Important End-of-Year Transactions? Beat the December Deadline

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Modern society – and the financial institutions that support it – runs on a yearly cycle. This is encapsulated in the U.S. tax code, which uses “tax years” to determine how and when to tax a transaction.

That brings up some interesting decisions at the end of the calendar year. Whether a transaction is finalized in December or in January has some significant tax implications, and those implications can determine which month makes sense to place the transaction. As such, you may be under a tight December deadline to finalize a purchase or sale.

Which Transactions Require End-of-Year Consideration?

Any end-of-year transaction that could significantly affect your taxes is worth thinking about. Ultimately, it’s case-by-case, as every taxpayer’s situation is different. However, there are some December transactions that can quickly alter that tax situation, including:

• Large equipment (or any tangible property) purchases or sales
• Acquisition or sale of real estate
• Purchase or sale of business equity (stock)
• Formation of a new business
• Merger between businesses or acquisition of a business
• Contributions to, or distributions from, a retirement or investment account

If any of the above are in play, timing the transaction may be important.

How Buyers and Sellers May View the December Deadline Differently

In many major business transactions, there is often a buyer and a seller involved. Each brings their own motivations to the table, of course, and those motivations may be influenced by the tax consequences the transaction has for them.

Buyer considerations

• The buyer may want to take tax deductions right away – If the transaction is completed in December, the buyer can deduct the expense or depreciation starting that tax year. For major equipment purchases, for instance, this could be a sizable deduction locked in at the end of the year.

• Conversely, the buyer may want to put off the deduction until the following year – The buyer may want to put off the purchase to reap benefits for the following tax year. This is often the case when a taxpayer is cycling between “fat” and “lean” years, seeking to take the standard deduction in lean years – when deductible expenses are less desirable – and loading up on itemized deductions during fat years. Depending on where the buyer is in this lean/fat cycle, they may want to put off the purchase until early the following year.

• The buyer may also have a “use it or lose it” budget to spend – Some buyers have a purchasing budget designated by their employer or a government agency, and any excess budget may be returned or next year’s budget reduced if this year’s is not spent during the current year. In light of this, buyers may be incentivized to empty their budgets in December.

Seller considerations

• The seller may want to delay the transaction to minimize taxes – The seller, though, may prefer to push the transaction into the following year to avoid additional capital gains or income taxes from the current tax year. This essentially gives the seller an extra year to resolve the transaction’s tax consequences.

• Conversely, the seller may want to accelerate the sale if tax increases are imminent – On the other hand, if tax increases are looming or if the taxpayer expects to be in a more expensive tax bracket in the coming year, they may want to accelerate the transaction’s timeline to avoid extra tax liabilities.

Because the buyer and seller are often at cross purposes regarding the transaction’s timing, it can be a challenge to resolve both parties’ concerns and complete the purchase or sale. However, there are ways to make both sides happy if you have a clever tax expert on your side.

There Are Ways to Satisfy Both Parties in an End-of-Year Transaction

Fortunately, transactions can be paced out so that they fit into both the buyer’s and seller’s timeline. The exact approach here can be complicated and highly context-dependent, but one general example of this is to form a corporation to facilitate the transaction through.

The experts at the Hap May firm have done this in the past for clients. It’s possible because depending on how assets are sold or purchased, the transaction may be timed in a way that’s favorable to both parties.

Holidays, and the Weather, Can Make December Transactions Trickier to Manage

Complicating end-of-year transactions are seasonal factors – the holidays and weather, specifically. Whether it’s taking additional time off to spend with family or to attend a holiday party, the people involved in most financial transactions – accountants, attorneys, bankers – tend to be less available during December. Furthermore, many transactions cannot be processed on the weekends or during bank holidays.

Heavy snowstorms can also bring entire cities to a standstill, along with the financial professionals working in those cities. A winter storm can slow critical transactions by several days.

With these holiday-season delays lurking, it’s extremely important to get the ball rolling early on any major transactions. The later this process gets started, the greater the risk to your transaction’s timeline, so it is recommended that you map out your end-of-year strategy ahead of time.

Executing an Important End-of-Year Transaction? Consult with a Knowledgeable Tax Expert

If you or your business has major upcoming transactions on its ledger, consider speaking with a Houston tax professional before proceeding with those transactions. A Houston tax attorney or accountant (or better yet, both) can provide expert guidance regarding December transactions, helping your organization time purchases and sales to reap maximum tax benefits.

