It's the end of the year, which means time has all but run out to make significant changes to your tax position. But it's an ideal time to think about next year's tax plan, notes William C. Lentine, a senior attorney in the taxation and estates group in Dykema's Bloomfield Hills, Michigan, office.
In a recent interview with Inc., Lentine cited three tax topics that small business owners should keep in mind heading into 2015:
1. Section 179 depreciation. You're probably familiar with the concept of depreciation: In plain English, it means that you're spreading deductions for your investments in business equipment over a period of several years (as opposed to taking a one-time deduction in the year you make the purchase).
For the past several years, Section 179 depreciation had allowed businesses to make a one-time deduction for investments in capital equipment of up to $500,000. This was a boon for business spending--the usual cap on these deductions was $25,000.
"When the economic crisis occurred, the thinking was that we need an additional benefit to encourage people to spend," says Lentine. "And that with that higher threshold, businesses would buy more significant equipment."
Here's the catch: Section 179 expired at the start of 2014. And as of this week, Congress had not yet reinstated it. But that reinstatement remains a real possibility. Last week, the House of Representatives overwhelmingly (by a vote of 378 to 46) passed H.R. 5771, a bill including the reinstatement of Section 179.
Now it's up to the Senate, which hasn't yet revealed when it will consider the bill. Some experts believe a one-year reinstatement is likely. In fact, Inc. columnist Gene Marks is quite confident about it, encouraging business owners to spend on capital equipment as if it's a sure thing the $500,000 limit will be reinstated.
Mark Luscombe, principal federal tax analyst for publisher and information-services provider Wolters Kluwer, is less optimistic.
Nonetheless, what you need to be mindful of, as an business owner, is that the reinstatement hasn't happened yet (as of Dec. 8). So keep tabs on H.R. 5771 and follow the news. It could have a significant impact on your tax bill--and spending strategy--for the next 12 to 18 months.
2. The IC-DISC tax benefit. If exports are a big part of your business, the IC-DISC is something you should look into for next year. (The acronym stands for Interest Charge-Domestic International Sales Corporation.)
First, you have to do the legwork of setting up an IC-DISC. In terms of time and effort, the process is comparable to setting up a standard corporate structure, Lentine says. Ask your lawyer to do it. You'll need a bank account, stock certificates, and nominal ($2,500) capitalization.
Once established, the IC-DISC exists as a tax-exempt domestic corporation, owned by your company's shareholders, to receive commissions on qualified export sales. In simplified terms, here's how it works: Your company's shareholders, now the owners of the IC-DISC, pay commissions to the IC-DISC. Those commissions are either 50 percent of the net income or 4 percent of the gross of qualified exports--whichever is higher.
The IC-DISC, in turn, can distribute the income from those commissions (up to $10 million) as dividends to your company's shareholders. You know what that means: Those shareholders get to pay the dividend tax rate (usually 20 percent) as opposed to the regular income tax rate (as high as 39.6 percent). That's a significant tax savings on qualified export receipts.
OK. So how can you tell if your business should set up an IC-DISC? Dean Zerbe, national managing director at alliantgroup, a national tax consultancy, listed three types of companies that tend to qualify for the IC-DISC tax benefit in a Forbes column. Lentine verified the list for Inc.:
- A company that directly exports goods it manufactures. Zerbe points out that "what counts as a manufactured good is also broader than many people realize--it can include software, films, and many agricultural products."
- A company that provides architectural or engineering services that are conducted in the U.S. for a building or bridge built outside the U.S. Zerbe's example is "an architectural firm based in Los Angeles designs a building that is built in China."
- A company that manufactures a good that is included in a product that is exported. "This is probably the largest missed opportunity for businesses when it comes to the IC-DISC," notes Zerbe.
To learn more about the IC-DISC, read The National Law Review's primer.
3. Midyear reviews. Lentine suggests meeting with your tax professionals in the middle of the year--not just at the end of it. By doing so, you'll be able to catch many of the errors which, too often in Lentine's experience, can go undetected for a full year.
Many of these errors involve basic habits of record keeping. "One of the most common mistakes you see is, in an audit, questions arise about what are the supporting documents for expenses," Lentine says. In his experience, many business owners simply fail to collect and save their supporting documents--the everyday receipts and credit card statements that verify their expenses.
Knowing a midyear review is coming can remind you to stay on track with your record keeping. The main thing you need to do is keep your receipts in a safe place. Better still, take the time every day to record your expenses in a notebook or on a spreadsheet. You can also download apps that help with the process.
In other words, even if the heavier-hitting tax tips in this story--Section 179 and the IC-DISC--don't apply to your business, the very least you can do for next year is resolve to regularly record your expenses. Your tax professional will thank you.