Year-End Tax Planning

Tax planning is the art of arranging one's financial affairs in ways that postpone or avoid taxes.  Deferring and avoiding income taxes by taking advantage of beneficial tax law provisions, increasing and accelerating deductions and credits, and generally making maximum use of all relevant breaks and favorable exceptions available under the Internal Revenue Code.  The following is a summary of a few tax provisions to consider for business and individual year-end tax planning.

Consider taking some capital gains in 2010.  The stock market has had a pretty good run-up recently.  Now may be a good time to take some gains by selling appreciated stocks and other taxable investments owned generally longer than a year.  The current long term capital gain tax rate is 15% and it is expected to go up to 20% or more in 2011.

If you have money left in your employer-sponsored FSA or your own HSA and use it for tax-free withdrawals for non-prescription drugs like pain and allergy medications consider stocking up on these medications before year end.  Starting next year, this tax-favored treatment will only be available for prescription drugs, insulin and doctor-prescribed over-the -counter medications.  It's always a good idea to review your FSA balance before year end and try to utilize an existing balance because whatever amount one doesn't use you lose.

After 2010 the 30% tax credit (Max $1,500 overall for 2009 and 2010) for common energy-saving home improvements and equipment expires.  If you're planning on purchasing new windows or exterior doors, insulation or various more common high efficiency heating and cooling equipment do it in 2010 to qualify for the credit.  It's important to note that the improvements must be installed in 2010 and one must obtain an manufacturer's certificate that the product is eligible for the tax break.  It's also important to remember the maximum credit for these common upgrades is $1,500 over the 2 years 2009 and 2010 not $1,500 per year.

C Corporation business owner should consider dividend distributions or a stock redemption in 2010.  Both dividends and long-term capital gains are currently taxed at the same maximum federal rate of only 15%.  Unless Congress takes action to extend the current tax rates, higher tax rates on dividends and long-term gains will kick in for post 2010 years.  2010 may be a good time to distribute extra cash from your C Corp at a low tax cost.  This move can have other side benefits as well.

If one's planning on starting or purchasing a small business there are tax benefits to doing it before 12/31/10.  The Small Business Tax Act increased the exclusion from 50% to 100% of capital gains from the sale of a business started between 9/27/10 and 12/31/10.  The business must be a C Corp and the investment must be for five years or longer.  The exclusion will apply to at least the first $10 million of gain upon the sale if applicable requirements are met.  The C Corp requirement for this exclusion may not be such a bad thing if individual tax rates increase next year.  A maximum post 2010 individual federal income tax rate of 39.6% or higher may favor a C Corp status over S Corp assuming that the current maximum C Corp rate structure will be left in place.  Consider this scenario, buy stock in a small business C Corp by 12/31/10, build the business and in five years sell it at a tax-free gain.  Not a bad retirement plan!  If things don't turn out like you plan and have to bail out at a loss, there also a tax provision that allows one to take an ordinary loss on the sale of qualified small business stock.

There are accelerated tax depreciation write-offs available for purchases of business autos, equipment, etc.  The section 179 expensing  limit is expanded in a way that could benefit more and more larger businesses than before.  The nice part about this deduction is that it can be taken immediately for taxes and deducted over a longer periods for book purposes so not to hurt your balance sheet.  The best of both worlds!

I've covered some complicated subjects that do not apply to everyone or every type of business.  To find out more about these or other tax provisions please contact Andrew Jordan, CPA at 248-514-6213.