SSI serves security installing contractors providing systems and services; surveillance, access control, biometrics, fire alarm and home control/automation. Coverage in commercial and residential product applications, designs, techniques, operations.
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Industry Pulse IN DEPTH Financial Planning Questions With Tax Cuts in Limbo LOS ANGELES — With the Bush-era tax cuts set to expire unless Congress can reach an extension agreement before Jan. 1, tax-planning uncertainties are presenting distinct challenges for busi- ness owners such as installing security contractors. As an example, business owners are often advised to defer fourth-quarter income into the following calendar year to delay tax liability. However, if tax rates rise in 2013, it might be better to recognize the income in 2012 and defer deductions to 2013 when they could have more impact. "We have to be prepared for all alter- natives, but the marching order really has to be control what you can control. What you can't control, you have to take a wait-and-see approach. It doesn't mean you sit on your hands. T ere are certain [preparations] that people should be doing all the time no matter what, " says Charles Schwager, a CPA and part- ner with Woodland Hills, Calif.-based Barkin, Perren, Schwager & Dolan who specializes in the alarm industry. "Every- one should maximize their retirement and be penalty proof. Make sure you are not going to incur unnecessary penalties for not paying your taxes adequately." A key provision of the Bush tax cuts of 2001 and 2003 is the 15% tax rate on long-term capital gains. For installing security contractors, when recurring monthly revenue (RMR) is sold by a sole proprietorship, S Corp., or partnership, it generally results in capital gains, explains Mitch Reitman, managing principal of Fort Worth, Texas-based Security Indus- try Capital (SIC) Consulting, which pro- vides fi nancial services to security alarm companies in 23 states and Canada. "If the 15% rate is allowed to expire at the end of the year, the tax rate on capital gains is set to return to 20%. T is could mean an increase in taxes of $50,000 on a $1 million gain," he says. Security dealers who are planning to sell their company in the near future, and are concerned about tax rates increasing, should "set things in motion now," Reit- man advises. "If it becomes evident that rates are going to increase there will be a rush to sell before the end of the year. T is could create a buyers' market in which a large amount of sellers want to sell to a small group of potential buyers. We may see a reduction on sales prices and it may be that some deals cannot be completed before the tax rates change. " Following are just some of the other focuses business owners should also ad- dress with their tax professional: Capital expenditures — In 2010 and 2011, businesses were allowed to expense up to a maximum of $500,000 in equip- ment and property on one year's tax return, rather than the standard practice of depreciating such assets over time. T e maximum Section 179 expense that can be claimed in 2012 is $139,000, will drop to $25,000 in 2013 if no changes are made. Bonus depreciation — T e tax compromise of 2010 allowed business owners to take 100% bonus depreciation, instead of standard depreciation, for purchases of tangible assets (such as fur- niture, vehicles and equipment) made in 2011. T at meant the entire cost of a par- ticular asset could be written off with no limit on its cost. In 2012, as it stands now, bonus depreciation is reduced to 50%; it disappears entirely in 2013, meaning that the cost can only be recovered by depreciating it over years. Self-employment tax — Self- employed people, including sole Yearend fi nancial strategizing hangs in the balance as business owners and tax profes- sionals wait to see if the Bush-era tax cuts will be extended before the Jan. 1 deadline. proprietors, partnerships, and limited liability companies, paid self- employment tax on earned income at a rate of 13.3% in 2011 and 2012 under tax compromise legislation passed in 2010. In the new year, barring any congressional intervention, that fi gure goes back up to 15.3%. "If I have not reached the maximum Social Security or self-employment income level, then I may want to bring that in to 2012 to take advantage of that lower rate, " says Schwager. "If I wait till the next year it could cost me a couple percentage points in higher social security or self- employment tax. It is important to realize that if I am already over the threshold [$110,000], I can't do anything about it. FICA — In 2012, the portion of FICA " or Social Security taxes that are deducted from employee paychecks is 4.2%. T e employee also pays 1.45% in Medicare taxes. T e employer pays 6.2% for Social Security and 1.45% in Medicare taxes. Absent an extension, the 2% break to the employee is set to expire Dec. 31. Although this tax benefi t has had no cost to employers, the money was paid to the employees as opposed to being remit- ted to the IRS, it has eff ectively given employees a 2% raise, says Reitman. "If the rate is restored to the full 6.2%, em- ployees are going to see their paychecks shrink by more than 2%. If the rates do revert, make sure that you explain this to your employees before they receive their fi rst January paycheck." Procrastination and insuffi cient tax planning can be damaging, Schwager says. Close attention to detail can stave off fi nancial penalties or worse. "If I am having a good year, I should expect to plan for either what I have to pay or take advantage to reduce that tax, " says Schwager. "If I am on top of my business and running it effi ciently, that in- cludes having good fi nancial feedback on how I'm doing. Don't get caught unpre- pared and miss planning opportunities. " NOVEMBER 2012 / SECURITYSALES.COM / 13