Tax-planning Strategies for Small Businesses

tax planning

Good news: you still have time to significantly reduce your 2014 business income tax bill. Here’s a digest of the best year-end tax-saving moves for small businesses.

Buy Heavy SUV, Pickup or Van
Big SUVs, pickups and vans are useful for hauling people and stuff around in your business, and they also offer major federal income tax advantages.

• Thanks to the Section 179 instant depreciation 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 before the end of your business tax year that began in 2014.

• After taking advantage of the Section 179 deduction, you can follow the “regular” tax depreciation rules to write off whatever is left of the business portion of the heavy vehicle’s cost over six years, starting with this year.

• 50% first-year bonus depreciation for new (not used) vehicles expired at the end of 2013, but I expect Congress to restore this valuable break for new vehicles that are put in service before year-end. If that happens, your allowable first-year depreciation write-off for a new vehicle will be even higher.

To qualify for this beneficial tax treatment, you must buy a “heavy” vehicle, which means one with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds, and you must use the vehicle over 50% for business. You can usually find a vehicle’s GVWR on a label on the inside edge of the driver’s side door where the hinges meet the frame. First-year depreciation deductions for lighter vehicles, are much stingier. The maximum write-off is only $3,460 for new light trucks and vans (or $11,460 if first-year bonus depreciation is restored), and it is only $3,160 for new cars (or $11,160 if bonus depreciation is restored).

Juggle Income and Deductible Expenditures Through Year-End
If you run your shop as a sole proprietorship, LLC, partnership, or S corporation, your share of the net income generated by the business is reported on your Form 1040 and taxed at your personal rates. Since the 2015 individual federal income tax rate brackets are not much different from this year’s (see the tables at the end of this column), consider the time-honored strategy of deferring income into next year while accelerating deductible expenditures into this year – if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2014 until 2015.

On the other hand, if your business is going great, you might expect to be in a significantly higher tax bracket in 2015 (say 35% versus 25%). In this scenario, take the opposite approach: accelerate income into this year (if possible) and postpone deductible expenditures until next year. That way, more income will be taxed at this year’s lower rate instead of at next year’s higher rate.

How to Defer Taxable Income
Most small businesses are allowed to use cash-method accounting for tax purposes. Assuming your business is eligible, cash-method accounting gives you the flexibility to micro-manage your 2014 and 2015 taxable income in order to minimize taxes over the two-year period. If you expect your business income will be taxed at the same or lower rate next year, here are specific cash-method moves to defer some taxable income until 2014.

• Charge recurring expenses that you would normally pay early next year on credit cards. You can claim 2014 deductions even though the credit card bills won’t actually be paid until 2015.

• Pay expenses with checks and mail them a few days before yearend. The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, consider sending checks via registered or certified mail, so you can prove they were mailed this year.

• Before year-end, prepay some of next year’s expenses. As long as the economic benefit from the prepayment does not extend beyond the earlier of: (1) 12 months after the first date on which your business realizes the benefit or (2) the end of the tax year following the year in which the payment is made. For example, this rule allows you to claim 2014 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.

• On the income side, the general rule for cash-basis businesses says you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near yearend to send out some invoices to customers. That will defer some income until 2015, because you won’t collect until early next year. Needless to say, this idea should only be used for customers with solid payment histories.

Stay Tuned for News About Restored Depreciation Breaks
Last year’s super-favorable depreciation rules will only apply if our beloved Congress resurrects them and President Obama goes along. The good news: I expect those things to happen. If they do, the following beneficial depreciation rules will be available for asset additions that are placed in service during the current tax year. I will notify you of any developments, but be prepared to act fast to take advantage.

Much More Generous Section 179 Deductions
For tax years that began in 2010-2013, the maximum Section 179 instant depreciation deduction for eligible new and used assets (other than heavy SUVs) was a whopping $500,000. For instance, the $500,000 limit applied to Section 179 deductions for new or used computer gear, purchased off-the-shelf software, new or used office furniture, and new or used machinery and equipment. The up-to-$500,000 Section 179 deduction limit also applied to new or used heavy long-bed pickups and new or used heavy vans used over 50% for business. As the tax law currently reads, however, the maximum Section 179 deduction for tax years beginning in 2014 is only $25,000 and the deduction cannot be claimed for off-the-shelf software. The good news: I expect the generous $500,000 cap and the allowance for off-the-shelf software to be restored for tax years beginning in 2014, when Congress reconvenes.

Real property expenditures have traditionally been ineligible for the Section 179 deduction privilege. However, there was an exception for so-called qualified real property that your business placed in service in tax years that began in 2010-2013. Specifically, your business could claim a Section 179 deduction of up to $250,000 for expenditures on the following types of real property:

• Interiors of leased nonresidential buildings.

• Restaurant buildings.

• Interiors of retail buildings.

As the tax law currently reads, no Section 179 deduction is allowed for real property expenditures. The good news: I expect the $250,000 Section 179 deduction for qualified real property expenditures to be restored for tax years beginning in 2014, when Congress reconvenes.

50% First-Year Bonus Depreciation for New Asset Additions
For 2013, your business could also claim 50% first-year bonus depreciation for qualifying new (not used) equipment and software. The bonus depreciation deduction was on top of any allowable Section 179 deduction. For example, bonus depreciation was available for computer systems, purchased software, machinery, office furniture, and so forth if the costs exceeded what you could write off under the Section 179 deduction privilege. As the tax law currently reads, no bonus depreciation is allowed for assets placed in service in 2014. The good news: I expect 50% bonus depreciation to be restored for qualifying new asset additions that are placed in service in 2014, when Congress reconvenes.

Coming Soon: News on Other Business “Extenders”
Beyond the aforementioned depreciation tax provisions, there is a list of other popular business tax breaks that Congress habitually allows to expire before ultimately extending them for another year or two. The tax credit for R&D expenditures is probably the most important example of these so-called “extenders.” I will notify you of any developments on the extender front. Meanwhile, be prepared to act fast before yearend if these breaks are resurrected for this year.

This article originally appeared on and is reprinted by permission from, ©2014 Dow Jones & Co. Inc. All rights reserved.

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