Steve Landsman, of local accounting firm Squar Milner, shares important tips on how business owners can plan for the upcoming tax season.

TAX PLANNING FOR BUSINESS OWNERS

Bonus Depreciation
Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance won’t be available for property put in service after 2013.

Section 179
Section 179 is the term used to describe the ability of a small business to deduct, as depreciation expense, a significant portion (if not all) of the cost of a qualified asset purchased. The maximum amount a small business owner can expense is $500,000 for 2013. Unlike bonus depreciation, there are certain limitations placed on the deduction. Additionally, the deduction cannot create a taxable loss. Unless Congress acts, this deduction will be substantially reduced in 2014.

Passenger Automobiles
For passenger vehicles used in a trade or business, the amount of depreciation allowed in the first year is $11,060 for 2013. This maximum must be reduced by the amount of personal use of the passenger vehicle. A passenger vehicle is defined as a vehicle that has a loaded gross vehicle weight of 6,000 pounds or less. Large vehicles (trucks and SUVs whose weight is more than 6,000 pounds but less than 14,000 pounds with total bed length under six feet) can utilize a Section 179 deduction of up to $25,000 in the first year in addition to 50% bonus depreciation and annual depreciation. These provisions do not apply to used vehicles. Alternatively, taxpayers can claim business mileage at 56 cents per mile.

Captive Insurance Company
Determine whether a captive insurance company should be used to assume certain business risks and achieve substantial tax benefits. Annual tax deductions of up to $1.2 million are available for insurance premiums paid to a captive insurance company, yet no income taxes are paid on the insurance premiums received by the captive (your insurance company). While it is probably too late to set-up a captive for 2013, it is not too early to plan one for 2014.

Retirement Plan Contributions
Retirement plan contributions should be maximized every year. If you do not have a retirement plan in place, consider establishing one before year-end. Deductions in 2013 can be as high as $51,000 or more per employee. However, the plan cannot discriminate in favor of the highly compensated executives. If you are self-employed, consider a Solo 401(k) plan that has a $51,000 contribution limit ($56,500 if age 50 or older). Defined benefit plans have even higher limits.

Home Office Deduction
Consider whether you qualify for the home office deduction (allocation of depreciation, utilities and maintenance expenses as business expense) based on exclusive and regular use of part of your home as an office for your business.

Issue Small Business Stock
There is no tax on gain from the sale of qualified small business stock (“QSBS”) if such stock is (1) issued (corporation capitalized) after September 27, 2010 and before January 1, 2014, and (2) held for more than five years. QSB stock issued after February 18, 2009 and before September 27, 2010 is eligible for a 75% exclusion from tax on sale if held for more than five years. This provision only applies to certain C corporations. A number of technical requirements must be met. Generally, service businesses are not eligible. The QSBS gain is not treated as a preference item for AMT (Alternative Minimum Tax) purposes.

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Click on our Squar Milner year-end tax planning guide to help you further investigate planning ideas. We are available to help you project your 2013 and 2014 taxes and evaluate planning opportunities. For assistance, please contact our office at (818) 981-2600.