Congress could pass some laws that retroactively reinstate the higher limits, as the House voted late last week to extend a handful of tax laws, which included making the Section 179 expensing provisions permanent. However, the bill still has to pass the Senate, and the White House has expressed disagreement to making the provision permanent. Considering it is an election year, it is likely we will not see any final votes until after November.
Meanwhile, what is a business to do to improve their tax situation? Consider cleaning house. Like individuals, businesses can donate property or business inventory to federally-approved 501(c)(3) organizations for a tax deduction. Donations are evaluated and deducted based on their fair market value. The property must be in good condition to qualify. Many organizations provide guidelines for establishing the fair market value of used property. Deductions are generally limited to 50 percent of adjusted gross income for individuals, partnerships and S corporations, while C corporations are limited to 10 percent of taxable income.
Business owners may also consider installment sales of property or real estate. Instead of receiving full payment at the time of the sale, the business would receive payments over the course of several tax years. Therefore, deferring the taxation of a portion of the income and capital gain to later years. An installment sale may help a business owner sell his business more readily. While the installment sale treatment is automatic, businesses should consult a C.P.A. and attorney to ensure the sale is structured correctly to account for interest charges that may apply and that gift tax liability isn’t incurred for property that sold for less than its fair market value.
Moreover, businesses should make a mid-year examination of the areas where the IRS is focusing their audits: the taxation of tips and service charges; the misclassification of employees as independent contractors; and issues commonly encountered with pass-through firms, such as S corporations, partnership and sole proprietorships — especially if the business is a cash-intensive business.
As of Jan. 1, 2014, business owners also have to contend with new regulations governing when they must capitalize and when they can deduct expenses for acquiring, maintaining, repairing and replacing tangible property, meaning business cannot just “write off” major repairs. While the regulations are more taxpayer friendly, retail, manufacturing, hospitality and utility industries are particularly affected.
Business owners should make an appointment with their C.P.A.s to make sure they are on track with their taxes this year. At mid-year, business owners can still make adjustments to prevent any surprises when their returns are due.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.