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Preparing for possible tax reform in 2013.

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Preparing for Possible Tax Reform in 2013
Significant changes in the tax code are expected next year — or even during the post-election Congressional session — that could have a big impact on decisions that you — the small business owner — make regarding capital expenditures, acquisitions, and simply your overall business operations and strategies.

In what is being dubbed the “fiscal cliff”, we could be seeing the effects of tax reform at the end of 2012 and into 2013. Due to the 2013 federal tax reform, as a small business, you need to consider making some adjustments in 2012 so that you are in the best position when any sweeping tax code changes roll in. The following provides insight into what your business can do to prepare for the upcoming 2013 federal tax reform.

Steps to Prepare for Possible 2013 Tax Reform

Review current tax operations. The first step to prepare for the 2013 federal tax reform is to review your current tax operations, including examining your accounting methods. Knowing where your tax rates stand right now can help you be better prepared about where they may head in 2013. During the Bush administration, tax cuts put the average tax rate from ordinary income between 10% and 33%. However, these rates may increase up to 39.6% for 2013 for certain levels of ordinary income. Decide if accelerating income makes sense. Many businesses typically defer income while accelerating expenses to have a more favorable tax situation. However, this approach may not end up being the best if certain tax code changes are made before the end of 2012. In other words, it may be more prudent for your business to accelerate income into 2012 and defer expenses into 2013 in order to minimize the potential of higher tax rates next year. If you decide to accelerate income, you’ll need to fit certain criteria. This includes collecting a bonus before December 31st, selling a home before January 1st 2013, selling any assets with capital gains, billing your customers immediately so your payments come in before the end of 2012, and delaying your 2012 capital expenditures and expenses. Convert traditional IRAs to Roth IRA’s. Your retirement savings, including IRAs, could result in negative consequences in the upcoming years due to the tax reform. One way to overcome this is to convert any traditional IRAs to a Roth IRA before the end of 2012. Consider delaying charitable contributions. If you typically make charitable donations near the end of 2012, consider holding off until January 1st 2013 or later. This will help reduce your taxable income in 2013, rather than being applicable for the 2012 tax year. Rebalance investment exposure to increase tax-exempt investments. One of the big hot topics for the 2013 tax reform is the Medicare surtax. This includes the addition of a 3.8% surtax for Medicare for anyone who has income not earned by salary or trade. As a business owner, consider rebalancing your portfolio of investments to increase tax-exempt investments exposure, which will lower your net investment income. While the entirety of how the tax reform will play out in 2013 is uncertain, in all likelihood some substantial changes are on the horizon. Examine the above considerations to prepare for possible tax reform, and be sure to speak with us about how the possible upcoming tax code changes can impact your business.

TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.
 

2012 Year End Tax Planning

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Year-end tax planning will be more difficult this year. Starting in 2013 individuals will see higher tax rates across the board and several key deduction and credit will disappear.

Some of the credits and deductions that will disappear are the bonus depreciation for business property and the tax credit for higher education and dependent care costs.  The phase-out rule that reduces write-offs for the most popular itemized deductions, such as home mortgage interest, state and local taxes, and charitable donations, will return for high income taxpayers in 2013.

Two new medicare taxes kick in in 2013. The new surtax of .9% on wages and self-employment earnings exceeding $200,000 (250k if MFJ, 125k if MFS), There is also a 3.8% medicare contribution tax that applies to the lesser of (1) net investment income, including interest income, dividends, capital gains and “passive” investment income; of (2) MAGI in excess of $200,000 (250k if MFJ; 125k if MFS).

The 2012 federal income tax scenario is more favorable than 2013, so tax planning that takes place between now and then may have a great impact on the final tax bill. Some tax planning ideas are below.

Deferring income to next year may not work as well this year.

This makes sense if you are CONFIDENT you will be in the same or lower bracket next year, then by all means defer. You can control the timing of December invoices by sending them out early (to receive in 2012) or late (to receive in 2013) depending. Same for deductions. Pay the bills now to get the expense in 2012. Some examples are property taxes, equipment purchases, etc.

