Year-end Tax Moves

Year-End Tax Moves

Tax consultant offers tips for business owners

BY Milton Zall, special to airport business

September 1999

You can reduce your 1999 tax bill by taking certain steps before the year ends. Here's a rundown of some of the more important tax moves you can make before 1999 draws to a close.

Marginal rate analysis
There's a chance to save some tax dollars, if you do business as a C (regular) corporation. Unlike an S corporation or a partnership, a C corporation is taxed as a separate entity. The first $50,000 of income is taxed at 15%. The next $25,000 is taxed at 25%; the next $25,000 is taxed at 34%. Taxable income from $100,000 to $335,000 is taxed at 39%. (This is done to eliminate the graduated rates on income below $100,000.) You may be able to take advantage of the graduated rates to substantially reduce this year's tax bite through "Marginal tax rate analysis". Example — Jim is an employee and the sole shareholder of XYZ Corp., a C corporation. Based on Jim's best estimates, XYZ will have a taxable income of $125,000 during 1999. Thus far in 1999, Jim has taken only $65,000 in salary. Jim and his wife Mary together have a taxable income of $60,000. That puts them well within the 28% bracket. On the other hand, the last $25,000 of income of XYZ will be taxed at 39%. If Jim increases his salary by $25,000, XYZ's income will decrease by that amount, saving $9,750 in taxes. His personal income will go up by the same amount, resulting in an additional $7,000 in taxes. The $9,750 reduction in corporate taxes less a $7,000 increase in personal taxes, yields a permanent tax saving of $2,750. You can calculate your potential tax saving by finding the difference between your tax bracket and your corporation's. In this example, the difference is 11% (39% less 28%). Multiply that by the amount of the income shift ($25,000 in this case) and you have your answer.

Contributions to IRA and Keogh Plans
In order to ensure the tax deductibility of your contributions to IRA and Keogh plans, make sure you make them in time. For IRAs, you can deduct contributions made before April 15, 2000, and have until that date to establish the IRA if you do not already have one. For Keoghs however, your Keogh plan must be established by December 31, 1999, although you have until April 15, 2000 to make your 1999 contribution.

Sale of Real Estate
If your business owns real estate that has appreciated in value and is considering selling it in 1999, one way to avoid incurring taxes on your capital gain is to make a "like-kind exchange" for another similar property that will also be held as an investment. If you make such an exchange, no income tax is due now. Income tax will be payable only when you dispose of the second property.

Income deferral
If you do business as an S corporation, partnership, sole proprietorship, etc. the net income (or loss) of the business is passed through to you and reported on your individual tax return. You want to defer income to next year if you anticipate being in a lower tax bracket. Conversely, you want to accelerate income into 1999 if you think you will be in a higher bracket next year. By now, you should have a good idea of which way your income is headed. If 1999 is a big year and 2000 will not be as good, you want to push income into 2000. If it's a toss-up, you should probably still defer income; it will improve your cash flow by delaying tax payments.

Timing the Acquisition of Depreciable Property
The tax reform legislation enacted thirteen years ago bars business owners from placing business equipment into service at the end of the year and still getting a full year's worth of depreciation. Under present rules, when you place depreciable assets into service, this has a direct bearing on the depreciation allowance you are entitled to. If you place more than 40% of your annual equipment purchases into service during the last quarter of the year, all of the business equipment placed in service during the year is subject to the "mid-quarter" rule. Under this rule, the quarter during which an asset is placed in service governs your depreciation allowance — the middle of that quarter is used to calculate the amount of depreciation that you are entitled to. When we speak of placing equipment into service, we mean that it is ready to be used, it need not actually be placed in use.