Herzlich writes the Small Business column in Newsday.
Tax planning may not be on your radar as year-end approaches, but it should be.
Some key provisions are set to expire Dec. 31, and the dollar limit for the popular Section 179 deduction on new or used equipment is scheduled to drop dramatically.
So before you ring in the new year, re-evaluate your tax strategy to optimize your deductions for the coming year.
"It's a last licks approach to using some of the great tax breaks we currently have," says Barbara Weltman, a Vero Beach, Fla.-based small business tax specialist and author of "J.K. Lasser's Small Business Taxes 2014" (Wiley; $22.95). "We're unsure if Congress will extend them, especially given the current uncertainty going on in Washington."
Equipment deduction: For one, the Section 179 deduction, which allows businesses an immediate deduction of up to $500,000 of the total cost of new or used equipment in the year it's purchased, rather than depreciating it over time, will drop to $25,000 next year, says Weltman. The deduction currently has a $2-million cap on annual purchases before the deduction limit declines; the cap will be $200,000 next year unless Congress intervenes.
Larger businesses with purchases exceeding $2 million can now take advantage of a 50 percent bonus depreciation deduction up front on eligible new assets, Weltman explains. That also expires Dec. 31 unless extended, she says.
This deduction would apply to equipment, furniture, fixtures and qualified leasehold improvements, says Jill Schneider, tax director at MayerMeinberg LLP, a Syosset-based accounting firm.
You can take the bonus depreciation no matter what your income is, she explains. But you cannot take the Section 179 deduction if by doing so it creates a taxable loss for your business, she notes.
Another change is the recovery period for leasehold improvements, says Schneider. In 2013, qualified leasehold improvements are depreciable over 15 years, she says. Next year, that will jump to 39 years.
R&D, hiring provisions: Two other expiring year-end provisions: the Research and Development credit, which allows a business to write off 20 percent of qualified research expenses, and the Work Opportunity Tax Credit, which ranges from about $2,400 to $9,600 for hiring targeted groups such as veterans.
"They usually extend the R&D credit every year," says Thomas Butler, partner in charge of tax services at Grassi & Co. in Jericho, noting that in the last couple of years lawmakers have done it after the year-end.
As for the other provisions, there's no crystal ball on whether they'll be extended, he notes.
"The sunset provisions are a problem," says Butler. "Instead of making some of these permanent in the tax code, every year you have to wait and see if Congress extends them and it creates havoc in tax planning."
But there's no question that if businesses need to purchase equipment, they should take advantage of the Section 179 deduction this year, says Butler.
That's exactly what Joseph Crook, vice president at Star Communications, did. The Hauppauge-based marketing, printing and mailing company made a "high six-figure purchase" of a 10-color printing press in May, says Crook.
"We made that purchase somewhat with that [Section 179] deduction in mind," he says. "It wasn't the only reason, but it certainly got us moving."
Also, with employee bonuses coming up, you might consider giving stock instead of cash.
If you have a C-corporation involved in technology, manufacturing, wholesale or retail that issues qualified small business stock before the year-end, the shareholder would benefit from a 100 percent exclusion on any capital gain realized from its sale as long as it's held more than five years, says Weltman. That exclusion will drop to 50 percent next year.
Seven years: Time recommendedto keep business records and receipts
Source: Jill Schneider, MayerMeinberg LLP