Small Business Tax Tips for Year-End 2013
By: Barbara Weltman, author of J.K. Lasser’s Small Business Taxes 2014 (Wiley 2013)
It’s never too early, or too late, to take action that can translate into tax savings. With the clocking ticking on 2013, now’s the time to get started on your taxes.
New tax rules for 2013 and uncertainty about some tax rules for 2014 make planning challenging. Here are five helpful ideas you can use now.
1. Assess your profitability
You have to know whether you’re profitable to determine the actions you’ll take between now and the end of the year.
In the red. If 2013 is disappointing, a sad fact for many businesses, you may be able to salvage something good from your loss.
The business loss in 2013, called a net operating loss, can be carried back to offset income reported in up to two previous years (three years small businesses with disaster losses; five years for farmers).
By filing for a quick refund at the start of 2014, you will get an immediate infusion of cash from the government; you don’t have to wait until you file your return to benefit from this tax break.
In the black. If 2013 is shaping up to be a good year, congratulations! You can use the following strategies to reduce the taxes that you’d otherwise pay on your profits.
2. Set up a retirement plan
Put your profits to good use by saving taxes now and by creating a financially-secure future by setting up a qualified retirement plan, such as a 401(k) plan. You can use a 401(k) plan even if you’re the only participant.
For example, if you’re a sole proprietor with no employees and set up a 401(k) plan, you can make both “employer” and “employee” contributions to the plan (even though you’re self-employed and not an employer or an employee). For 2013, you can shelter up to $56,500 of your income in the plan if your net earnings from the business are sufficient.
Sign the paperwork with a financial institution by December 31 to create the plan; you then have until the extended due date of the 2013 income tax return to make tax-deductible contributions.
If you miss the December 31 deadline, you’ll still be able set up and fund a Simplified Employee Pension (SEP) plan for 2013 up to the extended due date of the 2013 return (October 15, 2014.)
3. Give year-end bonuses
If you can afford to give bonuses to your staff, determine now what they will be.
The bonuses, and your payroll taxes on them, are deductible. Accrual based-businesses can deduct in 2013 bonuses for rank-and-file employees declared before the end of the year as long as they are paid by March 15, 2014.
Bonus payments to employees who own more than 50% of the company, C corporation shareholders as well as payments to owners of S corporation shareholders (regardless of their ownership percentage) become deductible only when actually paid.
C corporations in manufacturing, technology, retail or wholesale businesses may want to give "qualified small business stock" as bonuses before the end of the year instead of cash. Employees who hold shares more than five years won't pay any tax on their gains.
Note: Because of the new, additional Medicare tax of 0.9% on earned income for high-income taxpayers, check for withholding requirements for employees earning more than $200,000 (including commissions and bonuses.)
4. Upgrade your equipment
Take advantage of the great write-offs allowed in 2013 for buying machinery and equipment for your business. This is your opportunity to get those new gadgets, such as tablets and smartphones, for you and your staff. Besides the usual depreciation allowance, there are two write-offs that may be used:
- First-year (Section 179) deduction of up to $500,000. This break applies for both new and pre-owned items, but you have to be profitable to benefit from this write-off.
- Bonus depreciation of 50% of the cost. This break applies only to new items, but can be used whether or not you’re profitable.
Note: Financing the purchase in whole or in part does not limit your write-off in any way. And interest on your business borrowing is also tax deductible.
5. Charitable donations
Consider sharing your good fortune by giving money, inventory, or other property on a tax-deductible basis.
There are enhanced deductions for donations of certain types of gifts, such as food inventory to certain charitable organizations. Just be sure to keep receipts and, where required, obtain written acknowledgments for the contributions you make.
Contributions via checks mailed by December 31 and credit cards charged by this date are deductible in 2013 for calendar-year businesses.
Can't afford cash donations? Consider allowing your staff to take time off this holiday season for volunteering, especially if this is a slow time for business. Your company can support a particular charity and garner favorable publicity for your good works. Your cost: employees' wages for their volunteer time, which is deductible by your company.
If you do nothing else, be sure to schedule a meeting with your tax advisor. Business owners may need tax advice for their business as well as for their personal situation in light of new tax burdens on successful people. Your advisor should help you craft personalized strategies to implement before the end of the year that will help you save more on your 2013 return.
Reprinted with permission of John Wiley & Sons, Inc. Barbara Weltman, J.K. Lasser’s Small Business Taxes 2014.
Legal Disclaimer: None of the information provided herein constitutes legal advice on behalf of Monster.