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Year-End Tax Planning, Part 2

I previously compiled a list of year-end tax planning strategies for individuals.

Here is a list of year-end strategies for businesses and business owners:

1.   Businesses should consider making expenditures that qualify for the business property expensing option.

Code sec. 179 expense: For tax years beginning in 2010 and 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000, and a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax year beginning 2012, the dollar limit will drop to $125,000 and $500,000 (both indexed for inflation) respectively, and expensing won’t available for qualified real property. Keep in mind, Sec. 179 deductions are limited by net income, thus, they cannot be used to create a tax loss.

Bonus depreciation: Property that does not qualify for an immediate tax write off under the Sec. 179 may qualify for bonus depreciation. Unlike the Sec. 179 deduction, there are no restrictions on the amount of qualifying property and there is no taxable income limit. The deduction is 100% of the cost for qualified property purchased and placed in service during 2011. This first year write off won’t be available next year (2012) unless Congress acts to extend it.

2.   Businesses that hire qualifying workers (such as certain veterans) before the end of 2011 can claim a credit up to 40% of the first $6,000 in wages paid to each such employee.

3.   Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post 2011 expenditures unless Congress extends the credit.

4.   If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

5.   If you own an interest in a partnership or S corporation, and the business incurs a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss. These rules can be complicated,  and you should consult with your tax adviser.

6. Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

Again, we recommend that you always, see a professional when considering tax planning strategies for your situation. There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

Year End Tax Planning Time!

As the end of 2011 approaches, it is a good time to start year-end tax planning to minimize your individual and business taxes.

Here is a list of Year – end strategies for individuals:

  1. Realize losses on stock while substantially preserving your investment position. For example, you can sell the original holding at a loss, then buy back the same securities at least 31 days later.
  2. Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year. However, in some cases, it may pay to actually accelerate income into 2011 if a person’s marginal tax rate is much lower this year than it will be next year.  Bush tax cuts apply through 2012. If Congress does not act rates will go up in 2013.
  3. Consider using a credit card to prepay expenses that can generate deduction for this year.
  4. Estimate the effect of any year-end planning moves on the AMT for 2011 keeping in mind that many tax deductions allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction of property taxes, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. As a result, in some cases if you pay Alternative Minimum Tax, these deductions should not be accelerated.
  5. If you believe a Roth IRA is better than a traditional IRA, and wish to remain in the market for the long term, consider converting all or part of your traditional IRA to a Roth IRA. Keep in mind, however, that such a conversion will increase your taxable income for 2011. If you are expecting a business loss in 2011 that could offset the income realized on the Roth conversion, your tax consequences may be minimal.
  6. If you are a homeowner, make energy saving improvements to the residence. You may qualify for a tax credit.
  7. If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by your IRA trustee.  This is more tax efficient than taking the IRA distribution in cash then making a cash contribution.
  8. Purchase qualified small business stock (QSBS) before end of this year. There is no tax on gain from the sale of such stock if it is purchased after September 27, 2010 and before January 1, 2012, and held for more than five years.

Although I have covered a number of topics in this blog, I did not address every issue.  We recommend that you always, see a professional when considering tax planning strategies for your personal situation.  There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

2010 Tax Relief Act – Bonus Depreciation and Section 179 Expense

Bonus depreciation: 2010 Tax relief Act extended bonus depreciation through December 31, 2012. The Act also increases 50% bonus depreciation to 100% for qualified assets (must be new property) acquired and placed in service after September 8, 2010, and before January 1, 2012. Unlike Code Sec. 179 expense, it is not limited to use by smaller business or capped at a certain dollar level.

BONUS DEPRECIATION-Effective dates and limitations
Asset placed in service Bonus amount
January 1, 2008-September 8, 2010   50%
September 9, 2010-December 31,2011 100%
January 1,2012-December 31,2012   50%

 Code Sec. 179 expense: Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 deduction  limits to $500,000 for businesses with total asset purchases of $2 million or less for tax years beginning in 2010 and 2011. The 2010 Tax relief act sets the maximum Sec. 179 expense for 2012 at $125,000 for companies purchasing up to $500,000 in eligible assets. Both amounts are indexed for inflation. For tax years beginning after 2012, the Act resets Sec. 179 expense amounts at $25,000 with a $200,000 total acquisition limitation, and the reset amounts are not adjusted for inflation.

