Tax planning is often thought of solely as a year-end activity. While there are a number of tax minimization moves that can be made within the last 60 days of the year, it is typically a mistake to wait until then to do all of your strategic tax planning. For businesses in particular, numerous tax planning techniques cannot be effectively implemented without proper planning and implementation that require a longer timeframe.
“One of the key aspects of our tax department’s services is tax planning, helping our clients to look ahead and consider strategic moves that can minimize their tax exposure,” says Curtis Campbell, partner, HMWC CPAs & Business Advisors in Tustin. “Several of these strategies require a careful tax analysis, as well as business planning, so we typically work closely with clients to help them plan and execute each step.”
Smart Business spoke with Campbell about some of the midyear tax planning techniques that he offers his clients.
What are some of the tax breaks available for hiring workers?
The Work Opportunity Tax Credit is a federal tax credit incentive Congress provides to private-sector businesses for hiring individuals from target groups who have consistently faced significant barriers to employment. The main objective of this program is to enable the targeted employees to gradually move from economic dependency into self-sufficiency as they earn a steady income and become contributing taxpayers, while the participating employers are compensated by being able to reduce their federal income tax liability. It is available through Aug. 31, 2011.
If you own a business, consider hiring your children. As the business owner, you can deduct their pay, and other tax benefits may apply. They can earn as much as $5,800 (the 2011 standard deduction for a single taxpayer) and pay zero federal income tax. They can earn an additional $5,000 without paying current tax if they contribute it to a traditional IRA. They must perform actual work and be paid in line with what you’d pay nonfamily employees for the same work.
Are there opportunities with employee benefits?
Due to the economy, employers are continuing to evaluate their benefits and compensation programs to get the most ‘bang for the buck.’ For example, small employers (generally those with 100 or fewer employees) that create a qualified deferred compensation plans may be eligible for a $500 credit per year for three years. The credit is limited to 50 percent of qualified startup costs. Some fringe benefits, such as group term-life insurance (up to $50,000), health insurance, parking (up to $230 per month) and employee discounts, aren’t included in employee income, yet the employer still receives a deduction and typically avoids payroll tax, as well.
Should employers take action now on the health care act?
The Patient Protection and Affordable Care Act was a sweeping overhaul of the U.S. health care system. Starting last year, the act provides many small businesses a new tax credit for purchasing group health coverage. If you aren’t providing health care coverage, this tax credit might make doing so more affordable. For tax years 2011 to 2013, the maximum credit is 35 percent of the premiums paid by the employer. To get the credit, the employer must contribute at least 50 percent of the total premium or of a benchmark premium. The full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of less than $25,000. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $50,000.
What about tax planning for capital expenditures?
The Tax Relief Act of 2010 and The Jobs Act of 2010 had some positive changes affecting Section 179. The deduction limit was increased to $500,000 and the total amount of equipment that can be purchased was increased to $2 million. Business owners can use the Section 179 election to deduct (rather than depreciate over a number of years) the cost of purchasing such things as new equipment, furniture and off-the-shelf computer software. You can claim the election only to offset net income but not to reduce it below zero. There are other limitations, so check with your tax advisor.
In lieu of electing Section 179 deductions, a taxpayer could consider taking ‘bonus depreciation’ on new assets acquired during 2011. Bonus depreciation has no dollar amount limitations and can credit a net operating loss.
Are there any special incentives for manufacturers?
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the Federal Research and Development Tax Credit through Dec. 31, 2011. This credit, which is generally equal to a portion of qualified research expenses, continues to be the best tax incentive for manufacturers. It’s complicated to calculate, but savings can be substantial, so consult your tax advisor. Also, the Domestic Production Activity Deduction provides businesses that have ‘qualified production activities’ with a deduction of 9 percent of the net income arising from these activities based in the United States. Calculating the deduction can be complex, depending on the nature of the business activity.
This article is for general information purposes only and should not be construed as a professional opinion on any specific facts or circumstances. The tax advice contained in this article is not intended to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person.
Curtis Campbell is a partner at HMWC CPAs & Business Advisors (www.hmwccpa.com), one of Orange County’s largest local accounting firms. Contact him at (714) 505-9000 to discuss how your company or client could benefit from HMWC’s services.