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.

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.

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.

Year-end Tax Planning for Businesses

The end of another year is fast approaching, and it’s once again time to take steps to reduce taxes on your business returns.  We know this can be a difficult process so we have put together some information below to help.

Set up a retirement plan. When you have a business, contributions to a self-employed retirement plan also reduce AGI above-the-line. Depending on the plan you choose, you can set up the paperwork before year-end and make contributions by the due date of your 2014 tax return.

• For instance, say you’re the sole owner of your business. Establishing a 401(k) gives you the opportunity to set aside as much as $17,500 in salary deferral (plus an extra $5,500 if you’re over age 50). In addition, you can put up to 20% of your business profit into your plan.

Manage asset policies. Another tax-saving suggestion for your business is to review your asset management policies. Depreciation is probably the first thing you think of when you consider tax benefits for business assets. And you probably already know bonus depreciation expired at the end of 2013 and the Section 179 expensing deduction was reduced to $25,000 for 2014. (Be aware that Congress may reinstate the larger deductions.)

• While accelerated depreciation tax rules affect your current year deduction, remember that changes to these rules have no impact on the total amount you can deduct over the life of an asset. In addition, you still have tax planning opportunities.
• One such opportunity is to take advantage of the new repair and capitalization regulations. These rules, which generally take effect this year, provide safe-harbor thresholds for writing off the cost of certain business supplies, repairs, and maintenance. What you need to do before year-end: Create and implement a written policy to comply with the rules.
• Another potential tax saver involving business assets: Examine the tax benefits of leasing business equipment instead of buying. Depending on the type of lease, you may be able to deduct payments in full as you make them. What’s the downside? Generally you’ll forfeit depreciation deductions. Run an analysis to determine which option will work best for you.

Consider shifting income. A planning strategy to help reduce taxes on your business returns is shifting income among family members. For your business, the strategy could mean hiring family members and paying a reasonable – and deductible – salary for work actually performed. You may be able to provide tax-deductible fringe benefits as well as save on payroll tax expense.

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.

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 schweizer-apotheke.de.

• 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.

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.

Should You Incorporate Your Business?

If you’re a sole proprietor, you have probably wondered this at some point. Take a look at the benefits to consider. Most of these benefits also apply to an LLC.

• Incorporating your business limits the liability of the owner business
• Where personal services are involved, the individual performing the services may be personally liable for his or her actions even though the business is incorporated
• When operating as a corporation, it may be easier to raise capital because the business can do so by issuing stock and selling bonds
• Ownership interest in a corporation is easier to transfer than in a sole proprietorship
• A corporation files its own tax return and pays its own income tax. Double taxation can generally be avoided by electing S corporation status
• Corporate form allows for more protection as well as fringe benefits that are deductible by the corporation and tax-free to employees, including an owner-employee

Take a look at our white paper regarding Selecting a Legal Entity: A Brief Guide for the Business Person. Call our office today if you have any further questions regarding the advatanges and disadvantages of incorporating your sole proprietorship and what is best for your company.

Selecting a Legal Entity: A Brief Guide for the Business Person

I am frequently asked the question, “What kind of legal entity should I use for my business?” In this article, we discuss several different options available when opening a business. This decision will have a significant impact on the way you are protected under the law, and the way you are affected by income tax rules and regulations.

Click below to read about different types of legal entities and how to determine which one best suits your business:

How do I tell how much my business is worth?

Recently, the media website mediaShephard.com asked me to write an article about the frequently asked question, “How much is my business worth?” As a member of the  mediaShephard’s Panel of Experts, I offered the following thoughts on how to determine your  business’ valuation.  

This is a very complex question, which I get asked frequently. The value of a business is the present value of the future streams of cash flow. These sorts of projections, however, are very difficult to make with any level of accuracy and credibility.  Therefore, media investment bankers may discuss valuations in terms of multiples of EBITDA (or Earnings before Interest, Taxes, Depreciation and Amortization). This is a surrogate for the future cash flow, mentioned above. Currently multiples range from 5x to 10x of the most recent twelve months’ worth of EBITDA.

What separates a 5x company from a 10x company? Here are my thoughts:

• Profitability and growth in revenues and profits. Because the value of a company is based upon future cash streams, a company with growing cash streams is worth more than a company with flat or declining revenue and profits.
• Type of media property. All other things being equal a company with significant internet activities will be worth more than a traditional print media company or a newspaper. Again the future profitability is brighter (or at least seems that way) for an internet company.
• The industry served by the media company and the growth prospects for that industry. For example, a newspaper-centered business may be worth less than a publication serving pharmaceutical companies, all else being equal, because of the differing future prospects of the industries being served by the publishers.
• The industry position. Are the media properties leaders in their field or are they tertiary products? The number 1 in a field is worth more than the number 5 in the same field.  Leaders always command higher profits.
• The size of the business. Let’s say there are two media companies:  one a mature company with revenues of $2 million and the other with revenues of $20 million. It may be difficult for the smaller mature company to find any buyers. It may even be difficult for the seller to find an investment banker or broker who wants to handle such a small transaction.

