We breathed a sigh of relief when the Tax Prevention Act of 2014 was enacted which retroactively extended for 2014 many tax breaks that businesses and individuals benefit from. For most of the year the conversation with clients had to include “we hope the tax breaks will be extended, but we cannot guarantee it”. Among the over 50 tax provisions that expired as of December 31, 2013 and had not been renewed the two that affected our business clients the most were:
· Reduction of Section 179 expense limit from $500,000 to $25,000
· Elimination of 50% bonus depreciation
When President Obama signed the Act on December 19, 2014 many of our clients were rushing to make capital purchases before year end. We encourage our clients to plan and have a budget for their year. For Congress to consistently wait so late in the year to make important tax decisions can be damaging to businesses that need to plan for taxes and make capital investments to grow their business. As we look to 2015, we are facing yet another year of uncertain tax legislation.
In years of tax uncertainty we suggest both business and individual clients use the basic strategy of deferring income and accelerating deductions when possible. This would assume that you expect the tax laws to be more favorable in the following year. For individuals, this can mean taking a look at your investment portfolio to offset any capital gains for the year with losses, pay property taxes before yearend, donate noncash charitable contributions like appreciated stock, or increase retirement plan contributions.
For businesses, on a cash basis this can mean delaying invoicing customers until the beginning of the year or paying bills promptly as they come in instead of taking advantage of the typical 30 day pay window. While these strategies will help the tax bill, it may produce a temporary cash flow issue. There are several funding options available for businesses when cash flow is needed:
– Selling Assets – They can sell an asset, receive the cash, and not pay any gains on the sale in a Like Kind Exchange if replacement property is identified within 45 days of the sale and purchased within 180 days.
– Credit Cards – While these can be dangerous if used in excess and provide limited funding, they can provide a window to pay when needed.
– Working Capital Loans – With higher lending limits than credit cards these can be utilized for larger capital investments when the money is needed quickly. Kabbage is an online provider of these loans and more information on them can be found here: https://www.kabbage.com/how-it-works/
Keep in mind that the above are short-term solutions when cash flow is needed to make yearend strategic moves for your business. The hope is that we will get to a place of tax stability where we can maximize our value at planning for both business and individuals!