The early bird gets the tax worm
While most of us are engrossed in completing our 1999 taxes, you may want to get a head start on keeping your 2000 taxes as low as possible. A number of tax provisions change, expire or become effective in 2000 which could impact your business.
One big change that slipped by the small business lobby before enactment in late 1999 disallows installment reporting of gain for accrual basis taxpayers. This deal-breaking provision has received significant attention because it front-loads the tax burden on many business sales.
While there are ways to circumvent the problem, the solutions will not work for everyone. Watch for concerned businesses to lobby for changes to this new rule.
Another item affecting an increasing number of northern Michigan businesses was the late 1999 release of final rules on tax reporting for investments in foreign entities. In many instances, these rules trigger reporting requirements on transactions which previously did not need to be reported. Some types of transactions that were not reportable in the past must now be reported on new IRS Form 8865.
As more businesses find themselves in joint ventures or other arrangements with overseas partners, these rules take on increasing importance, especially given the high penalty costs associated with noncompliance.
Businesses should take note of changes on the payroll tax front. The Social Security wage base increased to $76,200 from $72,600 in 1999. Also, final regulations from the IRS provide that businesses can wait until their aggregate tax deposits (payroll plus other taxes) for a calendar year exceed $200,000 before being required to use electronic funds transfer (EFT) after a one-year grace period. Even businesses currently using EFT which are under the threshold can revert back to the former coupon-based method of depositing taxes.
Individuals should also keep an eye out for 2000 tax tips and tricks. Congress increased estimated tax payment requirements for higher-income taxpayers for 2000. Before changes in late 1999, married individuals with adjusted gross income over $150,000 for 1999 would have been required to pay in 2000 estimated tax equal to the lesser of 90 percent of their 2000 tax or 106 percent of their 1999 tax. Congress changed the 106 percent safe harbor amount to 108.6 percent.
A recently-announced coming attraction for all parents (and grandparents) of school-age children is the proposed Michigan College Savings Plan. This plan will have a number of advantages over the Michigan Education Trust, including use of plan funds to cover expenses at any qualified post-secondary institution in the nation, transferability among siblings and savings accruals of up to $125,000. For those who can’t wait until the Michigan version is released, other states have similar plans available.
The good news for smokers is that smoke-cessation programs and prescription drugs to alleviate nicotine withdrawal are now deductible, per a late 1999 IRS ruling. These items also qualify as medical expenses for coverage under tax-free employee benefits programs and for pre-tax contributions to medical flexible spending accounts.
For taxpayers who convert their traditional IRA to a Roth IRA during 2000 but find at year-end that their income exceeded the $100,000 adjusted gross income threshold, the Roth can be “reconverted” back into a traditional IRA before the 2000 tax return is filed, without adverse tax consequences. Failing to “reconvert” back to the traditional IRA when you are ineligible for the rollover to the Roth IRA is very costly–tax on the IRA withdrawal, an excise tax on any “excess” Roth contribution, and tax on income earned on the erroneously converted amount.
For 2000, a number of limitations, phaseouts, and exemptions tied to inflation were revised. The maximum allowable employee wage deferral to a 401(k) or 403(b) increased to $10,500. The business auto mileage rate increased to 32.5 cents. The estate tax lifetime exemption amount increased to $675,000, on its way to $1 million by 2006. The maximum Section 179 expensing election for fixed assets placed in service during 2000 is $20,000, up from $19,000 for 1999. Inflation indexing also increased the allowable standard deduction, personal exemption amount and tax brackets.
There are many additional ways to reduce your business and personal tax liability. Tax laws are numerous and complicated, however. So, it’s usually best to consult with a tax planning professional before you begin to implement a tax reduction plan.
Christopher Morse, CPA, MST, is a Senior Tax Manager at Weber, Curtin & Drake, PC, in Traverse City. He has over 12 years of public accounting experience serving financial institutions, construction, manufacturing and real estate industry clients and individuals. BIZNEWS