All I Want for Christmas is Another Bulldozer

Last year I wrote a post discussing the tax benefit of buying a piece of equipment by 12/31.  As I predicted, the depreciation rules were not extended at the end of 2013, and taxpayers marched into 2014 with no provision for bonus depreciation and only $25,000 of Section 179 available.  But, thanks to Congress' call to action with the Tax Extenders bill signed into law December 19th, these great depreciation provisions are back for 2014.  

Although it might not be too late to ring the register on a new capital acquisition for 2014 if you both need and have the funds to purchase equipment or other assets, the following information can help determine the impact bonus and Section 179 depreciation will have on your tax situation for 2014.  

50% Bonus Depreciation

Bonus depreciation permits a taxpayer to expense 50% of the cost of an asset in the first year, plus normal depreciation on the remaining 50%.  Bonus depreciation can only be taken on assets that are new or being used in a new way in the hands of the user.  Simply, a new computer is eligible for bonus, but a used delivery truck that is purchased to be used as a delivery truck is not eligible for bonus.  Bonus is "automatic", meaning that in order to not take bonus on new assets you must classify the asset as "used" or elect out of bonus, which must be done by class life.  Bonus cannot be limited either by income or other factors, and bonus can put the taxpayer into a loss.

Section 179

For 2014, taxpayers can elect to expense 100% of an asset in 2014 using Section 179.  Taxpayer's can elect up to $500,000 of Section 179, but this amount is limited by taxable income and also by the amount of purchases eligible for Section 179 made during the year.  The asset can be new or used.  Section 179 cannot be utilized if the taxpayer does not have a profit, and any elected 179 that is unused is carried forward to future periods.  Once a taxpayer has made $2 million worth of eligible purchases, the amount of 179 available is reduced.  Unlike bonus depreciation, Section 179 is an election the taxpayer must make.  

Special considerations

One of the methods above is not necessarily better than the other, because all taxpayers have different motives.  But there are a few things to consider when accelerating depreciation:

• Depreciation taken now cannot be taken later.  Taxpayers should consider their 2015 income and capital acquisition budget when determining how much accelerated depreciation to take in 2014.  
• Cars are special, especially luxury cars, SUV's or trucks.  The amounts of bonus and 179 in some cases are limited.  
• Cash flow planning is essential.  Utilize credit cards or short-term financing to purchase the asset before 12/31 and pay it off in January or in 2015.  
• Don't purchase new equipment simply to avoid taxes.  If you were planning to purchase the new equipment then do it before 12/31 to take advantage of the depreciation rules.  But remember some deductions do not create a dollar-for-dollar reduction in taxes.

Outsourced accounting

Small business owners are predominantly known for "doing it all".  In most small businesses, the owners are responsible for all aspects of the business, from customer relations to product delivery.  Yet, one of the most important business management tasks, commonly known as "the books" is often overlooked or thrown together quickly.  There are a variety of reasons for this lack of attention.  

First, most small business owners do not have sophisticated financial knowledge, which makes "the books" cumbersome and intimidating.  These are the clients that come to a CPA and hand over their books with the disclaimer "well, I'm not an accountant, so I apologize for the shape the books are in".  Well of course you're not an accountant!  If you were, you probably would have gotten a job in accounting, not have started your business.  

Second, most small business owners run relatively simple, cash-basis operations that do not require accruals and adjustments on a monthly basis.  These are the clients that determine the success of their business based on how much money is in their bank account.  

Third, most small business owners simply do not have time to focus on the financial side of their business.  By the time they are done dealing with customers and vendors, filling orders, managing employees and putting out other fires that come up during the day, the last thing most small business owners want to do is reconcile their bank statement.  

All of these reasons, albeit legitimate, can wreak havoc in a small business if left unchecked for a long period of time.  This is where small business owners can most benefit from outsourced bookkeeping and accounting services.  By outsourcing, the business owner is getting another set of eyes on the books.  This set of eyes can point out unusual charges, identify trends in the business finances, reconcile bank accounts and advise the business owner on their cash position.  

Outsourcing is most effective when combined with tax planning and preparation.  When the business owner's CPA can advise the client monthly or quarterly then the year-end planning and preparation are much less complicated and time consuming.  Outsourcing typically has a lower cost impact than hiring a part- or full-time bookkeeper.  Having the books analyzed by an accounting professional for a few hours each month, and then the tax return prepared by the same professional at the end of the year is more cost effective than only allowing the accountant to look at the books once a year.  Furthermore, the accounting professional will most likely set the accounting records up in a formal accounting software such as Quickbooks or Peachtree, which will give the business owner historical data going forward.  

If you are a small business owner and the burden of "the books" has become too much for you to handle, consider outsourcing your monthly accounting function.  This will free up more time for you to focus or running your business, which is why you started it in the first place!

Paying your taxes

I remember my very first bank account.  At a young age before I was driving, I somehow managed to obtain a job as a child disc jockey on a local kids radio program.  I worked 2 hours a week for $5 per hour and my job was to record a series of trivia snippets that were later aired on the radio.  After my dad got tired of toting me down to the bank every month to cash a $40 check, he helped me open a bank account.  I handed the teller my money, she put it in a drawer and handed me back a checkbook.  In order to get money out, I had to go into the bank and make a withdrawal.  

My how times have changed.  Now, 15 years later, 99% of my expenses are done automatically over the internet and I probably couldn't tell you where my checkbook was without looking for a minute.  What's more is that this is common for a fair amount of the population now.  So if you're a taxpayer and you owe taxes and you're having a hard time finding your checkbook, what are your options?

With the increasing popularity of electronic filing of tax returns, it seems that the IRS has also become open to the idea of receiving payments electronically as well.  Short of mailing in a paper check to pay taxes, the IRS also has other options available to taxpayers.  

Debit or credit card

Taxpayers can use one of a number of approved payment processors to pay their taxes with a debit or credit card.  The catch is that there are fees associated with the transaction that vary depending on which processor you choose.  For example, Pay1040.com will process your transaction for a flat fee of $2.79 if you use a debit card and 2.35% of the amount if you use a credit card.  This is a good option for taxpayers that are willing to pay the fee for the convenience factor and want to earn a couple of extra points on their credit card.  

Electronic Federal Tax Payment System (EFTPS)

EFTPS provides a taxpayer with online access to a tax payment account.  The taxpayer can attach their EFTPS to a bank account, view previous payments, and schedule future payments.  The EFTPS system is free and available to all types of taxpayers.  In fact, some businesses are required to use EFTPS.  Once a taxpayer signs up for EFTPS, they will receive a confirmation with a PIN in the mail, which they will use when they login.  EFTPS is a good option for all businesses, and individuals that make large payments or estimated tax payments.  The EFTPS system allows you to schedule future payments, reducing the risk that a taxpayer will forget to make their quarterly tax payments.  

Direct Pay

Direct Pay is a new option offered by the IRS.  Instead of using a card, Direct Pay allows a taxpayer to draft their taxes directly out of their bank account.  The process requires the taxpayer to verify their identity and enter bank information, and it has no cost to the taxpayer.  This is a good option for individual taxpayers that owe any amount and do not want to go through the EFTPS process.  Currently Direct Pay is only available to individual taxpayers, not businesses.  

Of course, taxpayers can always use the conventional method to pay their taxes by writing a check.