With lawmakers burning the New Year’s Eve oil to finalize tax laws, Business Alabama has gone to tax advisers and experts for their best strategies to help you steer your company toward a less taxing tax season.
Because of so many potential changes, 2013 is the year “to have your CPA on speed dial, ” says Clint Freeman, a CPA in Warren Averett’s Montgomery office.
Kimberly Key, associate professor at Auburn University’s School of Accountancy, urges business owners to monitor tax changes and to keep your tax advisers informed about your major plans in case tax-planning opportunities arise.
But, says Key, remember that even a year of tax uncertainty doesn’t translate to a time to let the “tax tail wag the business dog.”
Key Tax Changes Expected for 2013
Last-minute deals left even our experts uncertain about what has changed, what might change and what might change back. So follow up on these expected changes with your own tax expert. But don’t let them catch you off guard.
Tax Rate Increases
- Income tax rates — maximum could increase from 35 to 39.6 percent
- Corporate income tax rates — maximum would drop from 35 to 28 percent under President Obama’s Framework for Business Tax Reform
- Payroll tax increase. The temporary tax cut passed for 2011 and 2012 has expired, so employees will pay 6.2 percent toward Social Security again, instead of 4.2 percent and self-employed individuals will pay 12.4 percent instead of 10.4 percent.
- Capital gains tax rates due to increase between 10 and 25 percent
- Estate tax credit of $5.12 million decreases to $1 million, with the tax on the remainder going from 35 to 55 percent.
- To be taxed as ordinary income at the recipient’s regular rate, representing a jump of zero to 15 percent
- Depreciation drop
- Immediate write-off limit set to drop from $139, 000 to $25, 000 (IRC Section 179)
- Fifty percent bonus depreciation no longer available in 2013
Up 0.9 percent for employees earning more than $200, 000. (Patient Protection and Affordable Care Act of 2010 or PPACA)
- All employees must get the same health care benefits (PPACA) unless the company plan predates the law (March 23, 2010). There’s a $100 per day per affected participant penalty, but enforcement has been delayed until the IRS issues regulations.
- New cap on flexible spending account limits employee salary reduction contributions to $2, 500 in 2013
Consider the tax implications of any tangible property you purchase. New regulations on capitalization and deductions don’t take effect until 2014, but check them out now.
Complying With Changes and Protecting Your Bottom Line
Get ready to act on tax changes, but then wait, advises Brad Howell of Palmer, Meadows & Howell. Some of the changes may not materialize. But there are key steps to take now:
Reconsider your business structure.
Review with your tax adviser the choice of entity you are using for your business, which you probably selected for liability protection and taxes. It may be time for a change because increased Medicare taxes on wages and self-employment income affect some entities but not others.
Curtis Stewart, director of the Alabama Department of Revenue’s Tax Policy and Research Division, warns that businesses may experience a “double whammy” by paying higher individual tax rates and having to restructure to comply with payroll tax changes. Increasingly, he observes, companies are organizing as pass-through businesses to avoid double taxation — that is, income taxes levied at the individual owners’ level to prevent paying both corporate and individual taxes.
Start planning now.
Don’t wait until the last minute to consult with CPAs and attorneys, since many of these changes require time to plan.
Focus on taxes.
- Management should educate themselves on potential changes under the PPACA and inform their employees. Consider these steps:
- Create a team of tax compliance advisers (both internal and external) to be prepared for future changes.
- Strengthen or establish a tax department.
- Educate and train employees who plan business and tax strategies now, to minimize tax or HR issues as revamped laws and rules go into effect in the coming years.
2013 Deductions and Credits Businesses Should Not Miss
- Federal tax credit up to 35 percent for small businesses paying at least half the cost of employee health coverage. Business with 10 or fewer employees making $25, 000 or less get the biggest tax credit, sliding down for bigger businesses and higher-paid employees.
- Alabama allows an additional health insurance deduction for some businesses with fewer than 25 full-time employees.
- Consider flexible spending accounts that give employees a tax break for setting aside $2, 500 toward medical expenses.
Tax credit of 20 percent of cost of irrigation equipment, up to $10, 000.
Manufacturing, Construction, Engineering, Architecture, Agriculture Processing and Computer Software
Look for the manufacturer’s deduction (IRC 199) of a percentage of income and wages
Implement new regulations early to generate deductions for 2012.
Implement ways to mitigate or avoid the new 3.8 percent Medicare tax on net investment income in place in 2013
If marginal tax rates are higher, consider taking maximum advantage of tax deferral mechanisms, such as cash balance retirement plans.
Follow possible extension of valuable credits, such as the Work Opportunity Credit and Research Activities Credit.
Common Tax Pitfalls and Mistakes to Avoid
A common oversight is ignoring tax compliance issues until a problem surfaces or delaying to tackle a tax issue, says Hardwick Walthall, of Maynard, Cooper & Gale. If a compliance problem is not discovered until an audit occurs, for instance, it’s often too late to avoid significant taxes, interest and penalties. These are some other mistakes our experts warn against:
Inadequate record keeping
- Maintain and organize records throughout the year instead of waiting until the year’s end.
- Store digital records offsite through cloud computing services to protect your records beyond your physical storage device.
- Be aware of the record-keeping requirements for specific tax deductions
Misclassifying employees as independent contractors
Claiming entertainment expenses without documentation that shows a business benefit
Claiming personal miles on a company car
Borrowing from payroll tax withholdings.
- When businesses get in a cash crunch, they sometimes borrow from these funds but there are substantial penalties if withholding isn’t paid on time
Unreasonable compensation paid to company owners
Trusting one employee to handle accounting with no supervision from the owner
Talking taxes takes an expert
For many of us, taxes are always a conundrum. But this year tax matters are even more complex with lots of changes and plenty of unanswered questions. We asked a variety of experts around the state to help us unravel these taxing matters.
Tips and timely reminders were provided by:
C. Barton Adcox, attorney with Adcox Associates LLC, Tuscaloosa
William Dow, CPA with Warren Averett accounting firm, Birmingham office
Clint Freeman, CPA with Warren Averett, Montgomery office
Brad Howell, attorney with Palmer, Meadows & Howell in Birmingham
Renee Hubbard, CPA with Jackson Thornton accounting firm in Montgomery
Shirley Justice, attorney with Sirote and Permutt in Birmingham
Kimberly Key, associate professor at Auburn University’s School of Accountancy
Janet A. Moore, CPA and shareholder of JamisonMoneyFarmer in Tuscaloosa and Birmingham
Curtis Stewart, director of the Alabama Department of Revenue’s Tax Policy and Research Division
Laura C. Strachan, attorney with Adcox Associates LLC, Tuscaloosa
Hardwick Walthall, attorney with Maynard, Cooper and Gale in Birmingham
Jessica Armstrong is a freelance writer for Business Alabama. She lives in Auburn.