Prepare for the Tax Man

There are some important changes to understand when it comes time to pay Uncle Sam for the year just ending.

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We like to think of the end of the year as a festive occasion, but it’s something else, too: the opening to tax season.

As you get ready to file your 2013 tax returns, neither you nor your financial advisor should forget about some specific provisions that will ensure you get the maximum savings allowed on your 2013 bill. And although you might not be happy about it, you also will need to know about changes that could increase your bill as well.

If you’re reading this before New Year’s Eve, you may still have time to take some actions that can benefit your operation’s overall tax picture.

To review the most important issues that are likely to affect your taxes for 2013, I spoke with attorneys John Barry and Patricia Hintz. Barry and Hintz, who specialize in tax-related matters, are partners with Quarles & Brady, a Milwaukee-based corporate law firm with experience in a wide range of business areas.

As always, this column alone never substitutes for advice from a legal and financial professional who has a direct relationship with your business. If you don’t already work with a business lawyer, certified public accountant or other qualified professional to keep your business at its best, it’s long past time for you to seek out that assistance.

Equipment expenses

If your business made some substantial investment in new equipment, right now, 2013 is officially the last year that two particular provisions will be in place that could save you significant amounts of money.

The first is what tax pros call “Section 179 expensing.” That refers to a special provision allowing companies to take a tax deduction for new equipment all at once in the year it is bought, rather than having to spread the deduction over several years as the asset depreciates.

If your business bought new equipment in 2013 – and if your total purchases of equipment for the year did not exceed $2 million – you can deduct up to $500,000 of those purchase costs in their entirety on the 2013 taxes, Barry says.

If you’ve spent more than $500,000 on equipment, there’s an alternative break available above that threshold. It’s called “bonus depreciation.”

Barry explains that even if you can’t take the immediate deduction on the whole purchase that you can under the Section 179 provision, under bonus depreciation you can deduct immediately 50 percent of the cost of new equipment.

Next year, bonus depreciation is scheduled to go away completely, and the cap for the Section 179 provision would revert back to $25,000 from $500,000. It’s possible that Congress will renew both of those breaks; the lawmakers have often done that with popular tax provisions, and they could even do it retroactively later in 2014. But you can’t count on that, Hintz and Barry note.

Built-in gains tax

Another timely provision affects only businesses that have changed their corporate status in a particular way in the last decade or less: those that have converted from “C” corporations to “S” corporations.

Under the usual rules, an S corporation that converted from C in the last 10 years, then is sold to new owners, could have been “subject to a double tax when you sell the assets of the business,” Barry says. To avoid that, the converting company would have had to wait 10 years after the conversion before it was sold to a new owner, in order to avoid two levels of taxes on the sale, he continues.

That waiting time was shortened a few years ago to five years. But that provision expires at the end of 2013, when the rules will revert to the old standard.

“If you know you may want to be selling the company in the next year, you may want to sell at the end of 2013 before the waiting time goes to a 10-year period,” Barry says.

This particular issue, however, only affects operations that have converted from C corporations to S corporations in the relevant time period. Many operations in the service plumbing or septic pumping business are either LLCs or they have always been S corporations and so aren’t affected.

But if yours is one of those businesses that converted to an S from a C, you’ll want to make sure you understand this provision – especially if you hope to sell the business.

It’s personal

Your personal taxes are also affected by your business. For one thing, if your business is an S corporation or an LLC, the income all flows to your personal bottom line to be taxed. And as a result of Congressional action early in 2013, that bottom line is going up for the wealthiest taxpayers.

Since 2001, the highest marginal federal tax rate has been 35 percent of income. In early 2013, however, Congress agreed to raise that to 39.6 percent for those people with an adjusted gross income (AGI) of more than $400,000 if filing singly and $450,000 if married and filing jointly.

Those same taxpayers will also pay more taxes on the profit from the sales of investments – commonly called capital gains. Capital gains tax rates have been at 15 percent for everyone; they will go up to 20 percent for the over $400,000/single, $450,000/married earners.

Two other provisions also raise taxes on the wealthiest – and in fact could push some people into those higher 39.6 percent categories.

For people whose AGI is more than $300,000 if married and filing jointly or $250,000 if single, itemized deductions will be reduced by 3 percent of their AGI. (The reduction is capped at 80 percent of the itemized deductions, though.) Affected deductions include those on mortgage interest, state and local taxes, and contributions to charity, among others.

Certain deductions – on investment interest expense, casualty losses, medical expenses or gambling losses – will not be affected by the reduction, however, Hintz says. (Also, deductions not taken on Schedule A of the Form 1040 income tax form are not affected, she says – so, for instance, deductions would not be reduced for business expenses that an independent contractor claims on Schedule C.)

The personal exemption is also phased out, starting with taxpayers with an AGI of more than $300,000 (married/joint) or $250,000 (single). For married taxpayers with an AGI of $422,500 and single ones with an AGI of $372,500, the personal exemption is completely eliminated.

Health reform

The 2010 Patient Protection and Affordable Care Act takes full effect in 2014, and in the interim, some new tax-related provisions have been kicking in.

Hintz says a “Medicare surtax” of 0.9 percent on wages for people with an AGI of more than $250,000 (joint) and $200,000 (single) began in 2013.

Employers should make sure they have complied with this rule if they have any employees in those high brackets. Payroll services and bookkeeping software should reflect that change for calculating the withholding of highly paid employees.

But if your business pays you (or any individual employee) over those thresholds and you have not been withholding, get ready not just for an additional payment on your tax return – but a penalty as well.

Another ACA-related change doesn’t directly affect your taxes, but if you pay employees and issue W-2s, it will affect that process. The law requires, beginning with 2013, that employers providing health benefits to workers list on their W-2 the dollar value of those benefits. The benefits and their value are not taxable, but the information is deemed important for employees, Hintz explains.

But ACA has provided some additional tax benefits to business owners, Hintz noted.

Since 2010, small businesses with 25 or fewer full-time-equivalent employees and providing health insurance to their workers have gotten a tax credit on the insurance premiums.

A tax credit, she notes, is different from a tax deduction, because while a deduction lowers your income for tax purposes, a credit actually takes money off of your business tax bill.

For 2013, the credit for qualifying employers is 35 percent of the money they paid for employee health insurance premiums. In 2014, the credit rises to 50 percent – but with a restriction: Only insurance plans purchased through the Small Business Health Options Marketplace will qualify for that credit.

One other element of the ACA that has worried some employers has been the requirement for companies with 50 or more full-time equivalents to provide health insurance or pay a penalty. The penalty, however, has been delayed one year until Jan. 1, 2015, Hintz pointed out. And it doesn’t affect employers with fewer than 50 full-time workers in any case.

Forewarned, forearmed

There may be other particular tax changes that affect your unique circumstances. That’s why, as noted earlier, it’s critical for any business to have access to a top accounting and financial professional to whom it can turn for advice and help. But if you get on top of your tax returns now, you’ll be that much more prepared for the year ahead.



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