Year-end tax moves for small businesses There’s still time to cut your 2013 business tax bill

Bill Bischoff for MarketWatch writes: Good news: you still have time to significantly reduce your 2013 business income tax bill. Here’s a digest of the best year-end tax-saving moves for small businesses.

Buy a Heavy SUV, Pickup, or Van

Big SUVs, pickups, and vans are useful for hauling people and stuff around in your business, and they also offer major tax advantages.

• Thanks to the Section 179 instant depreciation deduction privilege, you can immediately write off up to $25,000 of the cost of a new or used heavy SUV that’s placed in service by the end of your business tax year that began in 2013.
• For a heavy long-bed pickup (meaning one with a cargo area at least six feet long on the inside), the $25,000 Section 179 deduction limit is inapplicable. Instead, the regular Section 179 deduction limit of up to $500,000 applies, as I will explain later. The same is true for a heavy van that has no seating behind the driver’s seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield.
• Thanks to the 50% first-year bonus depreciation privilege (more on that later), you can immediately write off half of the business-use portion of the cost of a new (not used) “heavy” SUV, pickup, or van that’s placed in service by 12/31/13.
• After taking advantage of the preceding breaks, you can follow the “regular” tax depreciation rules to write off whatever is left of the business portion of the heavy vehicle’s cost over six years, starting with 2013.
  To qualify for this super-beneficial tax treatment, you must buy a “heavy” vehicle, which means one with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds, and you must use the vehicle over 50% for business. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door where the hinges meet the frame. First-year depreciation deductions for lighter SUVs, light trucks, light vans, and passenger cars, are much stingier: the maximum write-off is only $11,360 for light trucks and vans, and it’s only $11,160 for cars and light SUVs.
  Claim Big Section 179 Deductions for Asset Additions
  For tax years beginning in 2013, the maximum Section 179 instant depreciation deduction for eligible new and used assets (other than heavy SUVs) is a whopping $500,000. For instance, the $500,000 limit applies to Section 179 deductions for new or used computer gear, purchased software, new or used office furniture, and new or used machinery and equipment. As explained earlier, the up-to-$500,000 Section 179 deduction limit also applies to new or used heavy long-bed pickups and new or used heavy vans used over 50% for business.
  Real property expenditures have traditionally been ineligible for the Section 179 deduction privilege. However, there’s an exception for so-called qualified real property that your business places in service in its tax year that begins in 2013. Specifically, your business can claim a Section 179 deduction of up to $250,000 for expenditures on the following types of real property:
  • Interiors of leased nonresidential buildings.
  • Restaurant buildings.
  • Interiors of retail buildings.
  Warnings: Watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction. You can’t claim a Section 179 write-off that would create or increase an overall business tax loss. This is the so-called business income limitation. Also, claiming Section 179 deductions for real property can trigger high-taxed ordinary income gains when the property is sold. For full details on the Section 179 deduction rules, check out IRS Publication 946 (How to Depreciate Property) at www.irs.gov. (This government website actually works!)
  Take Advantage of 50% First-Year Bonus Depreciation for Other New Asset Additions

  Over and above any available Section 179 deductions, your business can also claim 50% first-year bonus depreciation for qualifying new (not used) equipment and software that’s placed in service by 12/31/13. For example, this break is available for computer systems, purchased software, machinery, office furniture, and so forth if the costs exceed what you can write off under the Section 179 deduction privilege. There’s no dollar cap or business income limitation on 50% bonus depreciation deductions. That means bonus depreciation write-offs can be used to create or increase a net operating loss (NOL) for your business’s 2013 tax year. You can then carry back the NOL to 2012 and/or 2011 and collect a refund of some or all of the taxes paid in one or both those years. Cool!

  Juggle Income and Deductible Expenditures through Year-end

  If you run your shop as a sole proprietorship, LLC, partnership, or S corporation, your share of the net income generated by the business is reported on your Form 1040 and taxed at your personal rates. Since the 2014 individual federal income-tax rate brackets are not much different from this year’s (see the tables at the end of this column), consider the time-honored strategy of deferring income into next year while accelerating deductible expenditures into this year--if you expect to be in the same or lower tax bracket next year. In that case, deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2013 until 2014.

  On the other hand if your business is going great, you might expect to be in a significantly higher tax bracket in 2014 (say 35% versus 25%). In that case, take the opposite approach: accelerate income into this year (if possible) and postpone deductible expenditures until next year. That way, more income will be taxed at this year’s lower rate instead of at next year’s higher rate.

  How to Defer Taxable Income

  Most small businesses are allowed to use cash-method accounting for tax purposes. Assuming your business is eligible, cash-method accounting gives you the flexibility to manage your 2013 and 2014 taxable income in order to minimize taxes over the two-year period. If you expect your business income will be taxed at the same or lower rate next year, here are specific cash-method moves to defer some taxable income until next year.

  • Charge recurring expenses that you would normally pay early next year on credit cards. You can claim 2013 deductions even though the credit card bills won’t actually be paid until 2014.
  • Pay expenses with checks and mail them a few days before year-end. The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, consider sending checks via registered or certified mail, so you can prove they were mailed this year.
  • Prepay some expenses for next year. As long as the economic benefit from the prepayment does not extend beyond the earlier of: (1) 12 months after the first date on which your business realizes the benefit or (2) the end of the tax year following the year in which the payment is made. For example, this rule allows you to claim 2013 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.
  • On the income side, the general rule for cash-basis businesses says you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near year-end to send out some invoices to customers. That will defer some income until 2014, because you won’t get paid until early next year. Needless to say, this idea should only be used for customers with solid payment histories. 

  2013 Individual Federal Income Tax Brackets

  	Single	Joint	Head of Household
  10% tax bracket	$0-8,925	$0-17,850	$0-12,750
  Beginning of 15% bracket	8,926	17,851	12,751
  Beginning of 25% bracket	36,251	72,501	48,601
  Beginning of 28% bracket	87,851	146,411	125,451
  Beginning of 33% bracket	183,251	223,051	203,151
  Beginning of 35% bracket	398,351	398,351	398,351
  Beginning of 39.6% bracket	400,000	450,000	425,000

  2014 Individual Federal Income Tax Brackets

  	Single	Joint	Head of Household
  10% tax bracket	$0-9,075	$0-18,150	$0-12,950
  Beginning of 15% bracket	9,076	18,151	12,951
  Beginning of 25% bracket	36,901	73,801	49,401
  Beginning of 28% bracket	89,351	148,851	127,551
  Beginning of 33% bracket	186,351	226,851	206,601
  Beginning of 35% bracket	405,101	405,101	405,101
  Beginning of 39.6% bracket	406,751	457,601	432,201