Another year will end soon. There is (very) little tax planning that can be done after the year-end. With the maximum federal income tax bracket of 39.6% and the maximum State of Connecticut income tax bracket of 6.5% there is a lot of tax dollars on the table.
Here are 3 proven reasons a Connecticut business owner should meet with their CPA before year-end.
1) Elect Subchapter S Tax Status
A closely held business should elect Subchapter S (“Sub S”) tax status to avoid double taxation on sale. A corporation is a separate legal entity. A regular or “C” corporation is also a separate taxable entity. The tax code allows qualifying corporations to elect Sub S tax status. With this election, while the corporation will continue to be a separte legal entity, it will no longer be a separate taxable entity. The profit or losses of the corporation will flow through to the stockholder of the company.
To be eligible for Sub S tax status the corporation must:
* Be a domestic corporation
* Have no more than 100 shareholders
* The only shareholders are individuals, estates and certain exempt organizations and certain trusts
* There are no nonresident alien shareholders
* The company only has one class of stock
* The company is not an ineligible corporation
* The company will generally adopt a tax year ending December 31
* Each shareholder consents to the Sub S election
The primary advantage to a Sub S corporation is the single level of tax on sale of the business. With a C corporation, unless there is a stock sale, there will be double taxation. Presuming an asset sale, the first level of tax be at the corporation level.
Then when the proceeds of the sale are distributed, the shareholders will pay a tax. Ouch. Double taxation is very expensive.
2) Adopt a Retirement Plan
The tax code has a dizzying array of retirement plan options for small businesses. 401(k) Plans, profit-sharing plan, simplified employee pension (“SEP”) and defined benefit plan are the more common plans that are adopted.
You will need to work through these options with your CPA and a third-party-administrator (“TPA”) to determine which plan is appropriate in your circumstances. Keep in mind; to make the plan effective for the tax year 2013, the plan will need to be adopted in 2013. The only exception to this is the SEP plan. This can be adopted at any time prior to filing the return including extensions. For a December 31, 2013 year end, this would mean you would have until September 15, 2014 to fund your SEP contribution.
3) Maximize Your Depreciation Deductions
The tax code provides incentives for the purchase of many fixed assets. Generally fixed assets must be depreciated over the life of an asset as prescribed by the IRS. There is an election however that is allowed that allows some assets to be written off immediately.
This is known as Section 179. This applies to most fixed assets except vehicles and real estate. Vehicles that weigh more than 6,000 pounds are eligible however. For 2013 up to $500,000 of fixed assets can be expensed in one year. There is a cap however on the total fixed asset purchases of $2,000,000. This expense election however is scheduled to decrease to $25,000 in 2014. Will Congress increase this expense election in 2014? Who knows? If you are considering fixed asset purchases there is a good incentive to do so in 2013.
Connecticut business owners, will you meet with your CPA before year-end?
Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.
This is the depreciation that is allowed to be expensed for tax purposes for fixed assets, except land. Different types of assets are allocated to different CCA classes, and each class has its own rate for capital cost allowance. For instance, most automobiles would be class 10, which is allowed to be expensed at 30% per year on a declining balance basis. In most cases, the CCA allowed in the year an asset is purchased is only 50% of the normal amount. Thus, the class 10 CCA would be 15% in the first year.