Tax Recipe for 2013
The expiration of the Bush tax cuts was a potential change for 2013, but several tax and accounting adjustments already were baked in the cake.
By now, we should know whether the federal government has driven America off the fiscal cliff of tax increases and spending cuts, or kicked the can down the road. Whatever the outcome, the cliff wasn’t the only tax or accounting consideration that should have been top-of-mind for businesses.
Several tax increases were already set to take effect Jan. 1, and unless a last-minute surprise occurred in Washington, businesses could expect much less attractive expensing rules in 2013. On the positive side of the ledger, there is movement toward leaner and less complicated accounting rules for small and medium-sized business entities.
Even with the year-end uncertainty, comparatively few changes could make 2013 a time for accountants to catch their breath. “We needed a year when there is not a lot of change,” acknowledged Glenn Miller, managing partner of Wegner CPAs & Consultants. “For 2013, there was not a lot already baked into the cake.”
Perhaps not, but there are some key ingredients. So in addition to presenting small bites like adjustments in the maximum 401(k) contribution ($17,000 to $17,500), the FICA wage limit ($110,100 to $113,700) and employee tax rate (4.2% to 6.2%), and the mileage rate for business travel (55.5 to 56.5 cents per mile), IB spoke to several area accountanting executives who offer a combination of ingredients and cooking instructions.
While some are more appetizing than others, hopefully they won’t combine to serve as a recipe for disaster.
Ingredient #1: Just a Fraction of the Sugar
At year’s end, there was still a chance that more generous expensing could be revived, but most accountants expected the 50% bonus depreciation for qualified new property to be eliminated, and Section 179 expensing for equipment purchases to fall to $25,000. In 2011, the 179 write-off was $500,000; in 2012, it was $139,000.
“That is really going to be a disincentive for small businesses to purchase equipment because if you buy equipment, you’re going to have to write it off over seven years, but your bank is going to make you pay for it over three years,” explained Gordon Meicher, managing partner of Meicher & Associates. “That’s how a lot of businesses get trapped because you’re making the money, so you have to pay the tax. But you don’t have the write-off, and you’ve got to pay your bank.”
Ingredient #2: A Teaspoon of Tax Relief
Beginning in 2013, businesses can take advantage of an accounting change pertaining to repair and maintenance. According to Wendy Landrum, a partner in strategic tax services for Baker Tilly Virchow Krause, companies can reduce their tax burden by deducting repair and maintenance costs that previously were capitalized and depreciated.
Landrum said businesses would be able to write off “cosmetic” improvements as the costs are incurred, rather than over the appreciable life. Initial guidance came out in December 2011, and the regulations should be finalized in 2013. “They provide guidance on how to take a deductible repair cost in the current year instead of capitalizing and depreciating the cost of an asset over 15 or 39 years for building property,” she explained.
Examples of deductible repairs are painting, replacing or repairing damaged windows, and cosmetic updates to flooring and ceiling tiles. Not deductible are costs to replace major components or substantial structural parts of a building, or investments that result in a betterment, restoration, or change in use.
Ingredient #3: A Heap of the Surtax
As part of the financing piece of the Affordable Care Act, Congress established a 0.9% Medicare surtax on wages and self-employment income and a 3.8% Medicare surtax on net investment income, which applies to individuals, estates, and trusts. Both surtaxes kick in at the following income thresholds: $200,000 for single filers, $125,000 for married filing separately, and $250,000 for married filing jointly.
Diane Nienow, tax manager at Smith & Gesteland, said employers will have to withhold the additional 0.9% Medicare tax on employee wages over $200,000. In addition, “if you have a Schedule C business or pass-through income from a partnership involved in a trade or business, you may be subject to the 0.9% surtax,” Nienow said. “The additional withholding will be paid in 2013. You may also want to increase estimated tax payments for 2013 to cover the additional surtaxes. It’s one of those things you will have to look at when you do your tax returns.”
Ingredient #4: Leavening Agent
Joshua Ganshert, a partner with Baker Tilly Virchow Krause, said that because of these tax increases it’s important to maintain a consistent level of annual income, rather than having large spikes. “If you are a taxpayer whose income is cyclical, is there a way to flatten out your income stream so that you don’t make $500,000 one year and zero the next year?” Ganshert asked. “There are things you can do with regard to installment sale planning, timing your deductions and your income receipts, and with retirement planning.”
Moreover, since passive income is part of the surcharge threshold, Ganshert advised businessmen and women to study whether they can increase participation in passive activities to make them active. “Are there certain grouping elections that you can make, or should make, so that those activities aren’t passive? If you are involved in real estate, do you qualify for the real estate professional election? Those are all items that are important with the 3.8% surtax.”
Ingredient #5: Frosting
Since the passage of Sarbanes-Oxley, a controversial law that was passed to address the corporate accounting scandals of the early 2000s, privately held businesses have been pleading with accounting standards boards to keep it simple, stupid. The people who made these rules aren’t really stupid, but somehow the same regulations designed to prevent publicly held mischief (remember those high-level executive perp walks?) also impacted smaller, privately held businesses. Jim Smolinski, a partner in the assurance operations group with Baker Tilly Virchow Krause, said organizations like the Financial Accounting Foundation and the American Institute of Certified Public Accountants now realize they have to make financial reporting easier for small to medium-sized businesses.
As part of a new financial reporting framework, a Private Company Council is expected to propose exceptions to generally accepted accounting principles, including less onerous disclosure requirements and changes to fair value standards. Since the changes would impact loan covenants, they will get the white-glove treatment by banks, but Smolinski said his privately held clients would welcome leaner, more relevant financial reporting.
“The standards that are coming out today are more and more complex, there are a lot of disclosure requirements, and private companies have been saying for years that this isn’t good information,” Smolinski stated. “The expense it takes to put this information together isn’t worth it.”
Beyond our shores, the Financial Accounting Standards Board is working with the International Accounting Standards Board on global standards for revenue recognition, consolidation, insurance contracts, and leases. Some could be finalized in 2013, but they are likely to pertain to large, publicly traded multinationals. Implementation could take several years.
“With many businesses working in a global environment, getting those two standard-setting bodies to be a mirror of each other is the focus of all these changes,” said Dave Rupp, an assurance manager for Smith & Gesteland.
The fiscal cliff could make for a more complex accounting year, so track the results very carefully, especially since changes could impact this year’s tax preparations. “The answer to what’s going to happen is, ‘“I’m not really sure,’” Nienow said. “Hang tight. Stay tuned.”
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