Save Tax Dollars with Planning Strategy for 2012–2013
Now that we are a few weeks into 2013, a number of new and significantly higher federal income taxes are in effect and will cause many owners of profitable S corporations, partnerships, and sole proprietorships to see their tax bills increase 20 to 25 percent from 2012 to 2013.
That increase is not merely the result of timing differences; it is a pure tax increase. One way to beat the tax hike is to move income from 2013 and later years into 2012 and/or defer deductions from 2012 to 2013 and later.
While this planning strategy of accelerating income and deferring deductions is the opposite of what is done in normal years, it will allow you to recognize more of your income at the lower 2012 tax rates and receive more bang for your deduction buck in 2013 and future years, therefore saving overall tax dollars.
And even though 2012 is already past, it is not too late to implement this strategy in some ways.
Bonus Depreciation
One way to accomplish this strategy is through proper use of bonus depreciation. While 50-percent bonus depreciation was set to expire after 2012, the 2012 American Taxpayer Relief Act (ATRA) extended 50-percent bonus depreciation to qualified acquisitions (i.e., generally new, original-use property) made in 2013 as well.
To recognize more income under the lower tax rates of 2012 and leave more deductions to offset the higher taxes imposed in 2013 and beyond, the recommendation in many cases is to elect to NOT take bonus depreciation on 2012 additions, and then to again utilize bonus depreciation for 2013 acquisitions.
You should also consider accelerating 2014 acquisitions into 2013 to take further advantage of bonus depreciation.
Special Expensing Allowed Under Section 179
Another way to allow more of your taxable income to be subject to the lower tax rates in 2012 is through the proper use of the special expensing option allowed under Section 179. ATRA increased the amount of capital acquisitions eligible for the special election to $500,000 in 2012 and 2013.
The recommendation in many cases is to NOT use the Section 179 expense election in 2012 and instead capitalize and depreciate the property over its specified life. However, in 2013 you should again elect to expense up to $500,000 of capital acquisitions to maximize deductions in 2013.
Prepaid Expenses
Prepaid expenses offer a very valuable planning tool as well. Treasury regulations published in December 2003 permit accelerated deductions upon the payment of certain prepaid expenses such as insurance or certain service contracts.
Many business taxpayers have been taking advantage of these regulations to accelerate deductions. However, these same regulations permit an annual election to instead capitalize the prepaid expenses and thereby defer the deduction for one additional year.
By using this special election to capitalize those prepaid expenses in 2012, you could further recognize income at the lower 2012 tax rates and then take the deduction in 2013 against higher tax rates. Also, in 2013 when the higher rates apply, you could again accelerate that year’s prepaid expenses as you would normally do by forgoing this election.
The use of the above strategies is by no means automatic. They should only be implemented after careful consideration of your taxable income in 2012 and your expected taxable income in 2013 and later. While no one has a crystal ball by any means, in the right situation, these planning opportunities could result in major tax savings in the right situation.
