Year-End and Fixed Asset Purchases

As year-end is approaching, are you facing big profits and big taxes?  With December 31 getting closer, one of the right moves before the end of the tax year can be purchasing fixed assets.  Assets put in use by December 31 can be expensed through Section 179 instead of being depreciated over a number of years.  For 2013, firms can expense up to $500,000 of assets put in use during the year (sorry, cars with under a 6,000 gross loaded weight, buildings and many leasehold improvements do not qualify).  Both new and used assets are eligible for this break.  Unless Congress acts, the ceiling for Section 179 assets in 2014 will be around $150,000.

Certain assets that were not expensed through the Section 179 deduction have 50% bonus depreciation which is set to expire after 2013.  Businesses using this deduction can write off one-half of the cost of new (used assets do not qualify) assets with useful lives of 20 years or less.  Leasehold improvements made to the interiors of commercial buildings are eligible too.  The other half of the cost is recovered via regular depreciation.

A new 6000 lb SUV put in use during 2013 allows you to deduct much of the cost in 2013.  Say your business pays $52,000 for a new SUV with a gross vehicle weight over 6,000 lbs, it works like this.  You can expense $25,000 for the cap for SUVs.  Half of the remaining $27,000 cost, or $13,500, is bonus depreciation.  Twenty percent of the remaining $13,500, or $2700, is taken as normal depreciation.  So $41,200 of the $52,000 cost is deductible in 2013.

Pickup trucks with loaded weights over 6,000 pounds can be fully expensed as long as the bed is at least six feet long.  For lighter vehicles, the maximum deduction in the first year is $11,160.

Having said all that, I don't condone making fixed asset purchases solely to reduce taxes.  There should a solid business reason to purchase the fixed asset in addition to the tax savings.

The US Government Shutdown And The IRS

The IRS is predicting a delay in the start of the tax filing season by up to two weeks from January 21 to as long as February 4.  They are testing new procedures to detect identity theft and help prevent refund fraud and since they were on furlough for two weeks it sets back the testing two weeks.  You don't think it could be that they are pissed at Congress for the shutdown do you?  In December, the IRS will announce the official starting date.

In addition to the delay in the start date of 2013 tax filing season, the IRS is saying it will not issue refunds as quickly as in years past because of the anti-identity-theft controls it's implementing.  The IRS has not announced about how much longer it will take to get a refund.

If you mailed any correspondence to the IRS during the government shutdown, don't hold your breath.  The IRS Service Center was swamped, receiving an estimated 400,000 pieces of correspondence during the furlough, many of which were unopened.  It will be quite a while before the IRS gets caught up.  So anyone that sent in documentation in the last month to the IRS should not expect any resolution soon.

Between budget cuts and the furlough, customer service has taken a big hit at the IRS.  None of us mind if they don't have time to do as many audits, but the phone hold times are the worst I have seen in my 21 years of dealing with the IRS and it's taking a very long time to get issues resolved with the IRS.

The IRS and Merchant Card and Third Party Network Payments

Remember a couple of years ago when the IRS and Congress mandated that all Charge Card Processors must issue a 1099-K for Merchant Card and Third Party Network Payments? And these charge card sales were to be listed on a separate line on the business tax return?  Then Congress and the IRS reversed that decision and said we didn't have to list the charge card sales separately and we all released a sigh of relief.

Did you think that was the end of it?  Did you think that small business had made such a fuss on this issue that the IRS and Congress caved on this issue?  Well, think again.  We still don't have to report the charge card sales separately on the tax return but the charge card processors have to report card sales to the merchants and the IRS on Form 1099-K.

Guess what.  The IRS, or more specifically the Underreporting Department of the IRS, is taking the 1099-K information, tabulating it by taxpayer and comparing the total charge card sales to the total sales.  From there, they are sending out letters to taxpayers in question announcing that gross receipts may be underreported compared to other businesses of similar type and suggesting that the taxpayer in question may want to amend their tax return and report more sales.

If the Underreporting Unit does not receive a response to their original notice they send out, a follow-up notice where they threaten to issue a Statutory Notice of Deficiency or to conduct a tax audit if they do not receive a satisfactory explanation within 30 days of why the taxpayer's charge card deposits are not out line, will be sent.

Beware small business owners!  The IRS is watching your deposits closer starting in 2011 than previously.

Will I Get Audited? Itemized Deductions Comparison

Do you wonder how your deductions compare with the other tax filers?  Here is the preliminary the IRS released from the 2011 tax returns.

