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Year-End Tax Tips for Small Business Owners

With the end of 2013 on the horizon, now may be an ideal time for business owners to review their tax strategies. If you’re a business owner, here are just a few points to consider as you get ready to file your return.

Eligible equipment purchases and real estate investments

A number of tax provisions face possible expiration in 2013, unless extended by Congress. For this reason, business owners may want to consider making purchases and/or improvements now rather than putting them off until next year.

  • Internal Revenue Code (IRC) Section 179 expensing limit:
    IRC Section 179 allows a small business owner to deduct, or "expense," certain qualified property placed into service during the tax year. If the total cost of the qualifying property placed into service during the year exceeds a certain dollar amount (the "investment ceiling"), the deduction limit will be reduced on a dollar-for-dollar basis. In 2013, the total amount that can be deducted is limited to $500,000, and the investment ceiling is $2 million. In 2014, those amounts are scheduled to drop to $25,000 and $200,000, respectively.
  • Qualified real property:
    Up to $250,000 of qualified real property, which can include leasehold improvement property, retail improvement property, and restaurant property, may be included as IRC Section 179 property for purposes of the expense deduction above. Special depreciation rules also apply to this property. Both the IRC Section 179 and depreciation provisions expire at the end of 2013, however.
  • 50% bonus depreciation:
    This provision allows business owners to take a first-year bonus depreciation deduction of 50% of the cost of a qualified item, over and above the standard first-year depreciation amount. The provision will not apply after 2013.

When it comes to those deductions, it’s best to consult a tax advisor to help you determine the best strategy for your business. See IRS Publication 946, How to Depreciate Property, for more information.

Work Opportunity Tax Credit

Another temporary provision is slated to expire at the end of this year, unless renewed by Congress: the Work Opportunity Tax Credit, which allows employers a credit of up to 40% of an eligible new hire’s first-year wages (subject to a maximum credit limit). In order to claim the credit, new hires must be qualified and come from specific "targeted groups," including recipients of aid to families with dependent children or the supplemental nutritional aid program; veterans; ex-felons; residents who live in certain communities; vocational rehabilitation referrals; and SSI recipients. For more information, visit the IRS website (www.irs.gov) and review Form 8850 and its associated instructions.

Home office deduction

Finally, a new provision this year could benefit those who work out of their home. According to the U.S. Bureau of Labor Statistics, in 2010 there were 18.3 million home-based businesses (Source: "Home-Based Business Guide," Department of State, Family Liaison Office, November 2010). Yet the IRS recently reported that the number of taxpayers who claimed home office deductions in 2010 was just 3.4 million (Source: IRS news release, January 15, 2013). That may be why in 2013, the IRS launched its simplified home office deduction process. This "safe harbor" is designed to cut time and paperwork associated with taking the deduction. While the eligibility requirements do not change, the method of calculation does. Business owners may now choose to deduct $5 per square foot of eligible office space, up to a 300-foot ($1,500) maximum. The IRS has estimated that this safe harbor will save small businesses about 1.6 million hours each year in tax preparation time.

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