A year end checklist
The end of the year is fast approaching, but there’s still time for business owners to plan to minimize tax liability. The following checklist is designed to help you review your 2014 transactions and activities and take beneficial action before Dec. 31.
Have you under- or overpaid? If you’ve underestimated your quarterly payments, plan to send a larger amount to the IRS in the fourth quarter. You may be able to avoid underpayment penalties by increasing your estimated tax payment and using the annualizing exception when filing your tax return. If, on the other hand, you’ve overpaid at least $500 and at least 10% of your expected tax liability, you may be able to use the IRS’s “quick refund” procedure.
Calendar vs. fiscal year: When to make a change
When your business was new, you may have chosen calendar year tax filing because it seemed like the simplest option. Now that your company is more mature, you might want to think about moving to a fiscal year basis. Many businesses find that a fiscal year basis offers greater convenience, improved workflow and maximum data efficiency.
If you operate a seasonal business, reporting income by calendar year could split your season and provide a distorted view of income and expenses. So if your business shows most of its expenses in one year and income in another, consider switching to a fiscal tax year. It will help ensure that both periods are included in the same 12-month data set.
Have you calculated the impact of gains and losses? You may be subject to a higher than anticipated tax rate because of depreciation recapture. If this is the case, consider whether selling other depreciable assets will allow you to offset existing gains. If you’ve sold assets at a loss, you may be able to use those losses to reduce your ordinary income or to shelter a capital gain on other assets.
Have you deferred or accelerated income? Generally, you want to try to defer tax liability to next year. If your company is cash based, you might decelerate income and accelerate expenses by putting off billing for your products or services. If your company is accrual based, you might delay shipping products or delivering services into the new year.
Have you taken advantage of Section 179? If you haven’t used the $25,000 maximum for 2014, you may want to do so. Keep in mind that the Sec. 179 expensing election may be limited based on the amount of qualified assets your business purchased this year. Also, to the extent you’re eligible to use Sec. 179, watch out for the midquarter convention that limits depreciation if 40% or more of the year’s asset purchases are made in the last quarter.
Have you thought about owner distributions? It pays to plan if you want to minimize tax on owner distributions. Verify your company’s year-to-date profit or loss and accumulated earnings, as well as the owner’s basis, amount at risk, loans to the company, loan repayments and other factors.
This checklist is only a sample of the deductions that may be available to your business. Talk to us about others that may apply in your situation.