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Cut your 2014 taxes: Don’t Miss Out on Your 179 Deduction

The end of another year is quickly approaching, and it’s once again time to take the proper steps to reduce taxes on your personal and business returns. Tax planning strategies for 2014 includes accelerating deductions and deferring income.reduce-federal-taxes

Section 179 of the IRS tax code makes it possible for businesses to deduct the full price of qualifying equipment or software purchased or financed during the tax year. If you buy or even lease qualifying equipment, you are allowed to deduct the full price from your gross income up to a maximum deduction of $25,000 in 2014.

All businesses that purchase, finance, or lease less than $200,000 in new or used business equipment during tax year 2014 qualify for the Section 179 Deduction. If you spend more than $200,000 the Section 179 deduction begins to be reduced. This works great with your typical business.

Let’s say you purchased equipment, computers, etc.  here is an example that shows how Section 179 works:

Section 179 for 2014

Equipment purchased in 2014 $75,000
First year Section 179 write-off $25,000
Normal First year Depreciation (20% in each of the years on remaining amount) $10,000
Total 2014 Deduction

$35,000

Tax Savings assuming 35% tax bracket $12,250
After tax Equipment Cost in 35% tax bracket $62,750

Section 179 applies to virtually every type of  equipment you can buy. This includes passenger vehicles used 50% or more for business, however, there is are limitations. It also includes off-the-shelf software, qualified leasehold improvements and retail improvements.

There is one catch however, you need to place the property in service by December 31, 2014.

Year-end Tax Planning for Individuals

It’s that time of year again to begin taking the steps necessary to reduce taxes on your personal returns.  Below we have put together some tips to ensure you make the most of this planning time.1040 income tax form

Bunch your deductions: For example, bunching deductions on your personal income tax return can make sense for 2014. Bunching means you concentrate itemized deductions into the year offering the most tax benefit and claim the standard deduction in alternate years. Even if the current limitation on itemized deductions applies to you, bunching can be effective when combined with other tax planning such as reducing adjusted gross income.

  • One category of itemized deductions that lends itself to bunching is charitable contributions. In general, as long as you have written acknowledgment from a qualified charity, you can deduct donations in the year you write the check or put the charge on your credit card.
  • Instead of cash, donating appreciated assets before December 31 may be more tax advantageous. When you contribute property you have owned for more than a year, you can usually deduct the full fair market value.
  • For instance, say the value of the shares you own in a mutual fund has gone up since you bought into the fund. If you sell those shares and donate the proceeds to charity, you’ll have capital gain. But when you donate the shares to the charity, you can claim a deduction for the value on the date of your donation, garnering a benefit without the related income tax bill.
  • Other itemized deductions you can control in order to maximize tax savings include real estate taxes and state income taxes.

Check exposure to the AMT: Just remember to check your exposure to the alternative minimum tax and the 3.8% net investment income tax when deciding in which year to pay these tax bills. Why? Certain itemized deductions – such as taxes – are disallowed under the AMT rules, but can help reduce exposure to the net investment income tax.

  • What if you’re not planning to itemize? Taking a look at your deductions is still a useful exercise. One reason: The standard deduction is also disallowed under AMT rules, and you may benefit by itemizing even when your total itemized deductions are under the threshold.
  • The standard deduction for 2014 is $12,400 when you’re married filing jointly and $6,200 when you’re single.

Monitor adjusted gross income: Another tax planning strategy is to reduce adjusted gross income (AGI). One way to do this on your personal tax return is to maximize above-the-line deductions. These are expenses you can claim even if you don’t itemize. Above-the-line tax savers include such items as retirement plan contributions, student loan interest deduction, and the health savings account deduction.

Consider shifting income: A planning strategy to help reduce taxes on your personal returns is shifting income among family members.

  • An income-shifting technique is to make gifts of income-producing property to family members in lower tax brackets. (Be aware of the “kiddie tax.”) Though you can’t take a tax deduction for gifts, future income is taxed to the recipient, and may mitigate your exposure to the 3.8% net investment income tax.
  • Gifts of up to $14,000 per person ($28,000 when you’re married) made before year-end incur no income, gift, estate, or generation-skipping taxes.

The Affordable Care Act: How will it affect your 2014 taxes?

Staggered start dates. Exceptions. Waivers. Are you still trying to determine how the health care laws will affect your 2014 personal and business federal income tax returns? We can help. Here’s an overview we’ve put together of some current rules. Here’s an overview of some current rules.BarackObamaportrait

Individual penalty. The 2014 Form 1040 has a new line for reporting the “individual responsibility payment.” You’ll owe this penalty if you or your dependents did not have health insurance during the year and don’t qualify for an exemption.

  • The amount you’ll report on your 2014 tax return is the greater of $95 per adult and $47.50 per child, up to a maximum family penalty of $285, or 1% of your “household income formula.”

Individual premium credit. Depending on your income, you may be eligible for a reduction in the cost of your health insurance premium during the year.

  • When you signed up for insurance on the health insurance exchange, you had the option to use the reduction to offset your premiums as you paid them. Alternatively, you can apply for the credit when you file your 2014 federal income tax return.
  • The amount of the credit depends on your income and family size.

