N ow may be the perfect time to take advantage of the many new tax laws and changing tax regulations for closely held businesses.
Congress and the president finally got together on an extension of most of the Bush tax cuts and threw in some small business goodies as well. This article highlights possible tax advantages for closely held businesses and their owners – and some potential adverse tax laws to be aware of.
2012 tax considerations
2012 was a politically contentious year, to say the least. From that contention, however, an agreement was finally reached on a partial extension of the Bush tax cuts (The American Taxpayer Relief Act of 2012). The results: for 2013 and beyond, rates generally remain the same as in 2012 for taxpayers with taxable income under $450,000. There was further good news for 2012 available for closely held businesses to help offset some of the bad news coming down the road (such as the Obamacare taxes).
First the good news and some planning opportunities that are available as you prepare to file your 2012 tax return:
- Small businesses are allowed an increased deduction for fixed assets purchased in 2012. This includes two provisions: (1) the direct write-off of new or used purchased assets up to $500,000 (known as Section 179 expense), and (2) the 50% bonus depreciation provisions available for new asset purchases only.
- Consider funding an HSA high deductible health insurance plan that allows for HSA contributions. The advantage – health care expenses can be deducted pre-tax. An HSA is now much better than a Flexible Spending Arrangement (or FSA) account; because the FSA contributions are now limited to only $2,500 per year and must be used by calendar year end or will be lost. The 2012 funding limits are $3,100 – $7,250 depending on your age and policy coverage. HSA accounts do not have to be used. Instead the balance carries over year to year.
- Consider if you are using the correct method of accounting (accrual, cash, etc) to compute your taxable income.
- If your business has minimal or only “family” employees, consider creating a simplified employee pension fund in 2012 which would permit you to fund up to 25% of wages/owner self employment income directly into a retirement plan.
- In the event you have an operating loss, be careful to determine if you are entitled to the loss deduction. Watch for tax credits. Credits are available to offset tax liability dollar for dollar. The most popular and sometimes overlooked credits: Work opportunity tax credit; research and experimental tax credit; credit for off road use of fuel; tip credit (for restaurants); new retirement plan tax credits; energy credits; military employee tax credit; Wisconsin State jobs credits; AMT tax credits; small employee health insurance tax credit.
- Home office expenses – for self-employed individuals operating their business out of a home: consider the available deductions with respect to the portion of your home used for a business office, such as depreciation, utilities, interest, and taxes. Note that these deductions also reduce self employment tax!
Planning for 2013
- Entity Choice (often overlooked): Is your business currently a sole proprietorship or a Limited Liability Corporation (LLC)? Have you considered the potential tax benefits of an S Corporation? While wholly owned LLCs have become more fashionable, an S Corporation still provides the opportunity to save on self-employment taxes. Careful planning is required to use an S Corporation, to make sure a reasonable owner wage is set; and all appropriate payroll tax forms are prepared
- For businesses that have no employees:
- Consider a solo 401(k) plan to maximize the owner deduction into a retirement plan
- If your business only has “family” employees, consider employing your spouse, and offering your spouse a medical reimbursement plan that covers the whole family
- Consider employing your children, you may receive lucrative tax benefits as a result.
- Watch for the Obamacare taxes: For those making over $250,000, there are two new taxes this year: an additional 3.8 percent income tax on investment income and an additional 0.9 percent tax on earned income. Careful planning is required to minimize the effect of these taxes. Entity choice becomes even more important, and owner occupied real estate becomes a trap for the unwary! If you are in this situation – a trip to your tax adviser is in order.
- The health insurance mandate starts in 2014 – but the measurement period to determine which businesses are actually subject to the mandate is in 2013. The key is 50 employees – does your business have more or less? And are you close? Businesses with over 50 employees could be subject to a host of additional penalties (or taxes, according to the Supreme Court) in 2014. If you own multiple companies, be careful, you may be subject to the mandate even if each of the companies separately has less than 50 employees.
So there you have it, a compelling selection of possible 2012 and 2013 tax opportunities and traps for closely held businesses. n
Eric Trost, CPA, MST, is the leader of the SVA tax department. Joel Nettesheim, CPA, PFS, is one of the leaders of the SVA business advisory services group.
