranges from $2,400 to $9,600 depending on several factors, including length of employment and whether the veteran has a service-related disability. Note that the veteran must begin work prior to Jan. 1, 2013. For more information on hiring a veteran, visit the Department of Labor's Veterans' Employment and Training Service web page at www.dol.gov/vets/.
Although there is some risk in not waiting to see if Congress acts by year's end, these are just some of the moves you may want to make now to take advantage of current, and potentially short-lived, tax benefits. In the meantime, keep a close eye on Washington to see what legislative changes may lie ahead.
Be sure to consult your tax adviser to see how these suggestions apply to your particular situation.
• Please send any financial questions you wish to have answered in this column to Dorion-Gray Retirement Planning Inc., 2602 IL Route 176, Crystal Lake, IL 60014. You may also fax them to 815-455-4989 or email email@example.com. Paula Dorion-Gray, CFP, is a registered representative of Securities America Inc. member FINRA/SIPC.