Year-end tax planning is always important, but there’s an extra wrinkle this year. The Bush-era tax cuts enacted in 2001 and 2003 are scheduled to expire in 2013 and new Medicare taxes are scheduled to take effect. Without Congressional action, tax rates will rise to as high as 39.6 percent on ordinary income and 23.8 percent on capital gains.
Here are some important 2012 tax planning considerations for businesses:
- Consider timing of business investments. The rules for deducting investments in your business have changed. Last year, 100 percent bonus depreciation allowed businesses to fully deduct the cost of eligible equipment placed in service. Property placed in service in 2012 is only eligible for 50 percent bonus depreciation – meaning you can deduct half the cost of eligible equipment placed in service this year, while the other half will be depreciated using normal rules. Property placed in service in 2013 will not be eligible for bonus depreciation at all. To qualify for bonus depreciation, the property you place in service must be new and generally have a useful life of 20 years or less.
- Prepare for possible tax increases in 2013. If Congress does not act to prevent it, the new Medicare tax and the scheduled expiration of the 2001 and 2003 tax cuts will raise tax rates for individuals on many types of income. There are strategies for deferring deductions and recognizing income, but the key is to be flexible. Prepare your strategies but delay executing them until the situation in Congress becomes clearer.
- Help your employees prepare for possible tax increases. Corporate employers can help their employees prepare for possible tax increases by facilitating flexibility with respect to the payment of bonuses and deferred compensation. If it appears Congress will not act and rates will increase in 2013, it may benefit the employee to pay a bonus at the end of December, allowing it to be taxed under the current rates. But make sure this will not force the employee into a higher bracket, and do not give the employee the option of when to receive the bonus. The IRS will treat this as constructive receipt and require the employee to include the bonus in 2012 income.
Ed Maginot is a partner in Grant Thornton’s Milwaukee tax office.
