•Hire a worker who has been unemployed for at least 60 days before year end if you are thinking of adding to payroll soon. Your business will be exempt from paying the employer’s 6.2% share of the Social Security payroll tax on the formerly unemployed new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire on the payroll for a continuous 52 weeks, your business will be eligible for a nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This credit will be taken on the business’s 2011 tax return. In order to be eligible, the formerly unemployed new-hire’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
•Put new business equipment and machinery in service before year-end to qualify for 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance won’t be available for property placed in service after 2010.
•Make expenses qualifying for the $500,000 business property expensing option. The maximum amount you can expense for a tax year beginning in 2010 is $500,000 of the cost of qualifying property placed in service for that tax year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2010 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). Note that at tax return time, you can choose not to use expensing (or bonus depreciation) for 2010 assets. This is something to consider if tax rates go up for 2011 and future years, and you’d rather have more deductions after 2010 than for 2010.
•Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.
•Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.
•Consider whether to defer cancellation of debt (COD) income from the reacquisition of an applicable debt instrument in 2010. The business can elect to elect to have the cancelled COD income included in gross income ratably over five tax years beginning with the fourth tax year following the tax year in which the repurchase occurs (i.e., beginning with 2014).
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
The midterm elections have changed the Congressional landscape, with Republicans winning control of the House of Representatives and picking up seats in the Senate. Even so, it’s still too early to know exactly how this will affect open tax issues for 2010 and 2011.
Specifically, when the “lame-duck” Congress returns this month, it must decide whether to “patch” the alternative minimum tax (AMT) for 2010 (increase exemption amounts, and allow personal credits to offset the AMT), as it has done in past years. It also must decide whether to retroactively extend a number of tax provisions that expired at the end of 2009. These include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes, and the additional standard deduction for State and local real property taxes.
In addition, Congress must decide whether to extend the Bush tax cuts for some or all taxpayers. They and other Bush-era tax rules expire at the end of this year. Without Congressional action, individuals will face higher tax rates on their income, including capital gains. Also, unless Congress changes the rules, the estate tax, which isn’t in effect this year, will return next year with a 55% top rate.
In short, year-end planning—which always involves some educated guesswork—is a bigger challenge this year than in past years.