2013 Year-End Tax Checklist for Shops
The following is for general information only. Please contact your accountant to ensure these recommendations are applicable to your business. Please contact Matt Dougher with your Association with questions.
On January 1, 2013 Congress passed the American Taxpayer Relief Act (“ATRA”), resulting in significant increases in tax rates for higher income taxpayers. This makes year end planning all the more important, to determine the extent of the rate increases on your tax bill and to reduce taxes as much as possible.
The most prominent ways income taxes were increased in 2013 include:
1. Restored the highest tax bracket of 39.6% in effect before the Bush tax cuts
2. Increased the tax rate on dividends and capital gains from 15% to 20%
3. The new Net Investment Income Tax of 3.8% is now in effect
4. Reinstated the “Pease” limitation on itemized deductions
5. Brought back the phaseout of personal exemptions
6. Increased the payroll tax on compensation greater than $250,000
The most basic tax planning strategy is to look for ways to defer taxable income, either through accelerating tax deductions or deferring recognition of income. Even if income tax is deferred for only one year, the taxpayer enjoys the use of the cash saved in reduced taxes, in the form of added liquidity and financial return.
1. Make sure that a reasonable estimate of your LIFO adjustment for the year is on all versions of your December financial statement. There are no exceptions. The best place to charge the LIFO estimate is to cost of sales in a cost account that has no other activity.
2. Compare your actual parts inventory versus the accounting parts inventory and record any adjustments as needed. Have your parts manager determine which parts would be considered worthless or obsolete. Subject to your review, dispose of these parts by year-end. Have the parts manager give you a copy of the parts inventory summary that shows the dollar amount of parts in inventory at the end of the year along with the aging of the inventory.
Capital Expenditures / Depreciation
1. Review your fixed asset purchases and expense all items where appropriate. You may be eligible to utilize the one-time “Section 179” expensing election and bonus depreciation elections or for purchases of desks, computers, etc.
• Section 179 deduction – may elect to deduct up to $500,000 of qualified fixed asset purchases. The election is reduced dollar for dollar to the extent that more than $2,000,000 of assets are placed in service.
• Bonus depreciation – first year depreciation deduction of 50% of cost for the purchase of new qualified assets placed in service before December 31, 2013. Assets placed in service in 2014 or later are not eligible. Deduction is also allowable for alternative minimum tax (“AMT”)
2. If you have any building repair or maintenance items such as painting, etc. that needs to be completed in the next few months, have these performed by the end of 2013.
3. Consider performing a cost segregation study for recent construction projects. The significant potential tax benefits, which result from accelerating depreciation deductions, are amplified with the availability of bonus depreciation treatment described above.
1. Review all past due accounts receivable and write off those receivables that are uncollectible.
2. Review your bank reconciliations and void out any checks that are not expected to clear. Consider the Ohio unclaimed funds reporting requirements when voiding old outstanding checks.
3. Carefully review prepaid assets and expense all items in this account that pertain to 2013.
1. Accrue all expenses for wages, bonuses and vacation that will be paid within 2-1/2 months of year-end to employees.
2. Make sure you pay any interest, salaries, commissions, rents, or bonuses due to stockholders in December, in order to take the deduction this year (for S corps, all shareholders; for C corps, 50% or greater shareholders; or anyone related to either.) Also, be sure a Form 1099 is issued for interest and rents paid to any individual in excess of $600.
3. Make sure the payroll tax and sales tax payable accounts equal the actual amount of all taxes to be paid for the 2013 fourth quarter and year-end tax returns.
4. Make sure to accrue any unpaid 2013 profit sharing plan contributions, where applicable. These can be deducted in 2013 so long as they are paid before the extended due date of the company’s income tax return.
5. If you have any nonqualified deferred compensation arrangements, review them carefully with your CPA or attorney to assess how the American Jobs Creation Act of 2004 may affect them. Certain terms can make deferred income taxable now, as well as incur an additional 20% penalty.
1. Keep your accounting records open at the end of December:
a. Keep your accounts payable journal open to record all 2013 expenses in 2013 including advertising, interest, utilities, telephone, gasoline, data processing, insurance, property taxes, etc.
b. Make sure all miscellaneous inventories are adjusted to actual including labor inventory, sublet, gas-oil-grease, body shop materials, etc.
c. Where possible, reconcile all balance sheet accounts before closing year-end.
2. Make sure you have available the amount spent on meals and entertainment in 2013. This does not include travel and it should not include the employee holiday party. Consider establishing a separate sub-account for meals & entertainment to avoid additional work to identify these costs at the end of the year.
3. Make sure you have made all required personal and corporation income tax deposits for 2013 and see that your personal income tax withholding is adequate. Consider paying all real estate and state income taxes expected to be owed for 2013 before December 31, 2013, in order to take federal income tax deduction. Caution: review any potential AMT implications before taking this step.
4. If you plan to make any charitable contributions (both cash and non-cash) in the next few months, consider making them before the end of 2013 to get the deduction now. In certain circumstances, charitable contributions made by corporations can be accrued at year-end if paid within 2-1/2 months.
5. For S corporations, partnerships, and LLC’s that will incur a loss in 2013, make sure you have sufficient stock or debt basis in order to deduct the loss. If you will not have sufficient basis, consider making a loan to the entity to create basis. Remember that all loans must bear adequate interest and be in the form a formal written loan document.
1. Make sure to include in employees’ W-2s any personal expenses paid by the company during the year on their behalf, including personal use of company automobiles. For S Corporation shareholders, amount of group health insurance and disability insurance should be added to their W-2s.
2. A company which is an S Corporation, Partnership, or LLC should be reminded that owners of these entities cannot participate in Section 125 (Cafeteria Plans).
3. Make sure IRS Form 1099-MISC is issued to all non-employees (not corporations) that received over $600 in 2013. Review these non-employees to see if they should really be considered employees for payroll tax purposes.
1. If you or the company own stocks that have unrealized losses, consider selling them to offset any capital gains recognized earlier in the year.
2. If you make gifts to children or other relatives each year for estate tax purposes, make the gifts no later than December 31, 2013. Review gift tax return filing requirements.
Feel free to call John Hayes of Maloney + Novotny at (216) 344-5231.