Between now and year-end the best investment you can make in your business is some extra face time with your accountant or CFO to talk taxes. Yes, growing revenue is Job No. 1, but right now taxes deserve to be 1a. Potentially big federal tax changes that would kick in January 1 could boost your tax bill.
Granted, it's anyone's guess exactly what 2013 taxes will be. Congress has less than two months to decide what to do about the expiring Bush tax cuts. But this much we do know: Current tax rates will expire at year-end. We just don't know what the new rates will be. And the mere possibility of rising rates is worth huddling up with your tax pro today to discuss some potential tactical moves.
Year-end tax strategies for entrepreneurs fall into three categories:
1. Cashing in.
If you want to sell your business (or a piece of it) before potential tax hikes hit in 2013, know your best options.
2. Maximize your investing tax breaks.
With higher tax rates looming as a real possibility, it's time to stop groaning about bandwidth issues and take the time to make sure you're nailing all the tax-smart investing strategies.
3. Accelerate key payouts and spending before the end of this year.
Potentially higher tax rates -- and the scaling back of an entrepreneur tax break -- is an argument for shifting key expenses into this calendar year. Specific strategies follow:
Cut the bonus check in December. If Congress were to just let the Bush tax cuts expire, the top income tax rate will rise from 35% today to 39.6%.There is also a new 3.8% Medicare surtax (part of the Affordable Care Act) that kicks in next year for higher-income households. The surtax is only charged on net investment income. If you have none, no tax. If you do have net investment income, you still might not owe the extra 3.8% tax. The surtax is levied on the lesser of: your net investment income or the amount your modified adjusted gross income (MAGI) -- salary, plus investment income -- is above $200,000 ($250,000 for married couples filing a joint tax return.) If your MAGI is below those thresholds, you won't pay the surtax. Now if you do fall into the surtax's grip you could see your tax top rate climb from 35% this year to 43.4% in 2013 (39.6% + 3.8%). That's a pretty clear argument for pushing as much income as possible into this year. For highly compensated employees -- or married employees where you've got an inkling household income may be pushing those thresholds -- paying out a bonus this year guarantees they will pay a maximum rate of 35%. Pay it out in January and they could be hit with a higher tax bill.
Accelerate dividend payouts. If you pay yourself and shareholders an annual dividend, consider accelerating a 2013 payment into 2012. As you know, the current maximum tax rate on qualified dividends is 15%. Another expiring tax law would mean that come 2013 dividends will revert to the old (pre-Bush tax cut) system that taxed dividends as ordinary income. Again, that could be as much as 43.4% next year.
Invest in capital upgrades. Under Section 179 tax law you can deduct up to $139,000 for new or used equipment and machinery purchased in 2012. Next year -- barring a Hail Mary from Congress -- the limit plummets to $25,000. And the 50% bonus first year depreciation you can claim in 2012 is scheduled to disappear entirely in 2013. This is an additional tax break that kicks in if you reach the Section 179 limit. Bottom line is that if you can swing the expense, you'll get some valuable tax breaks on equipment purchases made this year. Next year? Who knows. Stay tuned.
The original "Tax Moves to Make Before 2013" article can be seen here.