Ideas for increasing deductions.

Make Charitable gifts of appreciated stock or mutual funds that you have held for more than a year. You won’t pay tax on the appreciation, but will get a deduction for the current value.

Accelerate Itemized Deductions into this year. No phase out this year, but there will be one next year. IF you have the cash, make those state tax payments before the end of the year.

0% rate on investment income.

If you are in the 10 or 15% federal tax bracket, consider taking the gains to the extent you remain in those brackets, no gain on the sale!

Year-end tax selling

The Max federal rate on LT cap gains for 2012 is 15%. That is increasing to 20% in 2013, and the 3.8% will apply for higher earners. If you are thinking about selling, do so before year end. IF you think it may still grow, lock in the 15% gain on the current value by selling, and buy it back!

Year end moves for business

If you are thinking of buying equipment or other fixed assets, consider doing so before year end to get the higher 179 deduction and bonus depreciation.

Maximize retirement contributions and take advantage of Flexible Spending Accounts.

Don’t Forget about Estate Planning

The unified federal gift and estate tax exclusion goes from a historically high 5.12 million to 1 million for 2013. Be sure to update your plan to minimize this.

 

Happy Thanksgiving!

The Importance of Year-End Tax Planning

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
 
The Importance of Year-End Tax Planning
 
As a business owner, taxes are a necessary evil, and they are especially important to keep in mind toward the end of the year. As year-end approaches, there are some things you need to plan for, including tax planning for your small business. With year-end tax planning your business can reduce liabilities and increase deductions. With the help of proper organization, a solid business plan, and an experienced accountant, you can avoid a stressful situation — and paying unnecessary taxes.

Year-End Tax Planning Strategies

Here are are three important tasks to conduct as the end of the tax year-end approaches:

1) Get organized. Start by getting your tax documents organized, which includes both your business expenses and income. If you handle your own accounting for your business, it’s prudent to use an accounting software program, which will help you record your income and expenses accurately as well as make it easier to organize your finances. An accounting software program can also be used for invoicing clients, creating business reports, and having access to balance sheets and income statements. It’s important to keep all financial areas of your business in order, including inventory monitoring, invoicing, incoming and outgoing funds, payroll, and other monetary paperwork. If you start getting organized now, the remainder of your year-end planning will go more smoothly.

2) Consider setting up a retirement plan. If you haven’t done so already, it’s not too late to set up a retirement contribution plan. Whether you decide to use a Traditional IRA or Roth IRA, any pretax contributions you make prior to year’s end will reduce your taxable income. As a result, your tax liability is reduced, offering some much-needed tax relief. If you haven’t yet maxed out your retirement contributions for the year, then if at all possible, do so as part of your year-end tax planning.

3) Set up an appointment with your tax accountant. Before the December holiday season — and the sooner the better — you should also set up an appointment with the accountant who handles your taxes. Ideally, this should be the accountant or CPA that you meet with to file your business tax return. In any event, if you have been following your business plan throughout the year with excellent recordkeeping and organized files, this end of the year meeting will go quickly and smoothly. Your tax accountant will use your documents, finances, and business assets for preparing your end-of-year taxes and plan for the next year.

The end of the calendar year is important for small businesses for many reasons, but tax planning is one of the most important. Tax time will be here before you know it, but if you have your financial house in order, you won’t have any hiccups.

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TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.
 

5 Best Practices When Hiring Employees

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Who you hire for your organization can be the most critical decision you make for the future success of your company. Hire the right team and success is almost guaranteed. Hire the wrong group and your company’s very survival can be in jeopardy. In other words, hiring is nothing to take lightly. This article will serve to provide the 5 best practices when hiring employees.

Practice 1. Define the position

Create a clear and exact description of the position you are seeking employees for. This will enable you to advertise to attract only those who are qualified for the position. Prospective employees need to know exactly what you are seeking before applying for the position. Fail to do this and you may be overwhelmed by ill qualified candidates.