End of Year Tax Planning: Tips, Tricks and Twists to Consider

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The holiday season approaches, which means the end of the tax year for many also approaches. And for some Houston taxpayers, it’s time to do some planning – tax planning, that is.

Tax planning strategies are designed to decrease your overall tax burden, in both the present and future years. Here, we’ve included some tips and tricks – and a creative, rarely used, twist – to get the most out of your tax planning approach this year.

First, a Few General Tips for Your End-of-Year Tax Strategy

Every tax planning strategy has the same goal – minimize what you owe the IRS by using the rules set out on the Internal Revenue Code. In practice, there are a few primary strategies that tax planning experts consider when customizing a tax planning approach for their clients. Think of them as tips to start your strategy off right.

They include:

• Timing your income – Your income is the single biggest factor in determining your tax liability and what top-line rate you’ll pay. Controlling the flow of this income – either by accelerating future income into the current tax year or decelerating it into the next – can give taxpayers some control over what tax bracket they settle into. This is obviously easier for people whose income is derived, at least in part, from investment instruments or from self-employment.
• Timing your expenses and deductions – Tax planning also considers your outlays and how they can be timed for maximum benefit. One way to do this at the end of the year is to pick up additional deductions. Charitable deductions are one approach. Another approach is to time equipment and capital purchases so they can be deducted when it would be advantageous to do so.
• Investing in tax-exempt instruments – Tax payments may be delayed by investing pre-tax funds into certain instruments. Retirement accounts, including 401(k)s and IRAs are two examples, but there are more.
• Ensuring your books are up-to-date and detailed – Whether you need to take additional deductions or accelerate/decelerate income, that won’t be clear if your financial records or books aren’t clear and up to date. Don’t wait until the end of the year to assess your tax picture, as it may be too late then to sort everything out and make the right tax planning decisions.
• Working with an experienced tax planner – The tax code is notorious for its complexity and exception-riddled nature. As such, it’s nearly impossible for individuals or business owners to optimize their own tax savings without an expert guiding the process.

Next, Some Tricks to Optimize Your Tax Planning Approach

Timing and smart investing – those are two of the guiding principles behind tax planning. Now, here’s some tricks to help apply those ideas to your taxes:

• Contribute to retirement investment plans – 401(k)s and traditional IRA plans are funded using pre-tax dollars, which means the tax obligation is shunted from the current tax year to the year that funds are removed from the account. Ideally, these distributions are pulled out when the taxpayer is in a lower tax bracket and therefore has lower tax obligations.Roth IRAs offer the opposite benefit – taxes must be paid upfront on any Roth IRA contributions, but future distributions are tax-free. This makes sense for taxpayers expecting to be in a higher tax bracket during retirement age.Other tax-advantaged retirement accounts include 403(b) plans, 457 plans and Roth 401(k)s.
• Contribute to tax-exempt saving or spending accounts – Health savings accounts (HSAs) and flexible spending accounts (FSAs) allow individuals to set aside money for qualified medical expenses. Contributions to an HSA or FSA are not taxed, nor are withdrawals made from either account.If you’re expecting a significant tax bill following retirement, an HSA is an ideal way to save for medical expenses while also reducing taxes. Further, HSA funds may be invested and carried over year-over-year.
• Contribute to a 501(c)(3) charity – Charitable contributions are deductible to an extent – an amount determined by the taxpayer’s adjusted gross income (AGI) and the nature of the donation. Cash donations, for example, are deductible up to 60 percent of the taxpayer’s AGI, while property is deductible up to 50 percent of their AGI. These thresholds concern 501(c)(3) charities only, which covers a large range of religious, scientific, educational, medical and other nonprofit agencies. Charitable contributions to non-501(c)(3) entities are not tax deductible.There are certain situations where taxpayers may enjoy additional tax benefits for making a donation. For example, securities may be donated to charities, which allows the donating taxpayer to take a deduction and avoid capital gains taxes on the realized gain.
• Delay billings (if you’re self-employed) or bonuses – Self-employed professionals can shape their income by putting off any billings until the following tax year. Those payments will be included on the following year’s tax return. Of course, if a higher tax bracket is expected next year, accelerating those billings may be the better choice.For employed individuals, it’s harder to accelerate or decelerate income, but for those that earn a bonus, your company may be willing to pay it out earlier or later, depending on company policies.
• Bunch deductions into “lean” and “fat” periods – Taxpayers may take the standard, flat deduction or itemize their deductions when filing taxes. Obviously, taxpayers should take whichever is greater, and for some, this means itemizing as many deductions as possible to exceed the standard deduction.When this is the case, it may make sense to bunch itemized deductions to overcome the standard deduction in certain years (the “fat” years) and minimize those itemized deductions in other years (the “lean” years) to leverage the standard deduction instead.
• Move income and wealth to family members – The gift exemption allows taxpayers to give money or items of value without reporting the transaction to the IRS. For 2023, the exclusion limit is $17,000 for single filers (and $34,000 for married couples), meaning $17,000 in gifts may be provided to a single person, from a single person, without any tax implications.If these gifts include dividend-producing assets, the income those assets produce will be taxed at the recipient’s tax rate. This could be considerably lower, but watch out for the kiddie tax, which taxes any income earned by a minor child (or adult child dependent) using the parent’s tax bracket after a specified income threshold is reached.
• Realize capital gains when it’s smart to do so – Capital gains are taxed at a lower rate once they are held long enough – usually for a year. If you’re looking to realize gains from stocks or other assets, holding on to them for more than a year can be a wise tax planning move.
• Harvest capital losses to offset gains – Another way to manipulate capital gains for tax benefits – realize losses on assets that have dropped in value. This can be used to offset any capital gains and allows the investor to liquidate underperforming assets to purchase different, better performing instruments. There are laws asserting how quickly this can be done, but capital loss harvesting is a proven tactic to bring taxable capital gains income down.

