The Impact of Indecision
Possible Tax Planning Ideas in the Face of Uncertainty
by Josh Weiss, CPA, ABV, CFF, Lutz & Company PC
On one side of the “Fiscal Cliff”, that is dominating the news and our governmental stagnation is the revenue side of the equation. The revenue is generated by income taxes and for as long as most can remember, there have been polarizing views on what to do with rates at which both corporations and individuals are taxed. For business owners, when the indecision and lack of compromise within Congress as well as between Congress and the President persists into late December, it is very difficult to plan for year-end and for the coming year. There are a few strategies business owners and individuals can employ at the end of 2012 to hedge against some of the uncertainty.
One thing that is known is the tax rates that will apply to income earned in 2012. Whether the government goes over the “fiscal cliff” or not, it is likely that some if not all tax rates will increase in 2013 and one will pay more next year. The Bush Era tax cuts will expire if Congress does nothing and all rates will increase. Additionally, qualified dividend income, which is currently taxed at the capital gains rate of 15%, is scheduled to increase to the ordinary income rates up to the highest marginal rate of 39.6%. Capital gains would also increase from 15%-20%. On top of those rate increases, the 3.8% surtax that was included in the Affordable Care Act (a.k.a. Obamacare) will be included on investment income for higher income individuals (those making over $200,000 singe or $250,000 married filing joint). While the 3.8% surtax applies to investment income, a 0.9% surtax will apply to earned income for those same higher income individuals.
Another major change relates to estate taxes. If Congress does nothing, the estate tax increases from 35% to 55% and the lifetime exclusion amount decreases from $5,120,000 to $1,000,000. This means that over $4,000,000 that could be transferred without an estate tax comes right into play with a much higher rate.
Of course, Congress and the President have time to strike a deal. However, it is not a lot of time and the chances of a policy being set forth before December 31, 2012 decreases every day. If one, had to guess, it appears likely that at least some rates on individuals are going up, the estate exclusions are coming down, but there are provisions from both sides that say not all the way to $1,000,000.
So what can a business owner do in the face of the uncertainty? One strategy may be to accelerate income into 2012 if possible. This can be done through use of the proper method of accounting on your tax returns. Construction companies have a variety of methods to choose from and owners should consult their CPA to be certain they have utilized the correct method. Another way to take income in 2012 is in the form of bonuses or dividends from the company. This strategy takes into account the financial health of the company and the specific tax circumstances surrounding the company and the individuals that may receive the income or dividends.
If you were considering selling or transferring company stock, 2012 may be the year to do it. The $5,120,000 estate tax exclusion has encouraged many owners to look at gifting or transferring a portion of their company stock to the next generation. This can be done with little tax implication if done properly. The gifting needs to take place during 2012 in order to take advantage of the exclusion amount and the lower rates on amounts above the exclusion level. Again, consult your legal and accounting professionals to be certain such a gift or transfer makes sense for your company. There are specific valuation and tax return requirements for a gift and a professional familiar with such matters should be a part of the transaction so that everything is within the appropriate standards and rules.
Selling or transferring stock in the company would allow the owner to take advantage of the lower capital gains rates. However, time is running short to complete such a transaction. If you are in the process of selling your business, it may be worth pushing to finalize the deal by the end of the year.
In any case, contractors and business owners in all industries should take a hard look at their individual circumstances. Selecting a tax strategy by trying to outguess what the government will do can create significant unknown repercussions. However, if you have analyzed your company and your individual tax situation, you may be able to react quickly or take advantage of some of the last minute strategies and take advantage of the things that are known over the last few weeks of the year.