Practice 2. Determine the salary range

Knowing what you are able to pay for the position can eliminate many headaches in the hiring process. If the position requires years of experience, a higher starting salary can attract qualified candidates. On the other hand, if the position is entry level, a lower starting salary can eliminate your dealing with prospective employees who need greater compensation.

Practice 3. Look inside first

Many hiring managers only look outside the organization when seeking talent. However, the best candidates are often already within the company. Hiring from within eliminates many of the hassles of training someone new into the company’s culture. Not to mention, a much lower cost than recruiting from outside. Always look inside first.

Practice 4. Advertise on many sources

If you can’t locate someone inside the company, the position should be marketed on multiple sources. This includes newspapers, websites, social media, universities and even by word of mouth with your current employees, coworkers and fellow business people.

Practice 5. Put it in writing

Once you locate the ideal candidate, put the offer in writing to avoid any misunderstandings. Verbal offers are a major no in this day and age. Be certain that the offer letter contains a complete description of the position, salary, benefits and expectations of the employee. It’s far better to have the employee turn down the job based on the offer letter than to hire and find out there was a misunderstanding about what the position entails.

TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.
 

What Is the Age Limit for Claiming a Child as a Dependent for Federal Tax Purposes?

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

 
Claiming a child as a dependent for federal tax purposes offers the taxpayer a number of tax related benefits. Along with being able to claim an exemption for the child, the taxpayer may also be able to take advantage of the Child and Dependent Care Credit and the Earned Income Credit, further reducing a taxpayer’s federal income tax obligation. In order to claim a child as a dependent, there are five basic tests that must be passed first. Those tests are the relationship, residency, support, joint return, and age test.
 
According to the age test, a child must be under the age of 19 at the end of the tax year in which a taxpayer plans to claim the child. In addition, the child must be younger than the taxpayer or the taxpayer’s spouse if filing jointly. If, however, the child is a full-time student, the age limit is raised. In that case, the child must be under the age of 24 at the end of the tax year and younger than the taxpayer, or the taxpayer’s spouse if filing jointly.
 
The age test does not apply if the child is permanently and totally disabled at any time during the tax year in question. In that case, there is no age limit

TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.
 

HRA Qualified Medical Expenses for 2012

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

 
A Health Reimbursement Arrangement, or HRA, is a plan offered to employees that will reimburse certain qualified medical expenses tax-free. Your individual HRA will be unique to what your business offers, but the basic eligible medical expenses and non-eligible medical expenses are the same. Understanding which expenses qualify under the HRA can help you get the most out of your plan.
 
HRA Qualified Medical Expenses for 2012
 
Under each HRA plan, there will be qualified medical expenses. These expenses include a certain amount that will be covered for the prevention, treatment, or diagnosis of certain medical conditions or illnesses as defined under Section 213(d) of the IRS Code.
 
For example, some of the common qualified medical expenses for 2012 HRA plans are ambulance fees, prescription birth control pills, acupuncture, dental treatment, chiropractic care, crutches, diabetes blood sugar test devices, eye glasses, hearing aid and batteries, laser eye surgery, lab fees, sterilization, surgery, optometrist, physician prescribed stop-smoking programs, x-rays and a list of dozens more eligible medical expenses.
 
HRA Non-Qualified Medical Expenses for 2012
 
There are also medical expenses that are not eligible for the HRA plan, including over-the-counter medications without a prescription, which became ineligible for HRA’s, along with Health Savings Accounts and Flexible Spending Accounts, as of January 1st 2011. Any medical expenses that occurred before you signed up for your HRA will not qualify under the HRA.
 
Other non-qualified medical expenses for 2012 include health club memberships, cosmetic surgery, bottled water, diaper service, hair transplant, maternity clothing, nutritional supplements, and other expenses.
 
The HRA provided by your company lets you receive reimbursements that are tax-free from medical expenses you are going to make throughout the year. If you know ahead of time that you will have many of the expenses that qualify for 2012, it can be extremely beneficial for you to sign up for your company’s HRA plan.
 
TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.