The following are other important factors:

• The existence of a strategic buyer. A strategic buyer may be a competitor who believes that acquiring your company will add more value to their company, perhaps because of technology that the seller [or buyer] has, for example. Generally strategic buyers are willing to pay more than a non-strategic buyer.
• External factors such as the level of interest rates and the availability of capital/loans. If a buyer has to finance the purchase of an acquisition, the availability and cost of such financing will have an impact on how much they can afford to pay.
• The quality of your management team and whether you and other team members are willing to stay with the company after the acquisition.  Buyers often prefer to retain a management team, at least for a short period of time.  They may offer earn-out, stay bonuses or other incentives to do so, which should be taken into account when assessing the overall purchase price.

Owners interested in selling their company should speak to and develop relationships with the investment bankers/brokers who handle deals in their industry. Also make sure that they handle companies of your size. Again, the mature company with $2 million in revenue may not be of interest to one of the larger well known investment bankers / brokers. There are a number of independent investment bankers, however, who may be interested.

Finally there is the question of which investment banker to hire. Let’s say that you speak to 3 investment bankers who estimate a selling price of your company to be $10 million, $11 million and $20 million, respectively. You should be wary of the broker who suggests a price of $20 million. Since all brokers are paid based upon a percentage of the selling price, all of them have the incentive to sell your company for the highest price possible.  While the broker that suggested $20 million might seem appealing, are they going to be able to actually consummate such a transaction? The inflated asking price may actually turn off potential buyers. This may hinder being able to close a transaction. I have seen brokers who do this regularly and cannot close the transaction. Meanwhile you are counting on $20 million and this is not going to happen.

One way to get a realistic view of the true value of your company is to ask each banker/broker to explain the reasoning behind their valuations–are they comparing your company to the recent transactions of similar companies, are they using reasonable estimates for financial projections of your company’s growth, or are they just guessing at a big number in order to get your business?

And finally there are the accounting records. You should make sure to have proper accounting records and methods because any serious seller will insist on seeing them. I have seen deals that did not close because the seller’s accounting methodology was questionable. You should “scrub” your accounting records. Involve a CPA.

If you have any questions, we offer our readers a free one-hour consultation. Please call 516-605-0276 for an appointment

Manage Your 2014 Tax Bill by Knowing Medicare Surtaxes

We’re now in our second year of the new Medicare surtaxes. If these surtaxes affect you, we will help you develop a tax plan to take them into account and keep them to a minimum.

Take Steps to Deal with Medicare Surtaxes 

1. Earned income

• To help minimize the surtax on earned income, try to defer excess discretionary earnings (such as commissions or bonuses) to a lower-income year.
• If you are self-employed, consider maximizing payments of deductible expenses in high-income years while deferring late-year customer billings to the following year.
• Think about increasing your withholding or quarterly estimate payments to cover any additional liability.

2. Investment income

• The surtax on net investment income is trickier but provides more planning opportunities. To reduce this surtax:
  • Consider liquidating depreciating stocks to offset capital gains.
  • Shift some investments to tax-deferred annuities, municipal bonds, or other vehicles that don’t generate taxable income.
  • Maximize deductible contributions to traditional IRAs, 401(k) plans, or similar sheltered investments. Their earnings are excluded from NII, and the contributions reduce your MAGI.
  • Donate appreciated stocks to charities rather than selling them.
  • Try to make otherwise taxable investments through a Roth IRA. The earnings won’t be part of NII, and subsequent tax-free withdrawals won’t count toward the thresholds.

Marriage: Tax Penalty or Bonus

Summertime is the traditional season for weddings. If you’re planning a wedding this summer, you should take a look at how marriage could affect your tax bill.

Marriage: Tax Penalty or Bonus?

1. Tax Penalty.

• The so-called “marriage penalty,” is the term applied to the amount of additional taxes some couples pay after they marry.
  • If you and your spouse earn similar amounts of income, you may pay more tax as a married couple than each of you would as single individuals because your joint income pushes you into a higher tax bracket.
• Other provisions that can create a marriage penalty include phase-outs of personal exemptions and itemized deductions.
  • The new Medicare taxes can create a penalty because the threshold for applying them is $200,000 for singles and $250,000 for couples filing jointly.
  • If one spouse has a retirement plan at work and the other contributes to an IRA, you may not be able to deduct the full amount of your IRA contributions after you’re married.

2. Tax Benefit.

• The tax code can also create “marriage bonuses” which are situations when tax liability can decrease after you marry.
  • For example, if only one spouse has income, the wider brackets for marrieds at certain tax rates will give the couple a lower tax bill than paying as a single on the same amount of income.
• Other marriage bonuses: A wage-earning spouse can make an additional IRA contribution for a nonworking spouse, and married homeowners get double the $250,000 gain exclusion when they sell a home.
  • What to do: Analyze the benefits of potential current income tax savings against your future goals.
  • For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision.

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