The government has increased tax rates and implemented other changes for 2013. However, companies may be able to employ tax-saving options — deductions, depreciation provisions or deferrals — prior to Dec. 31.
If companies review before year-end, they are better able to maximize potential savings, and it may even spur thoughts for future tax planning, says Sean Muller, partner-in-charge, Houston Tax and Strategic Business Services at Weaver.
Smart Business spoke with Muller about the opportunities to save on your 2013 taxes.
How can businesses utilize enhanced Section 179 deduction limits in 2013?
Enhanced Section 179 deduction limits were enacted for 2013, which allow companies to immediately deduct up to $500,000 of equipment purchases made, rather than depreciating over a number of years.
The deduction applies to 2013 equipment purchases of up to $2 million. The deduction is slowly phased out for taxpayers with $2.5 million or more in purchases. Section 179 deductions can be applied toward tangible property purchases, but real property doesn’t qualify.
In 2014, the Section 179 limitation will decrease to $25,000. Companies that plan to make large capital expenditures in 2014 may wish to purchase in 2013 instead. The deduction can be used to reduce tax liability to zero, but it cannot put you in a net loss position.
How does bonus depreciation differ?
Taxpayers in some states may be able to utilize a 50 percent bonus depreciation rate for qualified property placed in service during 2013. Unlike the Section 179 deduction, bonus depreciation is not limited to net income and does not limit the deduction amount.
Bonus depreciation applies to new, original use U.S.-based property with a recovery period of 20 years or less.
The 50 percent bonus depreciation and Section 179 deduction can be used together.
What savings are available through like-kind exchanges?
Another tax-saving opportunity to consider is like-kind exchanges. IRS Code Section 1031 enables a taxpayer to defer capital gains tax if the property sale proceeds are reinvested in similar property within a relatively short time. The exchange may be a simultaneous swap of properties or a deferred exchange. With a deferred exchange, one property is disposed of and the proceeds are then used to buy one or more like-kind properties.
Section 1031 exchanges exclude inventory, stocks, bonds and partnership interests.
Who can take domestic production activity deductions (Section 199)?
In 2013, businesses with qualified domestic production activities may be able to receive a 9 percent tax deduction. Qualifying activities include the manufacture, production, growth or extraction of qualifying production property within the U.S., as well as real property construction, oil and gas drilling, and engineering and architectural services related to real property construction.
Generally, a taxpayer is allowed a deduction equal to the lesser of:
- Qualified production activity income (QPAI), which is a modified calculation of income related to qualifying production activities.
- Taxable income.
- 50 percent of the form W-2 wages deducted in arriving at QPAI.
The level of complexity in calculating the appropriate deduction depends on the nature and structure of the business.
What are other year-end tax strategies?
Companies also should consider potential residual tax-saving activities, such as:
- Deferring income to 2014 if cash flow and current income permit.
- Making additional charitable donations.
- Writing off and disposing of damaged or obsolete inventory to reduce carrying costs and garner tax deductions.
- Writing off bad debt that cannot be collected. Companies should keep supporting material like phone logs, correspondence, collection agency contracts, etc., to prove a reasonable effort was made to collect.
Invest the time now to plan for your 2013 taxes and reap the benefits later. ●
Sean Muller is partner-in-charge, Houston Tax and Strategic Business Services, at Weaver. Reach him at (832) 320-3293 or [email protected].
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