There are plenty more tips and tricks that a professional Houston tax planner can deploy for their clients, so this is by no means a comprehensive list. When determining which strategies make sense for your tax picture, a tax planning professional can analyze your financial situation and help you make the right decision.

And Finally, a Tax Twist That Only a Tax Expert Could Come Up With

As you can see, tax professionals have a deep bag of tricks to pull from, but a true expert knows the law so well that they can develop unique tax reduction solutions for their clients. Our firm has organized advanced tax planning maneuvers for clients in the past, and one such maneuver stands out as an example of what a veteran tax planner can do for your situation.

In this real-life example, a client was expecting to receive a large sum for selling off stock in a business he owned to an interested party. The plan was for the transaction to be finalized in 2013, but there remained uncertainty regarding whether the transaction would be funded and executed.

Another complication, in 2013, the Obamacare net investment income tax went into effect, which added an additional 3.8 percent tax on investment income. Further, the Bush-era tax cuts were set to sunset in 2013, which meant tax rates were likely to increase.

Considering these factors, the transaction would ideally be finalized in 2012 to avoid the additional tax, but with uncertainty surrounding whether the deal would be completed, the Hap May firm had to get creative. Here’s what we did to position our client advantageously for tax purposes:

• Formed a limited liability corporation (LLC) for the purposes of facilitating the transaction. This was done at the very end of the year, on December 30, 2012.
• The client then sold the aforementioned stock to the newly formed corporation. This was a proper sale, not a contribution. The point was to ensure the transaction was taxable.
• Now, here’s the twist. LLCs may be treated as “disregarded entities” by the IRS, which means the special tax provisions that would be allowed under a corporation tax structure do not apply to the LLC. In this instance, the LLC would be considered a sole proprietorship for taxation purposes.Alternatively, the LLC may elect to be treated as a C corp (or S corp) for taxation purposes as long as the LLC makes this election within 75 days of forming.This bought our client 75 days to finalize the sale to the interested buyer.
• If the transaction to the interested buyer was never completed, the idea was to keep the LLC as a disregarded entity. This would essentially mean the client sold the stock to themselves, nullifying the transaction for tax purposes.If the transaction was to be completed, though, instead of selling the stock to the interested party, it would be transferred from the LLC to the new owner – the interested buyer, in this case.
• In fact, our client and their interested buyer did complete the stock transfer after the client was paid for the asset. In light of this, we guided our client into electing for C-corp taxation, which meant the sale of stock transaction was taxed retroactive to 2012, allowing them to leverage favorable tax laws to greatly reduce their tax burden on the sale.

Sound complex? Tax planning frequently is, especially when major, complex transactions like the above are part of your tax picture.

Consult with a Trusted Houston Tax Professional to Discover End-of-Year Tax Planning Twists for You

The end of the year brings with it plenty of tax planning questions. The above tips and tricks can steer your own tax planning process in the right direction, but to maximize your benefits, consider partnering with a reputable Houston tax planning expert.