Net investment income surtax. You may be familiar with this 3.8% surtax from last year’s return. It applies to net investment income – income such as dividends, interest, and capital gains, less related expenses – when your adjusted gross income (AGI) exceeds certain levels.

  • Those levels have not increased for 2014. When you are married filing jointly, the surtax applies if your AGI exceeds $250,000. When you’re single or filing as head of household, the AGI threshold is $200,000.

Medicare surtax on wages. As in 2013, this 0.9% surtax applies to wages, compensation, and self-employment income when your AGI exceeds $250,000 and you’re married filing jointly. When you’re single or filing as head of household, the AGI threshold is $200,000.

Business health insurance premium credit. Did you pay at least 50% of the health insurance premium costs for your employees during 2014? If you employed fewer than 25 full-time equivalent employees and paid them wages of less than $50,800, you may be able to claim a credit of up to 50% of the premiums you paid.

  • The credit is available even if you claimed it in prior years. Tax-exempt organizations can also benefit.

Business fee. When you self-insure your business health care expenses, you may have to pay a fee to help fund a healthcare research institute. The fee may also apply to your health reimbursement arrangement or health flexible spending arrangement.

Employer penalties. Depending on the number of workers you employ, you may be penalized for not providing health insurance and/or not providing affordable health insurance.

  • Neither penalty applies for tax year 2014. However, you’ll want to review your workforce to determine whether the penalty will affect you in the future.
  • Beginning January 1, 2015, the penalty will apply when 100 or more full-time employees work in your business. The penalty applies in 2016 when your business employs 50 or more full-time workers. When you employ fewer than 50 workers, you’re not subject to the penalty.
  • Employer reporting. The health care laws included a requirement for reporting on Forms W-2 the cost of the health insurance coverage you provide to your employees. However, reporting is optional for 2014 when you file fewer than 250 Forms W-2.

Understanding Sunk Costs in Business Decisions

One of the most difficult business decisions is to walk away from money that you have already spent. These losses are called “sunk” costs. This can be extremely frustrating, but the only efficient way to move forward is by focusing on future costs rather than dwelling on past losses.sinking-ship

Below we have put together some ideas to help you understand sunk costs, and how you should go about making business decisions after experiencing them. Should you have any questions we are only a telephone call away.

When a business incurs costs that can’t be recovered, those costs are of no use when making business decisions. These expenditures, called sunk costs, can include money spent, time, effort and energy used that are no longer recoverable.

For example: You’ve invested $40,000 in a new website, and it’s become apparent that it will cost another $20,000 to complete it. Regardless of what you do going forward, you’ll be unable to get back that initial $40,000. Now an opportunity comes along where you can buy a completed website for $12,000.

At this point, your only choice is whether to spend 20,000 or $12,000 for the same website. Whatever you decide, the initial $40,000 investment will be gone – a sunk cost. All else being equal, the best choice is the $12,000 facility.

Now assume the same $40,000 sunk cost with an additional $12,000 needed for completion. An opportunity to buy a similar completed website for $16,000 arises. Obviously you’ll go forward with the $12,000 completion costs, even though the total cost of the facility will be $52,000 rather than $16,000. The $40,000 sunk cost remains irrelevant.

Another example: Your company has spent time and money developing a new mobile app, and you’re understandably proud of the result. However, when you test market the product on your customers, you discover that most of them have no interest in it and wouldn’t buy it at any price. It is now time to swallow your pride (along with the sunk development costs) and walk away from your product.

It’s hard to forget about time and money you’ve already put into a project, but once such costs become irrecoverable, it’s counterproductive to factor them into your company’s decision making process. From that point forward, your choices should be based only on expected future costs.

You work hard for your money: How every entrepreneur can establish internal controls

As an entrepreneur, you work hard for your money. There is almost nothing worse than experiencing pilferage, embezzlementnt, and other types of misappropriation. Internal controls are extremely important to the entrepreneurial company.

We have put together some practical advice to help you protect the earnings and assets of your company. Should you have any questions we are only a telephone call away.

Entrepreneurs usually can’t afford cfo2go1to hire internal auditors or set up complete separation of duties. You can, however, establish controls in certain high-risk areas, such as the following:

Cash disbursements: If at all possible, the owner/manager should sign checks. This control has a dual purpose: management sees how the company is spending its money, and the cash disbursement function is kept separate from bookkeeping or accounting. If the same person signs checks and enters disbursement transactions in the accounting records, embezzlement is harder to prevent. Requiring two signatures on checks above a certain amount also provides greater control.
Customer collections: The entrepreneur should consider opening the mail. Alternatively, you might ask someone separate from the accounting function to open the mail and prepare the deposit slip. The practice of making daily deposits is also a good practice.

Personnel practices: Perform background checks before hiring key employees, especially those who will be handling cash or other high-risk assets, Unfortunately, financial pressures, addictions, and other factors can corrupt even good employees.

Perhaps an entrepreneur’s greatest control is the “tone at the top.” If management sets a high standard, employees generally follow. However, if a manager is perceived as lax or dishonest – for example, he or she doesn’t respond quickly when evidence of misappropriation surfaces – employees might conclude that theft isn’t such a big deal.

Make sure to remember: A company that fails to establish minimum controls is providing a golden opportunity for fraud. If you’d like help reviewing your firm’s controls, give us a call.

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