When talking about tax strategy for 2010 and beyond, the only sure thing is change.
Some tax laws are expiring and others are being enacted to stimulate the economy, presenting tax deduction opportunities for businesses and individuals.
While keeping track of those changes can be difficult and time-consuming for a busy executive, an experienced tax consultant can help you identify opportunities to benefit from the changes and develop your tax strategy, says Cathy Goldsticker, CPA, member, tax services at Brown Smith Wallace LLC.
“As the government works to reduce unemployment and stimulate jobs and the economy, tax strategy is the low-hanging fruit, and an expert can help you identify it,” says Goldsticker.
Planning is critical, and businesses should begin working now with an adviser to start identifying tax strategies to help minimize taxes, says Martin Doerr, CPA, member in charge, tax services, Brown Smith Wallace.
“There are lots of details to finalize and decisions yet to be made, such as the 2011 tax rate or whether certain tax cuts that are expiring this year will be renewed,” says Doerr. “However, businesses should look at everything on the table so they don’t miss any tax opportunities.”
Smart Business spoke with Goldsticker and Doerr about how to plan your rapidly approaching 2010 year-end tax strategy in a fast-changing tax environment and the steps you can take to maximize deductions.
What items can trigger Alternative Minimum Tax (AMT), and what steps can be taken to mitigate the loss of valuable tax deductions?
AMT was created to ensure that wealthy individuals and businesses pay a minimal level income tax. When calculating regular income tax, minus deductions, a separate alternative calculation is also figured.
The taxpayer must pay the higher of the two, and with all of the tax changes coming down the pike, more individuals and businesses will be paying AMT in fiscal 2011 and beyond.
That said, it’s important to consult with a tax adviser and determine how taking deductions or allowable depreciation will affect the overall tax picture. With AMT, certain business and individual tax deductions, such as property taxes, state/local taxes and investment expenses, are not recognized, thereby preventing taxpayers from getting the full benefit of these deductions.
There are some steps businesses can take to mitigate AMT: Slow down allowable depreciation on qualifying property by using a straight-line rather than accelerated depreciation method; defer certain deductions to a subsequent year because these deductions will not provide tax benefit in a year when a taxpayer owes AMT; and project whether AMT is likely in 2011 to plan future tax strategies accordingly.
How can self-employed individuals, such as partners, sole proprietors and S corporation shareholders, minimize self-employment tax?
Consider ways to receive business funds without owing self-employment taxes. Set up rental property and establish supporting operations.
For instance, rather than a business purchasing equipment, the individual buys it and rents it back to the business at fair market value. While that income is subject to income tax, it is not subject to self-employment tax.
Another suggestion that applies only to S corporations is to withdraw income as distributions rather than taking income as wages once reasonable wages are paid. Investor distributions are not subject to Social Security and Medicare taxes, but wages are.
Finally, for business owners of C corporations, now is a great time to consider taking dividends out of the company because they will be taxed at 15 percent this year, without incurring self-employment tax. Next year, that dividend tax will increase to 20 percent, and perhaps more, depending on how tax law plays out.
What should taxpayers know about selling a second home at this time?
Now may not be the time to sell a second home. In today’s environment, sellers who are fortunate to have a profit will pay 15 percent capital gains rates (plus sales tax where applicable) on that profit. This is different from when you are selling a primary residence, where sellers are usually exempted from capital gains tax.
But here’s the real clincher with selling a second home now: Not only do you pay capital gains tax if you make money on the sale, if you sell it at a loss, you do not get to take a deduction. Selling is a lose-lose situation.
Also bear in mind that if you have a foreclosure on the property, there could be hidden tax consequences. Hold out on selling that second home and consider renting; it may be your best option.
Does retirement plan funding still make sense in today’s tax environment?
Employer-sponsored plans, such as 401(k)s or certain IRAs, provide a tax deduction for the employer, and the employee is not taxed on the income. Employers wanting to fund benefits for their employees are wise to consider a retirement plan. A lot of businesses already have these plans in place, they just need to maximize them. The old adage to ‘buy low and sell high’ is a popular strategy, and that’s exactly what’s going on now in the retirement plan funding environment.
Tax law changes are approaching, but, with uncertainty as to which changes will occur, a proactive tax strategy will position businesses to maximize the benefits. Tax planning is essential in times of change.
Cathy Goldsticker, CPA, is a member, tax services, Brown Smith Wallace LLC. Reach her at (314) 983-1274 or firstname.lastname@example.org.
Martin Doerr, CPA, is a member in charge, tax services, Brown Smith Wallace LLC. Reach him at (314) 983-1350 or email@example.com.