It's Not Too Early to Ponder Year-End Tax Planning
As the economy slowly recovers from the recession, it is important that businesses, including their shareholders, partners and members, consider a variety of year-end tax planning opportunities. By being proactive in developing and implementing year-end tax strategies, businesses can avoid surprises come tax filing time.
Tax planning for 2010 presents new opportunities and challenges that should be evaluated to maximize potential tax benefits, and involves not only planning for the current tax year, but consideration of future years, as well. Here are a few of those opportunities:
Capital Expenditures
Recently signed into law was the Small Business Jobs Act of 2010, giving taxpayers the opportunity to accelerate deductions related to capital expenditures. Business owners considering making capital investments should consider doing so before year-end to take advantage of the earlier deduction. The key provisions include:
Additional first-year depreciation deduction equal to 50 percent of the cost of qualified property placed in service before Jan. 1, 2011.
Increased small business expensing, commonly referred to as Section 179, to $500,000 for tax years beginning in 2010 and 2011. The expense amount is reduced dollar for dollar to the extent the cost of qualifying property placed in service during the year exceeds $2 million.
Complicating year-end planning is the uncertainty relative to future tax rates, particularly for higher-income individuals. Accelerating deductions in a year prior to a rise in tax rates may not be the best strategy. Fortunately, decisions on a cost recovery strategy for assets acquired in 2010 may be deferred until tax filing time in 2011.
Timing of Income and Deductions
Another important year-end tax planning point is to evaluate the timing of income and deductions, especially for pass-through entities and their partners or shareholders. In past years, the basic strategy was, “defer, defer, defer.” However, without congressional action, the lower federal individual income tax brackets enacted by former President Bush are set to expire after 2010. Among the major changes that will occur is the increase of the top two federal individual income tax brackets from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively. With increased individual tax rates looming, taxpayers may want to consider accelerating income into 2010 and deferring deductions and losses into future years to take advantage of deductions at potentially higher tax rates, thus effectively reducing their tax burden.
The timing of income and deductions also applies when considering the impact of the alternative minimum tax. There are preference items that are disallowed when calculating the alternative minimum tax. These items need to be considered at year-end to avoid the permanent elimination of a deduction that, had it simply been deferred or accelerated, could have provided a tax benefit.
Dividend Distributions
Qualified dividend tax rates are also set to expire Dec 31. This means that in 2011, dividends will again be taxed at the recipient’s marginal ordinary income tax rate. Closely held corporations, including S corporations, with accumulated C corporation earnings and profits, should consider making dividend distributions to shareholders to take advantage of the current maximum rate of 15 percent.
Conversion to Roth IRAs
Roth IRAs have a number of advantages over the traditional IRA. Higher-income taxpayers (generally those with modified adjusted gross income over $100,000) have not been allowed to make contributions or rollovers to a Roth. In 2010, the income limit no longer applied to rollover contributions. The catch is? The conversion is fully taxable. However, if you believe your tax rate will go up and you’re willing to pay taxes on the account’s current value, future increases in value will escape income taxes forever. Finally, even a decision to convert to a Roth is not final: you actually have until the due date of your 2010 return (as late as Oct. 15, 2011, if extended) to change your mind and undo all or part of the conversion.
These are but a few 2010 tax strategies to consider. Additional planning opportunities and tax incentives and credits available should be considered when assessing specific needs of a business and its owners, so please consult your tax advisor. This information is general in nature; a more thorough review of the specific tax law and how it may be applied to particular facts and circumstances is necessary before taking action. 
J.J. Winston is a CPA and Jason Hamilton is a senior accountant, both with the firm of BKD LLP in Kansas City.
P | 816.221.6300
E | jwinston@bkd.com
E | jhamilton@bkd.com
Return to Ingram's October 2010