With great skill, confidence men divert attention to accomplish goals. Whether it was intended or not, the focus of the press on the events of Ferguson and on Obama’s new Immigration Executive Orders has diverted attention away from key tax planning strategies for December. And, I’m finding myself in a position I never thought I’d be, that being a spokesman for “Take the Income Today”.
Let me Explain
In normal years, it is usually most advantageous for people toward the end of a year to maximize deductions and minimize income in order to reduce the amount of tax paid the following April (March for corporations). It has kind of become a mantra. In fact, my last post was on cleaning up and making charitable donations. While that may still be a good idea for individuals, so long as they are able to itemize deductions, businesses this year may not want to do that.
Corporate Income Rates
2014 corporate income tax, at 15%, is a phenomenally better deal than 2015’s 25% and 34% rates. Even on a discounted cash flow basis, money that is taxed at up to more than twice the current rate would have to have a huge net present value increase in order to justify not taxing it now.
It Also Affects Future Estimated Tax Payments
Just in case the potential of more than doubling the tax rate didn’t grab your attention, corporations that make less than $1.0 million per year can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year, so long as they actually owed taxes the prior year. Otherwise, your only option of avoiding penalty is to pay, in advance, every quarter of 2015, the full amount of 2015 estimated tax at a much higher rate.
This could make a significant difference in your cash flow for next year. Think about it. Estimate taxes based on last year (15%), is a lot less cash paid every quarter than estimated taxes at 34%. Would you rather use that money yourself to make money during the year or would you rather give it to Uncle Sam for him to use?
If you are a normal corporation with taxable income of less than $1.0 million that currently anticipates a small net operating loss for 2014 and income in 2015, you may find it to your benefit to accelerate just enough income and/or defer enough deductions to ensure you create at least some taxable income for 2014.This will allow you to take advantage of the lower 2014 tax rates and a lower required estimated tax payment each quarter of 2015.