1. Make an S-Election on an LLC you set up this year and used for Operations- This is a unique trick we implement for several clients each year. If you previously paid a lot in Self-Employment Tax and for some reason had an LLC (sometimes a major mistake by other planners), you can easily still elect it to be taxed as an S-Corporation retroactively to January 1st, 2013. However, don’t forget to do your payroll (see the next strategy…you can’t pull this off in the spring without completing the payroll portion in Strategy 2 below).
2. Set YOUR Payroll Amount- If you have an S-Corporation, C-Corporation OR LLC-taxed as an S-Corporation, it’s critical you nail down your payroll before year-end. A lot of people wait until 4th quarter to do their payroll, which is not a good idea, unless you want to get nasty letters and a potential audit from the IRS. However, even if you were ‘good’ and did your quarterly payroll throughout the year, 4th quarter is a great time to nail it down and set the right amount…maybe you increase it or lower it based on your net-income. You may also want to increase or decrease it in order to maximize your 401(k) contribution (see Strategy #5 below). This strategy alone can save you thousands if you choose the right amount. PLEASE schedule a consult on your particular situation to hit the right payroll amount. You actually don’t file the payroll report until January, but again, if you are considering a 401(k) contribution, you’ll need to deal with it sooner.
3. Put your Kids or Grandkids on Payroll- This is another strategy that we have emphasized in previous newsletters and classes; however, it is often overlooked AND under- utilized. Paying your children for bona-fide services they provide in your business can be a powerful tax saving tool. First, remember that if you have an S or C-Corporation, be aware that the Internal Revenue Code requires that you withhold FICA from any and all employees on the payroll. However, if you pay your children through a sole-proprietorship or single member LLC, and the child is less than 18 years of age, the business is not required to withhold FICA. Moreover, the child can use their standard deduction of $6,100 in 2013, against that same amount of ‘earned income’ and pay no income tax at all. The onerous ‘Kiddie Tax’ does not apply to earned income. Needless to say, it is critical that you follow the proper procedure in capitalizing on this deduction. However, this may be a deduction you can utilize before year-end. As for Grandkids, they still need to work for the company and provide bona-fide labor, but maybe we run their pay through Mom and Dad (Your Children), thus they run a family management company providing support for your business. It may or may not work, but it depends on your situation and needs to be legitimately structured.
4. Put your Spouse on Payroll- This could be a great strategy, or a big mistake. To be direct and to the point, you only want to consider this strategy if your spouse wants to contribute money to their 401(k) for tax planning purposes. Other than that, it really doesn’t make sense to pay payroll taxes on income that will end up on your joint return anyway.
5. Implement a 401(k) or Defined Benefit Plan before year-end- If we had to isolate the most popular retirement vehicle and utilized most frequently, it would be the 401(k) for the small business owner. Historically, the 401(k) was too expensive and complicated for the small business owner. NOW there are companies that can provide very affordable 401(k) plans with easy set-up and maintenance procedures. MOREOVER, these 401(k) plans can be ‘self-directed’ and utilized in real estate transactions, hard money lending and small business investments. In sum, most business owners can implement a 401(k) in their business before year-end, wherein they are the only employee, and deduct up to $51,000 this year with matching ($17,500 right off the top as your deferral before matching, with an additional $5,500 for those 50 and older)! Defined Benefit Plans have the same investment opportunities and benefits, but can allow taxpayers to deduct even more and potentially over $225,000, depending on their age and the type of defined benefit plan.
6. Establish Your Entity- Start 2013 with the proper entity. January 1st is a perfect time to set up your books and a bank account. Just make sure you don’t file it too early and create a short-year tax return. Timing is everything. Our Para-legals are experts at this, please get us in the mix to get the right filing date.
7. Close on that rental property before year end!!- Historically, this may have been a tax strategy employed at the end of the year with extremely limited benefits (depreciation on real property is calculated on a month by month basis in the year it’s purchased). However, “Cost Segregation” is one of the fastest growing areas in tax planning and has only historically been used by owners of large commercial projects. Essentially, Cost Segregation is the process of reclassifying the assets of a rental property into real and personal property, thus moving certain assets into an accelerated depreciation class. This process can literally allow property owners to defer up to thousands of tax dollars. With that said, even if you don’t get a big ba10 Year ng for your buck with the depreciation, you could certainly ‘check it off your list’ if you haven’t bought your rental this year. Sometimes there are incredible deals right before year-end.
8. Purchase the Best Vehicle For YOU- Consider a vehicle weighing more than 6,000lbs- The rule states that if a taxpayer purchases a SUV or Truck with a Gross Vehicle Weight Rating (GVWR) in excess of 6,000lbs, the taxpayer may deduct depreciation expenses up to $25,000. Large trucks with a 6ft or greater truck-bed can deduct up to $500,000 (this will go down to $25,000 for all equipment purchases after January 1st…ANOTHER minor Fiscal Cliff will be coming). Act now if you’re in the market for a big truck or van. IF you want something more economical, consider the purchase of an Electric vehicle- This tax incentive ends December 31, 2013, so if you are in the market, get moving. The Nissan Leaf or Tesla are just two of several electric vehicles that are eligible for a tax credit up to a maximum of $7,500.
9. Push Income or Expenses to the Proper Year (Buy or Sell)- This is a standard strategy, but a tricky one with higher tax rates this year and ObamaCare taxes looming ase well. Typically, we want to push income to the next year and accelerate expenses to the present year (a basic time value of money thing). However, spreading out income between this year and next is most important and trying to stay under certain higher marginal tax brackets.
10. Make a ROTH Conversion- This could be the perfect time to convert your traditional IRA or 401(k) to a ROTH. Essentially paying taxes now at a lower rate and never have to worry about paying taxes on your withdrawals in the future. Regardless of your income, you can convert as many dollars as you want. The cool part is that as long as you make the election before December 31st, you can always ‘undo’ the election by April 15, 2014. So if you get gun shy later and/or can’t pay the tax you were expecting, check the ‘reset’ button.
In Summary, there is a lot here and PLEASE consider a consult with any of our Managers or Personal Tax Consultants (PTCs). If you are a client of ours, you’ll be getting an email from your personal PTC to suggest an appointment. However, if you get anxious, OR you are a potential new client, please give us a call!! You can reach the accounting team at K&E CPAs by calling and speaking with our administrative assistant, Merichia Merritt. You can reach her at 435-865-5866 or [email protected].
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.