The “Tax” media buzz words for 2014 predominately include Tax Phase-Outs and Extenders. Anything to worry about? Absolutely, could be.
Here are some changes that could affect you:
Phase-Outs Affecting Capitalization
What are Capitalized Deductions?
Capitalized deductions are business expenditures, such as the cost of equipment, furniture, and vehicles that are expected to help generate revenue in future years. Hence, they are treated as investments in a business. They cannot be deducted in the same way as current expenses. They must be deducted over a number of years, or capitalized, as specified in the tax code (with one important exception — Section 179 — discussed below). Theoretically, capitalizing expenses allows a business to more clearly account for its profitability from year to year. The general rule is that if an item has a useful life of one year or longer, it must be capitalized.
There are many rules for how different types of assets must be written off. The tax code stipulates limits on some depreciation deductions, and the length of years a business must spread its depreciation deductions for all asset purchases. Businesses, large and small, are affected by these provisions (IRC §§ 167, 168, and 179).
Section 179 deductions—REDUCED for 2014
A valuable tax break creating an exception to the long-term write-off rules is found in IRC Section 179. In 2012 and 2013, a small business could write off in one year most fixed assets and some qualified real estate improvements up to a total of $500,000. This was subject to a phase-out after you reach $2,000,000 or more of eligible Section 179 expenditures. These limits were approved under the tax law passed by Congress on January 1, 2013. Although some assets don’t qualify for this deduction, it’s almost always a good idea to take full advantage of Section 179 when you can, unless your business doesn’t have enough income to offset the deduction (the Section 179 deduction can’t exceed your total taxable earnings). The Section 179 annual limit is scheduled to go down to $25,000 in 2014 with a phase-out at $200,000 in purchases of fixed assets. It was not EXTEND by congress.
As a general rule, software has been eligible for Section 179 depreciation. If you are unable to use Section 179 because you surpass the asset phase out ($2,000,000 in 2013 which drops to $200,000 in 2014), or don’t have a profit to offset the Section 179 depreciation, the software bought for business use must be depreciated over a 36-month period.
Bonus depreciation Extender—REMOVED or NOT EXTEND for 2014
Another advantageous depreciation method, call “Bonus Depreciation” by tax professionals, has not been “Extended” into 2014. There has been a special depreciation deduction for “new” equipment and software which allowed taxpayers to depreciate an additional percentage of the cost basis of qualified property in the first year the property is placed in service. For 2012 and 2013, the bonus depreciation amount was 50%. This deduction can be (could have been) taken in addition to Section 179, on new equipment only. Not discussed often but worthy to mention, is after the 50% bonus deprecation is deducted, you can still depreciate the remaining cost using normal depreciation methods. At this point in time, it seems Bonus Depreciation has disappeared for 2014. Call your congressmen and tell him/her to re-extend the un-extended!
DPAD Deduction—REMAINS for 2014
The DPAD deduction, or the Domestic Production Activities Deduction, active in 2013, allows printers who have a profit, to reduce their profit by 9% with a make believe deduction. This deduction will continue in the foreseeable future, although some members of Congress think it’s a tax break that should be discontinued. Make sure your accountant is completing the forms necessary for the DPAD Deduction. Whether you company files as a regular corporation, an “S” corporation, as a partnership, or even a sole proprietor; this deduction can be used.
Extension of Research Credit—SET TO EXPIRE IN 2014
The Research Credit dates all the way back to 1981 and has been extended 14 times. The credit allowed companies that perform certain types of research to write off some of their expenses, from the wages of scientists to cost of equipment. The idea was to try to stimulate a little more domestic R&D and innovation.
Did this credit work? Many economists think so. One 2002 whitepaper in the Journal of Public Economics looked at the use of tax credits across nine countries over 19 years and found evidence that they “are effective in increasing R&D intensity.” It’s also worth noting that other countries use these credits much more heavily — the United States now ranks 24th in tax support for R&D. But that ranking was before the latest expiration of the research tax credit!
Estate and Gift Taxes—2013 Change Considered Permanent
In 2013 the lifetime exemption of $5,120,000 was surprisingly retained and is now permanent, with an inflation index to keep it current, but the tax rate increased from 35% to 40%. The very favorable “portability” of unused exemptions between spouses also became permanent.
High Income Bracket Changes
The tax legislation passed at the start of 2013 permanently extended the George W. Bush-era tax cuts for most people but also added a top marginal tax rate of 39.6 percent for those at higher incomes — $400,000 for single filers, $450,000 for married couples filing jointly and $425,000 for heads of household.
Not stopping there, an additional 0.9% Medicare tax on earned income, as well as an extra 3.8% tax on investment income, kicked in on earnings over $250,000 for married couples filing jointly and $200,000 for singles and heads of household.
Individual Income Tax Deduction—PHASE-OUT FOR 2014
Itemized Deductions Phase-outs are back (pre 2010). They came back in 2013 and are law for 2014. Basically, individual itemized deduction will phase out or disappear for a married filed jointly tax return with Adjusted Gross Income over $300,000 at 3% for every dollar earned over the $300,000 threshold ($250,000 for single).
Personal Exemption—PHASE-OUT FOR 2014
Similarly, personal exemptions phase out at 2% for ever $2,500 of Adjusted Gross Income in excess of certain amounts. For example, in the case of joint filers it starts at $305,000 and phases out over the next $125,000 of Adjusted Gross Income.
Capital Gains and Qualified Dividends—NO CHANGE FROM 2013
In 2013 the Capital Gains Rates went from 15% to 20% for high income earners on Capital Gains and Qualified Dividends, and presently will stay at 20% into 2014 (applicable to those in the top tax bracket of $450,000/join; $400,000/single). All other dividends and short-term capital gains are taxed as ordinary income.
Don’t forget, for those high income tax earners who pay a Capital Gain tax at 20%, you’ll have to pay an additional 3.8% on investment income.
By all means, this is not a full list of tax changes for 2014. Consult your tax advisor for information pertaining to your specific situation. If you don’t know where to turn, call me. I’d be glad to help.
About Margolis Partners
Margolis Partners has long been recognized as the financial expert for family-owned businesses with a specialty in the printing, packaging and allied graphic communications industries, assisting thousands of companies with strategic and financial management, valuation, mergers/acquisitions, accounting, audit and tax services. The firm is noted for its expertise in enabling companies to optimize profits. Proudly, it is the purveyor of the industry’s Value-Added Principles of Management, and compiles the annual Printing Industries of America Ratios, the printing industry’s premier financial benchmarking tool.
About New Direction Partners
The team at New Direction Partners LLC has guided over 200 printing company owners through the sales and merger process. The advisory services reflect a full set of skills to help you sell or expand your business: valuation, management consulting, financial advisory and investment banking. The deep experience and industry expertise at New Direction makes it uniquely suited to serve printing, packaging and allied graphic arts businesses.