The date is for those that had that particular deduction on their tax return.  For instance, most tax filers in the Under $15,000 category had no Medical Expenses.  This is just for those that did.  In fact, the Medical Expense Column only includes the deductible amount which is the amount over the 7 1/2% of Adjusted Gross Income.

Don't you have to wonder how a taxpayer who took the Medical Expenses Deduction with Under $15,000 on average could pay for $8,350 in Medical Deductions over their Adjusted Gross Income?

Don't worry, you won't automatically get audited for having above average deductions.  For example, taxes can vary by states that have income tax and those who do not.  However, if your deductions are disproportionately larger when compared with your income, your audit risk can go up.  Every tax return that is filed is scored by a top secret computerized formula and those with scores much different than the norm get pulled out and the audit department looks at them and decides when returns require a further look.

New Option for the Home Office Deduction Starting With Tax Year 2013

Claiming the home-office deduction is about to get easier.  The IRS announced last week it is introducing a simplified option for claiming the home office deduction, which owners of home-based businesses and some other home-based workers use to write off the expense of using part of their residence for work. 

In the past many have passed up the deduction because the calculations required are so complicated. 

Under the new rules business owners will be able to claim $5 a square foot for up to 300 feet or a maximum deduction of $1,500.  The new deduction will be available for 2013 tax returns and comes with a much simpler form (I know ... we will believe it when we see it).    

The current method requires taxpayers to fill out the 43 line Form 8829 which, unless you are one of the nerds on the Big Bang Theory, can be overwhelming. 

The IRS says you can stick with the old form and in many cases that will give you a bigger deduction. 

The IRS says nearly 3.4 million taxpayers claimed the home-office deduction in 2010 but the National Association of the Self-Employed found that nearly 60% of the business owners who used home offices didn’t file for the deduction so the change may benefit many business owners.

IRS Delays Tax Season Until January 30

The Internal Revenue Service announced yesterday that it has delayed the opening day of the 2013 tax filing season for the 2012 individual tax returns to January 30, more than a week after the initially planned start date of January 22.  It could be worse however for certain taxpayers.

The reason for the delay is the very late passage of the fiscal cliff legislation by Congress.  The Internal Revenue Service needs the extra time to update their forms and complete the programming and testing of its computer system. 

If you claim residential energy credits, depreciation of property or general business credits it may be until late February or into March before the IRS finishes the extensive forms and processing system changes. An exact date will be announced later.  The depreciation of property could affect those individuals with Schedule C Sole Proprietor or Schedule E rental property.

This delay goes for both E-filing and paper returns. The IRS says this delay does not affect Corporate or Partnership tax returns.

Fiscal Cliff Changes

Yes, your taxes are going up but it could have been much worse.  The average American's household tax will go up about $25 a week but without the changes it could have been as high as $67 a week if Congress did nothing.

The biggest change is the temporary reduction in social security tax from 2011 & 2012 was not extended.  This mean the 2% cut in the payroll taxes that wage earners have enjoyed over the past two years ratchets back to its normal 6.2 level on the first $113,700 of wages or self-employment taxes.  You no doubt already discovered this in your first pay check in 2013.

The highest wage earners will pay higher taxes.  Their marginal income tax rates will rise from 35% to 39.6% on income over $400,000.  In addition their tax rate on dividends and capital gains will increase from 15% to 20% which will not make Mitt Romney happy.

The new tax bill also restores caps on itemized deductions and phase outs on those individuals making more than $250,000 ($300,000 for couples).  Mortgage deductions will be capped for individuals making more than $250,000 and couples making in excess of $300,000.

The Alternative Minimum Tax "patch" which adjusted the Alternative Minimum tax for inflation was also passed.  Previously it had to be passed each year but now it happens automatically.  This actually affects the 2012 taxes as well.

It appears that most of the items that were set to expire such as the Child Credit, Earned Income Credit, and the College Tuition Tax Credits have all been extended another 5 years to when there very well could be another fiscal cliff.

And lastly since it took Congress so long to pass these changes (mainly the Alternative Minimum Tax) it's going to take a couple of weeks for the IRS and the Tax Software people to update the changes and be able to process the 2012 tax returns particularly for those that itemize.  You early tax filers may have to wait an extra couple weeks for tax season to begin.  Also the IRS is not promising their rapid refunds in the 2 week window we have experienced the last few years.