not too late. You can still take steps to
significantly reduce your 2013 business income tax
Here's a rundown of the best small business year-end
1. Buy a Heavy SUV, Pickup, or Van
While buying a big SUV, pickup, or van for your
business may not be seen as politically correct
because of the gas the vehicles use, the fact is
they are useful if you need to haul people,
equipment and materials around. They also have major
Thanks to the Section 179 deduction privilege, you
can immediately write off up to $25,000 of the cost
of a new or used heavy SUV that is placed in
service by the end of your business tax year
beginning in 2013 and used over 50 percent for
For a heavy long-bed pickup (one with a cargo area
that is at least six feet in interior length), the
$25,000 Section 179 deduction limit does not apply.
Instead, the "regular" Section 179 deduction limit
of up to $500,000 applies, as explained later in
this article. The same is true for a heavy van that
has no seating behind the driver's seat and no body
section protruding more than 30 inches ahead of the
leading edge of the windshield.
Thanks to the 50 percent first-year bonus
depreciation privilege (more on that later), you can
write off half of the business-use portion of the
cost of a new (not used) "heavy" SUV, pickup,
or van that is placed in service by December 31,
2013 and used more than 50 percent for business.
After taking advantage of the preceding two breaks,
you can follow the "regular" depreciation rules to
deduct whatever is left of the business portion of
the vehicle's cost over six years, starting with
To cash in on this favorable tax treatment, you must
buy a "heavy" vehicle -- one with a manufacturer's
gross vehicle weight rating (GVWR) above
6,000 pounds. First-year depreciation deductions for
lighter SUVs, light trucks, light vans, and
passenger cars, are much less. You can usually find
a vehicle's weight rating on a label on the inside
edge of the driver side door where the hinges meet
Example 1: Your
business uses the calendar year for tax purposes.
You buy anew $65,000 Cadillac Escalade and
use it 100 percent for business between now and
December 31. On your 2013 business tax return or
form, you can write off $25,000 of the cost thanks
to a Section 179 deduction. Then, you can use the 50
percent first-year bonus depreciation break to write
off another $20,000 (half the remaining cost of
$40,000 after subtracting the Section 179
Finally, you can follow the regular depreciation
rules to depreciate the remaining cost of $20,000
(the amount left after subtracting the Section 179
deduction and the 50 percent bonus depreciation
deduction), which will generally result in a $4,000
deduction for 2013 (20 percent times $20,000).
Overall, your first-year depreciation write-offs
amount to $49,000 ($25,000 plus $20,000 plus
$4,000), which represents a whopping 75.4 percent of
the vehicle's cost.
In contrast, if you spend the same $65,000 on a new
sedan that you use 100 percent for business between
now and year end, your 2013 depreciation write-off
will be only $11,160.
Example 2: You
operate a calendar year business for tax purposes.
You buy a used $40,000 Cadillac Escalade and use it
100 percent for business between now and December
31. With a Section 179 deduction on your 2013
business tax return or form, you can write off
$25,000. Then, you can generally deduct another
$3,000 under the normal depreciation rules [20
percent times ($40,000 minus $25,000) equals
$3,000]. Your first-year depreciation deductions add
up to $28,000 ($25,000 plus $3,000). In contrast, if
you spend the same $40,000 on a used light SUV or a
used regular passenger car, your maximum 2013
depreciation write-off will be only $3,160.
Example 3: For
tax purposes, your business uses the calendar year.
You buy a used Dodge Ram heavy long-bed pickup for
$35,000 and use it 100 percent for business between
now and year end. On your 2013 business tax return
or form, you can write off the entire $35,000 thanks
to the Section 179 deduction, assuming you have no
problem with the business income limitation rule
explained later. (The $25,000 Section 179 deduction
limit that applies to heavy SUVs doesn't apply to
heavy long-bed pickups.) In contrast, if you spend
$35,000 on a used light pickup, your maximum 2013
depreciation write-off will be only $3,360.
2. Take Advantage of $500,000 Section 179 Deduction
for New or Used Assets
For tax years beginning in 2013, the maximum Section
179 deduction for eligible new or used assets other
than heavy SUVs is a much larger $500,000. For
instance, the larger $500,000 limit applies to
Section 179 deductions for things like new or used
machinery and office furniture, computer equipment,
and purchased software. As explained earlier, the
up-to-$500,000 Section 179 deduction privilege is
also available for new and used heavy long-bed
pickups and new or used heavy vans.
out if your business is expected to have a tax loss
for the year (or close) before considering a Section
179 deduction. The reason: You cannot claim a
Section 179 write-off that would create or increase
an overall business tax loss. Contact your tax
adviser if you think this might be an issue for your
Benefit from Bonus Depreciation for Other New Assets
Your business can claim 50 percent first-year bonus
depreciation for qualifying new equipment and
software that is placed in service by December 31,
2013. Used assets do not qualify. For example, this
tax break is available for new computer systems,
purchased software, machinery and office furniture.
There is no business taxable income limitation on
bonus depreciation deductions. That means 50 percent
bonus depreciation deductions can be used to create
or increase a net operating loss (NOL) for your
business's 2013 tax year. You can then carry back
the NOL to 2012 and/or 2011 and collect a refund of
some or all taxes paid in one or both those years.
Contact your tax adviser for details on the
interaction between asset additions and NOLs.
December 31 placed-in-service deadline for assets
eligible for 50 percent first-year bonus
depreciation applies whether your business tax year
is based on the calendar year or not. So time is
growing short if you want to take advantage.
4. Take Advantage of $250,000 Section 179 Deduction
for Real Estate Improvements
Real property improvements have traditionally been
ineligible for the Section 179 deduction. However
there's a big exception for qualified real property
improvements that your business places in service in
a tax year that begins in 2013 -- you can claim a
first-year Section 179 deduction of up to $250,000.
