Eilene Zimmerman writes: There’s still time to squeeze in some tax savings before 2014. And if 2013 was a great year for your business, the bite could be big. The new tax rate for high-earners [more than $400,000 in 2013] is 39.6 percent, says David Katz, regional director at Gitterman & Associates Wealth Management in Boca Raton, Florida. “And there are new taxes on top of that, like an additional 3.8 percent tax on net investment income for the highest earners.”
No matter what tax bracket you’re in, here are seven things you can do now to lessen the sting in April:
1. Pay some bills ahead of time. If 2013 was a really good year for your business, deduct as many expenses as possible against that income to lower your tax liability. “Pay as many bills as you can before the end of the year,” says Katz. “You could even pay upcoming bills—ones that will be due in the beginning of 2014–in advance.” If you are able to pay yourself a bonus this year, consider doing so in January so it won’t count towards 2013 income.
See also: How To Survive an IRS Audit
2. Invest in new capital equipment. If you’re thinking of investing in new equipment, this is an especially good year to do it, says Katz. Section 179 deductions allow a business owner to deduct 100 percent of the cost of those capital purchases up to $500,000. The deduction is intended as an incentive to get business owners buying. Generally the IRS requires that capital equipment purchases be depreciated 20% per year over five years. Without any action from Congress, the max amount of this deduction will drop drastically in 2014—to $25,000.
Last year Jack McDevitt, 60, the owner of Prototype & Short-Run Services, a metal-stamping job shop in Orange, California, decided to buy three expensive pieces of equipment at the end of year to get the Section 179 deduction. “These were things I had been considering getting, but we had a really good year in 2012 and there were tax benefits to purchasing the equipment then,” he says. McDevitt spent about $190,000 on the equipment. “We saved roughly 40 percent by being able to deduct it all. And I’d rather spend the money on equipment than taxes,” he says.
Businesses can also claim Section 179 deductions for up to $250,000 of qualified leasehold or retail improvements to real property in 2013, adds David Walters, a CPA and certified financial planner with the Palisades Hudson Financial Group office in Portland, Ore. “Usually a business would be required to depreciate these costs over a 39-year period. This deduction is also scheduled to expire in 2013.”
3. Take a deduction for making things like software, video, music or tee shirts. If your business involves domestic manufacturing, and not just widgets but even things like like software, film, sound recordings or food from farming, you can deduct about nine percent of the income derived from that, says Mark Steber, chief tax officer with Jackson Hewitt Tax Service in Sarasota, Florida. “It’s called the Domestic Production Activities deduction and it’s not new but very few businesses take advantage of it because they don’t know about it,” he says. “So if you’ve got a software startup in your garage or you’re making Vine videos, sound recordings, tee shirts, things like that, you can take this deduction.”
4. Get tax credits for being innovative. To encourage innovation and the development of new products, the government gives tax credits for research, development and experimentation. “People often think that means they have come up with something really cutting edge. But it includes developing software or an app, businesses that have a new process of doing something, or a process that was offline and they brought it online. All of that is eligible for this tax credit,” says Ryan Himmel, a New York State CPA and CEO of BIDaWIZ, an online network for professional tax advice and services in Manhattan. Businesses can back up their R&D claim by showing they’ve filed a patent application for the invention or innovation for which they want to take a deduction, says Himmel. “It could be as much as 10 percent of the research expense. That’s significant—it’s a dollar-for-dollar reduction of your tax liability.”
5. Use the new, simpler home office deduction. If you have a really, really small home office—no more than 300 square feet –you may never have tried to take a deduction for it because it was too complicated to be worth the effort. This year the IRS put in place a new deduction for small home offices. “Taxpayers can simply take a deduction equal to $5 per square foot of home office space up to 300 feet or $1,500,” says David Walters. “Otherwise you have to keep track of expenses like utilities and anything bought for the home office. This way even if you don’t track expenses, you can get a deduction.”
6. Make the maximum contribution to your company’s retirement plan.Contribute as much as possible up to the legal limit to your 401(k) or SEP-IRA, says Gitterman & Associates’ David Katz. “Every dollar you contribute reduces your adjusted gross income for 2013, so that’s an immediate tax savings. If you’re in the highest tax bracket—39.6 percent—and contribute $10,000 to your 401(k) plan, that will reduce your taxable income by $3,960,” he says.
7. Have a holiday party. Don’t forget to throw your employees a nice holiday party and let Uncle Sam help foot the bill by allowing you to deduct 100 percent of the cost. “You have to invite all your employees of course, it can’t just be you and your spouse,” says Katz. “But as long as you include everyone, you can deduct the whole thing.”
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