Small-business owners should maximize expiring state tax credits and deductions

vbridges@newsobserver.comDecember 16, 2013 

  • Upcoming changes

    Personal income tax

    2013: Tax rate ranges from 6 percent to 7.75 percent; Jan. 1 changes: Reduce to flat rate of 5.8 percent; Future: Reduce to a flat rate of 5.75 percent in 2015.

    2013: Pre-set amount for standard deductions and exemptions; Jan. 1 changes: Standard deduction increased; exemptions eliminated.

    2013: Deduction for first $50,000 of net business income ($100,000 for couples filing jointly); Jan. 1 changes: Deduction eliminated.

    Corporate income tax

    2013: Tax rate of 6.9 percent; Jan. 1 changes: Rate reduces to 6 percent; Future: Rate reduces to 5 percent on Jan. 1, 2015. If revenue targets are met, rate reduces to 4 percent in 2016 and to 3 percent in 2017.

    Sales tax

    2013: Very limited number of services taxed; Jan. 1 changes: Service contracts added to the list of services subject to the sales tax. The state sales tax rate is 4.75 percent. Local rates vary from 2 percent to 2.25 percent depending on the county.

    Source: N.C. Association of Certified Public Accountants

— In the final weeks of 2013, small-business owners should collect as much revenue as possible, defer any bills that can be paid next year, and have a clear understanding of how the loss of state tax credits and deductions will impact their bottom line in the years to come.

That’s the advice from local certified public accountants on maximizing expiring tax breaks and preparing for the North Carolina tax law changes that go into effect Jan. 1.

Small-business owners will probably benefit from the 2014 reduction of the personal and corporate income tax rates.

For many small-business owners, however, the personal income tax reduction will be offset by the upcoming loss of the small-business income tax deduction.

“Some will come out ahead. Some will be a wash,” said Gregg Thompson, the North Carolina director of the National Federation of Independent Business. “I would say most of the truly small, small businesses will have a loss.”

Under the new tax package, companies subject to the corporate income tax will go from paying 6.9 percent to 6 percent in 2014 and to 5 percent in 2015.

However, many small businesses are classified as limited liability, S corporation, and sole proprietorship structures, in which profit is distributed to the owners and taxed as personal income. The personal income tax rate is dropping from a range of 6 percent to 7.75 percent, to a flat rate of 5.8 percent in 2014 and 5.75 percent in 2015.

To help pay for the changes, state legislative leaders eliminated many tax deductions and credits and implemented taxes on a narrow range of services, Thompson said.

A motive to collect

In 2012 and 2013, state tax law allowed sole proprietors, active shareholders of S corporations, partnerships and limited liability companies to deduct up to $50,000 of business income on their personal state income tax returns. The maximum benefit for individuals topped out at about $3,875, and some married couples could claim twice that amount.

Proponents of the tax break said it gave small-business owners capital to invest in their business and create jobs, while opponents say the tax break resulted in a loss of state revenue and didn’t include an income threshold, allowing both small and large firms to benefit.

For Jamey Bass, owner of Carolina Wealth Strategies, the end of that deduction translates into a loss of about $2,500 in 2014.

“That pays for a good chunk of marketing,” and some part-time employees, said Bass, an independent financial adviser who founded his Cary firm nearly 10 years ago.

To maximize the last year of the deduction, owners should collect as much revenue as possible before Jan. 1, said Kerry Dyer, a Raleigh certified public accountant.

“Go out there and do as many collections as you possibly can,” especially if it’s a cash-based business, Dyer said. “Because you don’t want accounts receivable rolling into next year.”

Meanwhile, owners should also consider deferring paying expenses until after Jan. 1 – something that could increase business profits and allow owners to maximize the deduction in 2013. It could also reduce the amount that would be taxed in 2014.

Lee Traister, who co-owns On The Double Locksmith in Durham with her husband, David, will reach out to facility management companies to which they provide services.

“We are asking them to try and basically pay everything by the end of the year,” said Traister, who also manages the company’s accounting.

Traister will also delay paying invoices for bills received in December until after the first of 2014.

The best strategy, said Dyer, who is the Traisters’ accountant, includes looking at purchases to maximize capital and improvement depreciation claims in 2013.

Plan for deductions

Small-business owners should examine expiring tax credits and deductions to decide whether to take advantage of them in 2013, and how the loss will impact profit in 2014, said Mike Wenig, a business attorney with Greensboro law firm Tuggle Duggins.

Many small firms will probably pay more taxes for the 2014 tax year, but planned income tax reductions and other adjustments could result in larger savings in coming years, Thompson said.

New sales taxes kick in

Starting Jan. 1, Some small-business owners will also have to add a sales tax to service contracts on tangible property, such as warranty and maintenance agreements on televisions and appliances.

“So, what you typically think of is when you go to Best Buy, and you pay an additional amount for them to come fix something if it goes wrong,” said Cindy Avrette, a legislative analyst who worked on the tax reform package. It does not apply to situations, such as labor on a standard car or home repair.

“A contract for a one-time repair would not be a service contract,” Avrette said.

Randy Pleasant, vice president of operations at Garner TV & Appliance, said he doesn’t expect the sales tax to affect their customers’ decisions to buy extended warranties, which range from $150 to $300. The few extra dollars, he said, will still ultimately save their customers money compared to paying for a repair.

The added taxes on services, NFIB’s Thompson said, is one that the organization has been watching and will continue to watch closely.

Thompson is concerned, he said, that the state legislature will consider taxing even more services if tax revenue projections are not met.

“That is very much on NFIB’s radar as far as something that we are very concerned about,” Thompson said.

Bridges: 919-829-8917; Twitter: @virginiabridges

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