This temporary break applies to:
Interiors of leased non-residential buildings.
Interiors of retail buildings.
The $250,000 Section 179 allowance for real estate
is part of the overall $500,000 allowance, and it
will not be available for tax years beginning after
2013 unless Congress extends it.
again, watch out if your business is already
expected to have a tax loss for the year (or close)
before considering any Section 179 deductions. You
can't claim a Section 179 write-off that would
create or increase an overall business tax loss.
Also, claiming Section 179 deductions for real
property can trigger high-taxed ordinary income
gains when the property is sold. Contact your tax
adviser for details.
Juggle Income and Deductible Expenditures if they Go
on Your Personal Return
If you run your operation as a sole proprietorship,
S corporation, LLC, or partnership, your share of
the net income generated by the business will be
reported on your Form 1040 and taxed at your
personal rates. The 2014 individual federal income
tax rate brackets will be about the same as this
year's (with modest bumps for inflation), so they
will remain relatively taxpayer-friendly. Therefore,
the traditional strategy of deferring income into
next year while accelerating deductible expenditures
into this year makes sense if you expect to be in
the same or lower tax bracket next year. In that
case, deferring income and accelerating deductions
will, at a minimum, postpone part of your tax bill
from 2013 until 2014.
On the other hand, if your business is healthy, and
you expect to be in a significantly higher tax
bracket in 2014 (say 35 percent versus 28 percent),
take the opposite approach. Accelerate income into
this year (if possible) and postpone deductible
expenditures until 2014. That way, more income will
be taxed at this year's lower rate instead of next
year's higher rate.
C Corporation: If
you run your business as a regular C corporation,
the 2014 corporate tax rates are scheduled to be the
same as always.
So if you expect your corporation to pay the same or
lower rate in 2014, postpone income into next year
while accelerating deductible expenditures into this
If you expect the opposite, try to accelerate income
into this year while postponing deductible
expenditures until next year.
How to Do It: Most
small businesses use cash-method accounting for tax
purposes. If your business is eligible, cash-method
accounting gives you flexibility to manage your 2013
and 2014 taxable income to minimize taxes over the
two-year period. Here are some specific moves if you
expect business income to be taxed at the same or
lower rate next year.
Before year end, charge recurring expenses that
you would otherwise pay early next year on credit
cards. You can claim 2013 deductions even though the
credit card bills won't be paid until next year.
However, this favorable treatment doesn't apply to
store revolving charge accounts. For example, you
can't deduct business expenses charged to your Sears
account until you actually pay the bill.
Pay expenses with checks and
mail them a few days before year end. You can deduct
the expenses in the year you mail the checks, even
if they won't be cashed or deposited until early
next year. For big-ticket expenses, send checks via
registered or certified mail. That way, you can
prove they were mailed this year.
Prepay some expenses for next year. This
is allowed as long as the economic benefit from
prepaying does not extend beyond the earlier of: 12
months after the first date on which your business
realizes the benefit, or the end of the tax year
following the year in which the payment is made. For
example, you could claim 2013 deductions for
prepaying the first three months of next year's
office rent or the premium for property insurance
for the first half of next year.
On the income side, put off sending some invoices so
you don't get paid until early next year. The
general rule for cash-basis taxpayers is you report
income in the year you receive cash or checks in
hand or through the mail. Of course, you should
never put off sending invoices if it raises the risk
of not collecting the money.
When Should You Take the Opposite Approach?
If you expect to pay a significantly higher tax rate
on next year's business income, try to do the
opposite of these moves to raise this year's taxable
income and lower next year's.
Go for a Net Operating Loss
With the exception of the Section 179 depreciation
deduction, the business tax breaks and strategies
discussed here can be used to create or increase a
2013 net operating loss (NOL) if your business's
expenses exceed its income. You can then choose to
carry a 2013 NOL back for up to two years in order
to recover taxes paid in those earlier years. Or you
can choose to carry the NOL forward for up to 20
years if you think your business tax rates will go
Get in Position for 0 Percent Tax on Gains from
Selling QSBC Stock
For qualified small business corporation (QSBC)
stock that is issued in calendar year 2013, a 100
percent federal gain exclusion break is potentially
available. That equates to a 0 percent federal
income tax rate on future profits from selling QSBC
shares down the road.
However, you must hold the shares for more than five
years to be eligible. This break is not available to
C corporation shareholders, and many companies don't
meet the definition of a QSBC. (The QSBC must be a C
corporation.) Contact your tax adviser if you have a
start-up business that you think might be eligible.
But hurry -- the 100 percent gain exclusion deal
won't be available for shares issued after this year
unless Congress extends it.
Take Advantage of S Corp Built-In Gains Tax
Do you operate a corporation that converted from C
to S status a few years ago? You probably know that
a corporate-level built-in gains tax (the BIG tax)
may apply when certain S corporation assets
(including receivables and inventories) are turned
into cash or sold within the recognition period.
The recognition period is normally the 10-year
period that began on the date when the C to S
However, for gains recognized in tax years beginning
in 2013, there's an exemption from the BIG tax. It
applies if the fifth year of your corporation's
recognition period went by before the start of the
tax year beginning in 2013. If your S corporation is
eligible, consider making some asset sales that
trigger built-in gains this year (when the BIG tax
exemption is available) instead of selling in future
years (when the BIG tax might bite).
For more detailed information, please call Robert
Puerto at 516-248-7361 or click
here to email Robert Puerto. He would be happy to
address any concerns you may be facing with respect
to preparing yourself
for next year.
Thomson Reuters/Tax & Accounting