Blog Entries - Nov. 2014
Year-End Planning for Business Owners
written by: Dan Backus
The year is quickly coming to a close as is the time to review your current tax standing for the year. Together we can determine the strategy needed to limit your business and personal tax liability. Keep in mind that any business or investment decision made just to save some tax dollars is never a good strategy. Three of the more common planning methods to quickly affect current year tax liability:
Tax deferral allows you to postpone on earnings and contributions made. Thus, a faster growth on investments with a possible lower tax bracket in retirement.
- Contribute to a retirement plan. Contribution limits for those under 50 in 2014 are $5,500 IRA, $17,500 401(k), and up to $52,000 for Simplified employee pension (SEP) plans.
- Sell stocks at a loss to offset current year gains. You can avoid changing your investment position by replacing them with a security of another company in the same industry or re-purchase after 31 days.
- Group itemized deductions in the same year. Consider paying medical, state/local income tax due, real estate taxes, and charitable contributions in order to maximize itemized deductions. In the following year, the $12,400 standard deduction can be used.
A strategy of accelerating income or delaying deductions can be beneficial for those with suspended losses. In the event that your income is much lower this year than it will be next year the method will help to avoid the higher tax bracket in 2015. Especially useful for an individual who plans to purchase health insurance on a health exchange and are eligible for a premium assistance credit.
- Convert traditional IRA into a Roth IRA to diversify retirement income. This will increase current year taxes while allowing the account to grow tax free.
- Put cash or assets into your company to help realize suspended losses.
- Delay the sale of an expected long-term capital losses as it will be more valuable if they are used to offset short-term capital gains or ordinary income. To do this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken.
Likely the first thought when it comes to tax planning is how to avoid the tax altogether. There is an assortment of options that need to be utilized prior to year end.
- Purchase equipment to put in place before year end for depreciation. While the ability to fully expense purchases has been reduced, there is still a $25,000 limit that can be used in 2014.
- Wages paid to children in a family business are deductible by the owner as business expenses. The child may pay little or no tax on the earned income, because the child's standard deduction is available to offset earned income in its entirety.
- Records need to be maintained to authenticate the reasonableness of wages and job performed.
- Health Saving Accounts allow eligible individuals to make deductible contributions that can later be withdrawn tax -free to reimburse the individual for out-of-pocket medical expenses. This can be an easy way to reduce income by $3,300 to $6,550 while saving money for expected medical cost on your or dependents.
- Use credit card to pay December business expenses to record a deduction in 2014 while in 2015.
- Pay health insurance through business instead of personally.
Tangible Property Regulations, TPR, are changing on capitalization and deductions coming in the year 2014. For more information on TPR please see our 2014 November Newsletter using the link provided.
Call us to schedule a time to meet so that you can take advantage of the tax deductions that are in place helping you hold onto more of the income you have earned. Together we can determine the strategy needed to limit your business and personal tax liability. We look forward to hearing from you.