§179 Expense
For Taxable years beginning in Deduction Limit Total Acquisition Limit
2009 $250,000 $800,000
2010 $500,000 $2,000,000
2012 $125,000* $500,000*
2013 $25,000 $200,000
*Indexed for inflation    

 Other important issues relating to bonus depreciation and Code Section 179 deduction:

Section 179 deductions are limited by net income, thus, it cannot be used to create a tax loss.  Used equipment qualifies for Section 179, but is not eligible for bonus depreciation.  Bonus depreciation can be used to create a tax loss.  Section 179 and bonus depreciation can be used in tandem when circumstances permit.

To see more examples of qualified property eligible for bonus depreciation, see my blog from October in the Archives which discusses qualified leasehold improvement, restaurant and retail properties

2010 Tax Relief Act – Payroll Tax Cut

On December 17, 2010, the Tax Relief , Unemployment Insurance Reauthorizations and Job Creation Act of 2010 (2010 Tax Relief Act), was signed by President Obama. The 2010 Tax Relief Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years. The bill also provides for an AMT “patch”, a one year payroll tax cut, bonus depreciation for 2011 and 2012, a top federal estate tax rate of 35 percent with a $5 million exclusion, and more.

For most individuals , the most immediate impact of the new law will be  the payroll tax cut and  the extension of the reduced individual income tax rates.

The 2010 Tax Relief Act reduces the Social Security (FICA) portion of payroll taxes collected from employees and self-employed individuals from current 6.2 percent to 4.2 percent for 2011 only.  So what does this mean in real dollars?

If you earn the maximum amount of $106,800 that is subject to FICA tax, you will save $2,136 next year. Anyone earning less will save 2 percent of wages or net self–employed income.  See your tax professional with any questions you may have regarding the new legislation.

No more federal tax deposit coupons (Form 8109-B) after 2010

IRS has issued proposed regulations which will eliminate the use of paper-based federal tax deposit coupons after 2010.

Under current regulations, taxpayers whose aggregate annual deposits exceed $200,000 must generally use electronic funds transfer (EFT) to make federal tax deposits. Depositors not currently required to use Electronic Federal Tax Payment System (EFTPS) for deposits may instead use the paper-based FTD coupon system to make a deposit by presenting a check and a federal tax deposit coupon to a bank teller at one of the financial institutions authorized as a government depository or a financial agent.

The proposed regulations require all deposits of the following federal taxes to be made via EFTPS beginning January 1, 2011:

–          Corporate income and corporate estimated taxes;

–          Unrelated business income taxes of tax exempt organizations;

–          Private foundation excise taxes;

–          Taxes withheld on nonresident aliens and foreign corporations;

–          Estimated taxes on certain trusts;

–          FICA taxes and withheld income taxes;

–          Nonpayroll taxes, including backup withholding;

–          Federal Unemployment Tax Act (FUTA) taxes; and

–          Excise taxes reported on Form 720, Quarterly Federal Excise Tax Return.

Some business paying a minimal amount of tax can, however, continue to make their payments with the related tax return, instead of using EFTPS.

The proposed regulations are expected to be finalized by the end of this year.

In early January we will send our business tax update letter to all business clients.  We will also post this update on our website.  If you are not already using the EFTPS system for tax deposits, watch for important information regarding this change in Treasury Department policy in our annual letter.

Expense Qualified Real Property up to $250,000 in 2010 and 2011

The Small business Jobs Act of 2010, for the first time, allows first year expensing of certain real property. For any tax year beginning in 2010 or 2011, a taxpayer may elect to expense up to $250,000 of qualified real property.

The qualified property must be depreciable, acquired for use in the active conduct of a trade or business, and cannot be certain ineligible property (i.e., used for lodging ,  used outside the U.S., used by governmental units, foreign persons or entities, and certain tax-exempt organizations, air conditioning or heating units).

