By Cliff Ennico
In last week’s column, I wrote about some of the recent tax law changes that you will have to deal with when filling out your tax return for the year.
Is there anything you can do to minimize the impact of these changes?
The short answer is “yes, maybe”. Here are six things small business owners may be able do to reduce their tax exposure this year.
Divorce Your Spouse (At Least On Your Tax Return). The new tax rates that went into effect last year created a significant “marriage penalty” for spouses who file their taxes jointly. Generally:
- Married couples with income of more than $250,000 ($125,000 if filing separately) have to pay the 0.9 percent additional Medicare Tax and 3.8 percent additional tax on “net investment income;”
- Married couples with income of more than $300,000 ($150,000 if filing separately) can no longer take all their personal exemptions and itemized deductions; and
- Married couples with income of more than $450,000 ($225,000 if filing separately) face an additional 4.6 percent tax on ordinary income.
If there is a large income discrepancy between you and your spouse and you are filing jointly, it may make sense for you to file separately this year if doing that will reduce one spouse’s income below the appropriate thresholds. For example, if a married couple where the husband has income of $500,000 and the wife has income of $100,000 files separately, the recent tax increases would not apply to the wife’s income and she will retain all personal exemptions and itemized deductions. If that couple files jointly, the additional taxes will apply to their combined $600,000 income less the threshold amount, and the couple will lose some of their personal exemptions and itemized deductions.
Form a Limited Liability Company (or Better Yet, a Corporation) for Your Business. “Above the line” deductions reduce both your “adjusted gross income” (AGI) and your “modified adjusted gross income” (MAGI), while below-the-line or “itemized” deductions do not. Your level of AGI or MAGI is much more important now as they determine your exposure to the 3.8 percent net investment income tax and the phase-out of your itemized deductions and personal exemptions.
If you are not currently treating your moneymaking activities as a real “business”, forming a corporation or LLC may enable you to convert many of your itemized deductions into “ordinary and necessary business expenses”, which are above-the-line deductions for self-employed people.
Forming a “C” corporation gives you an additional benefit, in that corporate tax rates are currently much lower than the individual tax rates owners of LLCs and other “pass through” entities have to pay, and there’s talk of reducing corporate tax rates even further. Taking money out may even be deductible to the corporation if you do it right.
Take the Home Office Deduction. The eligibility rules for claiming a home office deduction have been loosened. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. Doctors, for example, who consult at various hospitals, or plumbers who make house calls, can now qualify. You must, however, use the space exclusively for business.
Depreciate Your Home. Even if you are taking the home office deduction, you may not be depreciating your home office for tax purposes. Doing so gives you a bigger deduction, but keep in mind that if you sell your home you will have to pay tax on any capital gain that results from depreciation claimed for the office after May 6, 1997.
Fire Some People. Under the Affordable Care Act, small businesses with 50 or more “full-time employees” are required either to provide them with qualified health insurance coverage or pay a penalty to the IRS. If you have part-time employees (or independent contractors that can be reclassified as employees because you haven’t been following the rules), the calculation becomes quite tricky.
Speak with your tax advisor as soon as possible and do the “Obamacare headcount”. If you find yourself uncomfortably close to 50 full-time employees, consider laying off some employees, or converting some full-timers to part-time status, in order to avoid the Act’s requirements.
Give Away Lots of Stuff. One of the few itemized deductions to remain unscathed by the new tax laws is the deduction for charitable contributions. Give generously, and give often, in 2014 to take maximum advantage of the deduction. If you are considering a significant 2014 contribution to a public charity (such as a church, synagogue, or college), it will usually save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds to charity.
Finally, if you plan on dying in 2014, you and your spouse can reduce your taxable estate by making annual gifts to your children and others up to $14,000 each ($28,000 total) for each donee.
Cliff Ennico(email@example.com) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. Copyright 2013 Clifford R. Ennico. Distributed By Creators Syndicate, Inc. Follow Cliff: @cliffennico.