Mid-Year Tax Planning: Do It Now to Save Later

Barbara Weltman for the SBA writes: With just about half of the year already in the books, now is the ideal time to take stock of your business activities year-to-date. This will enable you to take wise tax actions that will pay off on your tax bill when you file your 2013 income tax return next year.

What to look for in your books

Determine whether you’ve been profitable so far, and whether your numbers meet, exceed, or fall short of your estimates at the start of the year. Also, face up to losses that you may have experienced to date. If your analysis shows:

Better than expected, you’re looking for ways to reduce your taxes, so explore traditional actions such as:

• Setting up a qualified retirement plan, such as an SEP or 401(k) plan, to save for your retirement in a tax-advantaged way
• Buying new equipment and machinery to better run your business while capturing tax write-offs (explained later)

Also, make sure that your remaining estimated tax payments for 2013 are increased to avoid underpayment penalties.

Lower than expected, tax savings can still be helpful but may not be the most important action now. If your profits aren’t what you expected, or you experienced losses, reduce your remaining estimated taxes to conserve your cash and avoid making an interest-free loan to the government. (You can’t recoup overpayments until you file your return next year.)

Use expiring provisions

While Congress has a habit of extending expiring or expired provisions, you can’t count on this to happen this year. A number of important business-related tax breaks are scheduled to disappear on December 31, so take advantage of them while you can. Key actions to consider now:

• Purchasing of equipment, machinery and off-the-shelf software. The dollar limit for 2013 is $500,000 for new or used items, as long as you are in the black. At present, the limit is set to decline to $25,000 in 2014. Alternatively, if you buy new items, you can use 50% bonus depreciation to write-off half the cost, whether or not you’re profitable. Either way, you can take one or both write-offs even if you finance purchases in whole or in part.
• Improving your facilities. You can expense up to $250,000 of the cost of leasehold, restaurant, or retail improvements made before the end of the year. Costs over this dollar limit can be depreciated over 15 years (rather than the usual 39-year depreciation period for commercial property).
• Raising capital. If your business is a C corporation in the fields of technology, manufacturing, retail or wholesale, you can induce investors to come on board with the tax law’s 100% exclusion for gain on the sale of “qualified small business stock” held more than five years. Since these deals usually take several months or more to put together, start now so that the stock can be issued before the end of the year; the exclusion is set to revert to 50% on January 1, 2014.

Revisit your recordkeeping

Summertime may be slow for you and an ideal time to examine your recordkeeping habits as they relate to taxes. The better your records throughout the year, the more deductions and other tax breaks you’ll be able to take advantage of when you file your return.

• Recording your income and expenses. No matter how small your business or how much you hate numbers, it’s vital to keep a record of your income and expenses. Software or cloud solutions make this recordkeeping very easy and inexpensive.
• Tracking travel and entertainment costs. Receipts to prove the amount of an outlay aren’t enough for tax law. You must also keep a record of the date, purpose and other information related to each expense. Fortunately, there are apps to simplify this recordkeeping chore.
• Tracking car or truck mileage. Unless you use a vehicle solely for business, you’ll need to keep track of the miles you drive for business if you want to take a write-off for vehicle usage. Again, apps can be used for this purpose.

Meet with your tax advisor

Nearly 90% of small business owners used paid professionals to prepare their tax returns. But how many use expert advice during the year to better position themselves from a tax perspective? Meet with your tax advisor now to review all of the above actions and devise strategies that you can follow for the balance of the year that are unique to your situation.