If you have not yet filed your business’ income tax return for 2012, there are still some pointers that can help you legally minimize your taxes and avoid IRS scrutiny of your return.
Take advantage of extended tax rules and know what actions can trigger IRS audits so you can steer clear of them.
Use extended tax breaks
As part of the deal to avert the “fiscal cliff,” many tax breaks that had expired at the end of 2011 were extended for 2012 (and in many cases 2013 as well). Check to see if any of these favorable deductions, tax credits, or other tax rules apply to you:
Hiring incentives. If you hired certain employees in 2012, you may be eligible for a tax credit based on a portion of their wages. Such credits include:
- Work opportunity credit for hiring workers from certain targeted groups (e.g., certain veterans; ex-felons). To claim the credit, you must submit Form 8850 to your state workforce agency. Usually this must be done within 28 days of the workers’ start of employment. However, for workers hired in 2012, you have until April 29, 2013, to act.
- Empowerment zone credit for hiring workers for businesses within certain government-designated areas.
- Indian employment credit for hiring workers on Indian reservations.
Equipment purchases. Instead of depreciating the cost of equipment and machinery over three, five, or seven years, you can opt to claim first-year expensing (“Section 179 deduction”). The deduction limit for 2012 is $500,000. This limit phases out when total purchases for the year exceed $2 million. You must be profitable to benefit from this deduction. You can also use 50% bonus depreciation, provided the items are new (not pre-owned). You need not have been profitable for this write-off.
Certain building improvements. If you made leasehold, restaurant, or retail improvements (e.g., a new wiring system), you may not be limited to simply depreciating them over 39 years, the usual period for depreciating commercial realty. Instead, you can use first-year expensing up to $250,000. You can also depreciate costs over 15 years.
Of course, the full the cost of repairs are immediately deductible. Regulations defining repairs versus capital improvements were supposed to be effective for 2012, but have been postponed until 2014. However, you are permitted to use them for 2012 and 2013 returns. Check whether the safe harbors and de minimis rules in the regulations are helpful to you.
Avoid audit red flags
While there is no way to guarantee you won’t be audited, there are actions to follow that minimize your exposure.
- Classify your workers correctly. Don’t label an employee as an independent contractor merely to avoid the cost of being the worker’s employee. This IRS audit target can cost you dearly in penalties if you misclassify workers and the IRS finds out.
- Report income correctly. Merchants receiving Form 1099-K, reporting payment transactions through financial institutions, PayPal, and other payment processors, must report their gross receipts on their returns. They do not have to reconcile the income reported with amounts on this information return, but should report all income.
Work with your tax advisor
Your advisor can help you timely file your return. He or she can also help assess which tax breaks you qualify for.
Filing extensions. Your unincorporated business (e.g., partnership; sole proprietorship) has until April 15th to file the 2012 return. If, for any reason, you can’t file by this date, ask for a filing extension:
- Sole proprietors file Form 4868 to have a filing extension to October 15th.
- Partnerships (and limited liability companies filing partnership returns) file Form 7004 to have a filing extension to September 15th.
Returns for calendar-year corporations were due on March 15th. Corporations that failed to file and did not request extensions should file as soon possible to minimize late filing penalties.
Taxes are a cost of doing business successfully. However, you do not have to pay more than the law requires. Staying current on tax developments and working with your advisor can go a long way toward obtaining favorable tax results. Good luck!