As 2012 draws to a close, time is running out for small business owners to plan for potential changes to the tax code. Several tax provisions are set to expire at the end of the year which could have a significant impact on small businesses. While no decisions have been made yet, one of the current proposals is to allow tax cuts to expire only for small businesses making $250,000 or more per year. With the looming changes to the current tax code and the uncertainty surrounding these changes, small business owners need to understand how these changes may affect their business so that they can be prepared.
Changes in Individual and Capital Gains Tax Rates
A vast majority of small businesses are organized in such a way that revenues are taxed at the individual rate instead of the corporate rate. Without action from the federal government, the expiring tax cuts will increase individual tax rates in 2013, resulting in a tax rate hike for many small businesses. The ten percent tax rate would vanish, leaving 15 percent as the lowest rate. The remaining rates of 25, 28, and 33 percent would go up three percent and the current highest rate of 35 percent would rise to 39.6 percent.
In addition, the capital gains rate would also increase. Gains on assets held longer than a year would be taxed at 20 percent instead of the current rate of 15 percent for middle-income and upper-income taxpayers. The rate for lower income taxpayers would rise to ten percent from zero.
Changes in Business and Estate Tax Rates
If the current tax cuts are allowed to expire, businesses will also face a decrease in the allowable expenses and real property will no longer be included. The start-up deduction for businesses will also be reduced from $10,000 to $5,000.
For business owners looking to leave their business assets to their heirs, or for those who may inherit assets, the maximum estate tax rate would increase from 35 percent to 55 percent. At the same time, the maximum exemption would decrease to $1 million from $5 million.
Reducing Taxes by Increasing Expenses and Deferring Income
The easiest way to reduce income taxes is to either increase deductions or defer income. Small business owners can increase deductions in a variety of ways, including purchasing supplies and equipment before the end of the year to be used in the future. Paying bills early, prepaying for maintenance and subscription plans and making charitable donations can provide significant deductions if done before the end of the year. Depending on the accounting method used, business owners can also depreciate assets to create additional deductions.
Small business owners can defer income by contributing to a qualified retirement plan before the end of the year. Qualified retirement plans include 401(k), IRA, and SEP accounts. Some types of investments, like annuities, also allow investors to defer taxes. Investors avoid paying federal income taxes on the principle and interest until they withdraw the money.
CPAs Can Help Facilitate These Proceedings
Certified Public Accountants (CPAs), can be a valuable professional resource, particularly when it comes to helping business owners identify and take advantage of opportunities to reduce their income tax burden. In addition to providing guidance and expertise regarding qualified retirement accounts and strategies for deferring income, a CPA can help small business owners manage cash flow, plan for growth, and mitigate risk.
In addition, many CPAs are also well versed in estate planning and can help business owners minimize taxes incurred when business assets are included in an estate. Since the finances of many small businesses are closely linked with the owner’s finances, a CPA can help business owners make sound decisions that benefit both the business and the personal interests of the owner.
How are you preparing your small business for the looming tax changes? Have you considered hiring a CPA to help your small business get through with minimal financial losses?
By Grant Webb with Bisk Education. Grant is a writer and learning facilitator with the 2012 CPA review program and focuses his attention on providing updates to Exam dates and blackout dates in addition to best practices for preparing to become a CPA.
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