Year End Tax Planning Opportunities

By: William J. Killory, CPA (Nov, 2011)

Last year at this time Congress had passed four major tax acts and the extension of the Bush era cuts would be passed right before Christmas. This year one very small piece of legislation was passed that extends the Work Opportunity Tax Credits to unemployed military veterans and eliminates the three percent withholding on federal contracts that was set to be implemented. With a divided Congress and the failure of the so-called Super Committee, the likelihood of any significant legislation before the November 2012 elections is remote.

With the approach of the year end there are several tax planning opportunities that should be looked into. Bonus depreciation, where you are able to write off the entire cost of new assets with a useful life of twenty years or less, will expire on December 31. The assets must be placed in service by the end of the year in order to qualify so make sure the equipment is plugged in and available for operations. If you are paying for the equipment with a term loan, please understand that the deduction comes this year and the cash flow out will continue over the term of the loan. You must affirmatively opt out of bonus depreciation if you want to use the normal tax depreciation allowances. New York State (and many other States as well) does not recognize bonus depreciation so there will be an adjustment on your state return as a result.

The expensing election under Section 179 is $500,000 for 2011 for new and used assets. If you purchase more than $2 million in qualified assets then the expensing benefit starts to phase out. The expensing election next year will be $139,000 and the phase out will begin when purchases exceed $560,000. New York State does recognize the federal limits but not all states do. Like the rules for bonus depreciation in order to qualify for the deduction the asset must be placed in service prior to the end of the year. If it is in the budget and cash flow allows this is a nice tax benefit that can be used this year.

One of the last best tax shelters out there is the pension plan. In order to take full advantage of your 401(k) plan your deferral amount must be made before the end of the year. The maximum deferral for 2011 is $16,500 with an additional $5,500 for those of us over age 50. The maximum compensation for a profit sharing plan is $245,000 with the maximum contribution of $49,000 for 2011. The matching contribution doesn't have to be made until the extended due date of the return so you can take a deduction for 2011 and make the payment in 2012 for this year's tax return.

This is a good time to figure in your year-end bonuses, calculate withholding to at least make your minimum tax payment and determine how much will be owed come April 15th. The value of the personal use of company provided vehicles should be in your last pay stub along with the health insurance benefits for S Corporation owner-employees.

Federal tax brackets remain the same as last year with minor adjustments for inflation. The rate ranges from 10% to 35% and will remain the same for 2012 along with the maximum rate of 15% for qualified dividends and long term capital gains. Many of our clients are affected by the Alternative Minimum Tax (AMT) because of high New York State income taxes along with our property tax rates. AMT limits the ability to utilize state income tax deductions or use your personal exemptions. The expanded AMT exclusion remains the same as last year to mitigate the impact of this alternate tax calculation. When your adjusted gross income goes from $150,000 to $200,000 you start to lose the benefits of education and other credits and this can put you in a marginal tax bracket that exceeds fifty percent. The New York State rates for those that make more than $500,000 are 8.97% for 2011. The maximum rate is scheduled to revert to 6.85% in 2012 if Governor Cuomo gets his way.

Year end tax planning is not as simple as putting pencil to paper. Balancing corporate obligations, making sure you meet loan covenants, utilizing pension plan opportunities and trying to forecast cash flow complicates the process. Related party rental activity creates other problems and opportunities where losses could be suspended while income may not be available to offset other unrelated passive loss activities. It takes putting all the pieces together, weighing the options available and using good planning software to verify the results. If the proper planning is done now then there should be no big surprise come next April 15th.

As always, please contact your Dermody, Burke & Brown advisor if you have any questions regarding your year end tax planning.

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