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