CED

November 2013

Issue link: http://read.dmtmag.com/i/205815

Contents of this Issue

Navigation

Page 48 of 59

On the Numbers A Double-Whammy Tax Bite Just Around the Corner A big tax bill in April '14 could be followed by an equally painful estimated tax payment in '15. BY GARRY BARTECKI Here we are again, another year-end facing us. Time flies when you're having fun – and we are having fun aren't we? Let's see, what can I say about 2013? How about: It was a very "confusing" year, and consequently I never got comfortable about the future – not for a year, quarter, month, or even a day. It really is tough to plan when you don't have a handle on inflation/ deflation, interest rates both short and long term, construction work in your area, your tax position both federal and local, the demand for rental, caution about hiring, health care costs, and Tier-4 costs. These are the major areas one has to be concerned about as we finish up 2013 and head into 2014. There is still time to take action in 2013 to avoid headaches in 2014 by notifying your customers that 50 percent Bonus and a $500,000 Sec. 179 are still available for equipment purchased and delivered by the end of the year. This may be a way to move some of those units still on the lot that you would like to turn. Make them a deal they can't refuse, add an extended warranty package on it, and it may turn out to be a win-win for both of you. The other major area you need to understand in 2013 is your tax position, because things are about to change in 2014. In 2013, you still have some great tax benefits (as described above) to use on the dealership return for 2013. In 2014, it will be another story. Most likely Bonus will disappear with 179 dropping down to $25,000. In short, your 2014 tax exposure is going way up, not just because of changes to Bonus and 179 but because your rental and other business assets have a low tax basis – if sold after 2013 they will generate significant taxable income without new tax benefits to offset the taxable gains. There is also a tax trap related to 179: If you are in a 179 carryover position, you can only deduct what is available for 179 in the year the carryover is being applied to. For example, if you took advantage of the $500,000 179 in 2013 and could not use it, you only get to use $25,000 of your carryover position a year going forward. Better make sure you use any 179 balance in 2013, even if that means you bypass other types of deductions in the process. Those low tax basis assets along with rental department taxable income are both subject to the new Obamacare 3.8 percent tax on investment income if you use a flow-through tax entity (Sub-S or LLC). Example: If you sell $1 million of rental assets and wind up with $1 million in taxable gain (because you used Bonus on those assets previously or just had them in the fleet long enough to depreciate and you meet the gross income test), you will pay an additional $40,000 on the sale of those assets. The same goes for rental department taxable equipment gains. The scary part of all this is the potential overall tax bite you could incur over the next 18 months. First, you pay taxes for the first time in a long time, or you pay a lot more than you normally do – possibly with no estimated tax in reserve to cover the liability, so you have to write a check in April to pay the tax. Then, having paid this extensive tax bill, you have to have this same amount paid in for 2014 based on an estimated tax schedule. So beware of this not-so-hypothetic scenario: You owe $200,000 in April of 2014, and you also have to pay in another $200,000 by January of 2015. Ooops – big hit to the checkbook. To avoid this bad April Fools' surprise, you must have a very good estimate of where you stand with the tax basis of your business assets, the taxable profits from the rental operation, your carryover positions for NOLs and Section 179 balances, as well as your taxable income situation personally – for estimating 2013 tax bill. While you are at it, do the same for 2014, assuming that Bonus and Section 179 are going to have a much smaller tax impact starting in 2014. If your tax person tells you these issues don't apply to you, get a second opinion. What you don't want is to have the IRS figure it out for you. Call me at AED if you need guidance: 630-468-5121. GARRY BARTECKI (gbartecki@ aednet.org) is AED's vice president of Finance. November 2013 | Construction Equipment Distribution | www.cedmag.com | 47

Articles in this issue

Links on this page

Archives of this issue

view archives of CED - November 2013