December is a wonderful month. Aside from the holiday festivities, you have one final opportunity to keep Uncle Sam from getting your money. Savvy business owners and executives are working with tax advisors now to predict and manage their 2003 tax bills. If you aren’t one of them, you should be. Here are some year-end tax strategies that you should consider.
Investing in equipment can save you more in taxes than ever before. In addition to the consumer-oriented cuts like the accelerated child tax credit and reduction in taxes on dividends, the new law includes some strong incentives for businesses to invest in equipment. Congress boosted first-year bonus depreciation to 50 percent – up from the already-generous 30 percent enacted about a year earlier – for certain assets purchased after May 6, 2003. The Section 179 expensing limit also has been increased to $100,000 from $25,000.
If you have not made sufficient purchases yet in 2003, you may want to complete them before New Year’s Eve.
Understand tax basis. If you have an S corporation and have had losses in this or previous years, be aware of limits that may be placed on how much of these losses you can deduct. Tax basis can be controlled near the end of the year to your advantage – if you plan carefully. The technique may involve temporarily increasing shareholder loans to increase your tax basis, and thus increase your deductions.
Control income through accelerations or deferrals. If you are on the cash basis of accounting, this strategy can be as simple as timing billings or collections or timing the payment of certain deductible expenses. On the accrual basis, this approach is much tougher, but there are some opportunities related to valuing inventory and looking at bad debt charge-offs. Realize, however, that simply paying down loan principal or pre-paying certain expenses will not help. These payments are not deductible. Consult your tax advisor for details on what qualifies.
Take advantage of increased retirement plan limits. For 2003, contributions to 401(k)s have increased to $12,000, SEPs to $14,000, traditional IRAs to $3,000 ($3,500 if over age 50) and SIMPLE plans to $8,000 (to $9,000 if over age 50). Plan now to immediately have many of these contributions made through your payroll. If you’re a company owner, you might consider a year-end bonus – with most withheld for retirement – to catch up for the year if needed. But be very careful: All retirement plan contributions should be carefully coordinated with required contributions for other employees.
Consider savvy investment moves. The new tax law favors holding more dividend-paying stocks in addition to your favorite growth stocks. Also, look at reducing your stock portfolio turnover and reducing short-term gains in favor of long-term capital gains since the maximum tax differential is now up to 20 percentage points lower for longer gains than for short-term gains. Most people also carried over huge capital losses from 2002 and earlier, so taking some profits this year could offset those earlier losses. A pre-year-end checkup with your investment advisor is likely in order.
Review passive versus active income. Many company owners rent their buildings or certain equipment from operating companies. Without careful planning, losses in one could be undeductable due to the “passive loss rules.” So you should project the full year rental income or loss and consider adjusting total rent paid before the end of the year.
Take advantage of tax breaks for big passenger vehicles. If you like big SUVs and personal trucks, you could be in luck. Purchases of vehicles used primarily for business – not including commuting to and from work – can qualify for the $100,000 expensing allowance if the vehicles weigh more than 6,000 pounds.
Act now to learn where to save on this year’s taxes. The sooner you get with your tax advisor for a pre-year-end planning session, the sooner you’ll be raking in the savings.