There are three types of qualified real property:

     1.   Qualified leasehold improvement property: Qualified leaseholder improvements include any improvement to the interior of non –residential building if:

–          The improvement is made pursuant to a valid lease

–          Such portion is occupied exclusively by the lessee or sublessee (not common area)

–          The improvement is placed in service  more than 3 years after the date the building was first placed in service

            A lease between relate d persons does not qualify (i. e., a lease between a taxpayer and his more than 50% owned business).

     2.   Qualified Restaurant Property: Qualified restaurant property includes a building or an improvement to a building if more than 50%of the building’s square footage is devoted       to preparation of, and seating for on-premises consumption of, prepared meals. 

     3.  Qualified Retail Improvement Property: Qualified retail improvement property means any improvement to an interior portion of a building which is nonresidential real property if:

–          Such portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and

–          Such improvement is placed in service more than 3 years after the date the building was first placed in service.

Qualified retail improvement property, like qualified leasehold property, may NOT include: any enlargement of the building, any elevator or escalator, any structural component benefitting a common area, or the internal framework or structure of the building.

Taxable Income Limitation: The amount of Section 179 expense is limited to the business’s taxable income for the year. Any disallowed expense is carried forward. Disallowed Section 179 expense attributable to qualified real property cannot be carried over to a tax year beginning after 2011. Any expense carryforward that cannot be used in 2011 will be treated as property placed in service at the beginning of 2011, and will be depreciated through the property’s useful life.

As always, please see your tax professional for guidance on your circumstances.

Late Filing Penalties Increase for Failure to File a Partnership or S Corporation Return

For many years the penalty for failure to file a federal partnership return was $50 per partner per month for a maximum of 5 months. Over the last couple of years, similar penalties have been extended to S Corporations, and the penalty rates have been creeping up.

The current federal penalty rate is $89 per partner or shareholder per month for a maximum of 12 months. The Worker, Homeownership, and Business Assistance Act of 2009 includes a provision to increase the penalty again. The new penalty rate will be $195 per partner or shareholder per month for a maximum of 12 months for a tax year beginning after December 31, 2009. The maximum penalty now will work out to $2,240 per partner or shareholder. This provision is projected to raise over $1.2 billion over the next 10 years.

Recently signed California legislation, SB 401, also increases the partnership late filing penalty and adds a new late filing penalty for S corporation returns. The FTB assesses the late filing penalty if a partnership or LLC, treated as a partnership, files a late or incomplete return. The current late filing penalty is $10 per partner, for each month or fraction of the month the return is late or incomplete, to a maximum of five months. Beginning with returns required to be filed after January 1, 2011, the penalty will increase to $18 per partner or shareholder for a maximum of 12 months.

U.S. Taxpayers Working Abroad

You may be surprised to learn that even though you may move out of the country, and work abroad, you are still required to pay taxes. Every year you will need to file a tax return reporting your worldwide income, even if you have already paid taxes on the income in the country you are living in. The good news is if you meet one of the following tests, you may elect to exclude up to $91,400 (for 2009) of foreign earned income from taxable income.

  1. Bona fide residence test: The bona fide residence test applies to U.S. citizens and to U.S. resident aliens who are citizens or nationals of a country with which the United States has an income treaty in effect. To meet this requirement, you have to be a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year. For a calendar year taxpayer, this literally means a period which includes January 1 and December 31 of the same year. Brief or temporary trips for business or vacation will not disqualify you. 

             The determination of whether you are a bona fide resident of a foreign country must be determined on a facts and circumstances basis.

     2.     Physical presence test: The physical test applies to U.S. citizens and resident aliens.  With this test, you can qualify if you spend 330 full days during a period of 12 consecutive months. The 330 full days need not be consecutive, and may be interrupted by periods during which you are not in a foreign country.          

If you quality for the foreign income exclusion, you also might be eligible for a tax break on a portion of overseas housing costs. Only employer-provided housing costs qualify for the hosing cost exclusion. For the self-employed, foreign hosing costs still can be claimed as a deduction. For 2009 taxes, the most a worker abroad can exclude for hosing costs is $27,420.

These exclusions are not automatic. You must elect them on Form 2555 and file it along with your Form 1040.

See a professional when making these decisions. Every situation is unique and must be considered separately.

 

 

 

 

 

 

 

 

     

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