By Maureen Werther
Although the Presidential election is over, it is still too early to know what Congress will do – if anything – about overhauling the nation’s tax code.
Experts in the field recommend that individuals and small businesses consult accountants regarding year-end tax planning well in advance of Dec. 31 to ensure that they take advantage of programs and reduced their tax burden.
With the so-called “bonus” deduction of 50 percent depreciation in the federal tax laws set to expire at the end of 2012, advisers say businesses may want to consider purchasing capital equipment before the end of the year. The deduction accelerates the normal rate of depreciation that is allowed for most new capitalized assets with a recovery period of twenty years or less.
“If a business purchases a piece of equipment for $10,000, with the special bonus depreciation they can take 50 percent of it up front in the first year and depreciate the remaining 50 percent over the asset’s class life,” said Dale Mullin, CPA and partner with the accounting firm of Whittemore, Dowen & Ricciardelli, LLP.
“In some cases, you’d have to depreciate the total cost of an asset over seven years without the bonus depreciation,” he said.
Similar to the bonus depreciation is the Section 179 deduction which will be even further reduced in 2013 if Congress does not extend it. Section 179 allows the entire cost of capital equipment up to $139,000 to be expensed in the first year.
“Unless tax laws are extended, the $139,000 limit is scheduled to be reduced to $25,000.00 in 2013,” said Mullin.
Capital gains rates are also set to increase in 2013, unless the Bush era tax cuts are extended. But for now, cautions Mullin, it may make sense to take advantage of the more favorable 2012 rates.
“If someone is in a 10 or 15 percent ordinary income tax bracket and they sell something resulting in a long term capital gain, there is actually a zero percent capital gain rate until the end of the year for people in this lower tax bracket,” he said.
Mullin noted that this rate applies to individuals as well as to non-corporate businesses. Mullin said there is a new tax going into effect in 2013. The 3.8 percent Medicare contribution tax is scheduled to be imposed on passive investment income such as dividends and interest income.
“That’s another reason why people may want to look to accelerate capital gains in 2012 to avoid the additional taxes, as well as the potentially higher capital gain rates in 2013,” he said. The new tax applies to modified adjusted gross income of $250,000 or more for married couples and $200,000 or more for single or head -of-household taxpayers.
Employees should also develop strategies for using dollars in their flexible spending accounts for medical expenses. Mullin said the deadline to use this money has been extended until March 15, but cautioned that any unused dollars left in an employee’s account after that date will be forfeited and employees will lose access.
Smaller businesses without a retirement plan already in place may want to consider a Simplified Employee Pension (SEP), one of the easier plans for a business to set up, he said. The administration is also much less complicated with this type of plan, a factor that keeps costs down.
According to Mullin, “This type of plan offers a lot of flexibility, which is terrific for small business owners. An employer can elect to make a contribution one year and decide to do nothing in the next year, without incurring a penalty. And, like a 401K, businesses can take a deduction on their contributions to the plan. However, unlike the 401K, it doesn’t allow for employee contributions.”
The SEP can be set up before Dec. 31, but it is the only plan that can be funded after the year end while still allowing a deduction to be taken for the tax year. In other words, if the plan is set up in January 2013, a deduction can still be claimed in April 2013 for 2012, he said.
According to Mullin, “Retirement contributions are the only deduction that can be taken where you actually get to keep the money – the business owner is putting the money into his own account and getting a tax deduction.”
With a simple IRA – the employee can go ahead and make a contribution which the employer can then match. The business owner takes the matching contribution as a deduction, while facilitating goodwill and providing a benefit for its employees. The limit for the simple IRA is a little lower than the 401k. In 2012, that limit is $11,500 with an additional $2,500 allowed as catch-up for employees over age 50. The contribution limit typically changes yearly, indexed to inflation.
If a company already has a 401K, the maximum contribution allowed per employee in 2012 is $17,000, with an additional $5,500 catch-up amount allowed for individuals over the age of 50.
For more information, or to make an appointment for year-end tax planning with Whittemore, Dowen & Ricciardelli LLP, call 792-0918 or visit www.wdrcpa.com.