The end of any calendar or tax year naturally causes one to reflect upon initial targets and aspirations for such year, accomplishments during the year and aspirations for the coming year. As owners of closely held businesses turn their focus to financial performance, budgets, and new targets and projections, they also should think about tax planning, corporate records and relationships, succession planning, and gift and estate tax planning. By its nature, this article merely raises topics for review and consideration; you are urged to contact your professional adviser for details, discussion and review.

Income tax planning and review. 2013 began with the passage of the American Taxpayer Relief Act (2013 Act), which dramatically impacted certain income, estate, gift and generation-skipping transfer tax provisions. Businesses should review and consider, in concert with advisers, any income tax planning that may be accomplished as the end of the year looms and visibility as to year-end financial performance improves. Obvious candidates are the acceleration of expenses and the deferral, under certain circumstances, of income. Year-end is a good time to undertake a careful analysis of the payment of bonuses versus dividends versus other forms of compensation. Certain equipment may be able to be acquired and depreciated on an accelerated basis or, in certain circumstances, deducted. If you are planning to establish a 401(k) plan or other retirement vehicle, it could be hugely beneficial to accomplish this prior to the end of the tax year. The end of the year is also a good time to take a close look at your current business entity/structure and determine whether it makes the most sense for you going forward.

Among other things, the 2013 Act reinstated the 39.6 percent individual income tax rate over certain thresholds and increased the rate for certain long-term capital gains and qualifying dividends for certain taxpayers. Some of the taxes imposed by the Affordable Care Act (enacted in 2010) take effect in 2013, including net investment income tax of 3.8 percent assessed on interest, dividends, annuities, rents, capital gains and passive income from partnerships or S-corporations over certain thresholds, and an additional 0.9 percent Medicare tax on salaries, wages and bonuses over certain thresholds.

Depreciation is usually a significant consideration for closely held businesses, particularly when contemplating the purchase of equipment before the end of the year. The 2013 Act extended the Section 179 expense deduction (through 2013), increasing the annual limit for 2013 to $500,000, reduced on a dollar-for-dollar basis to the extent the cost of qualifying property exceeds $2 million. This means that small businesses may expense (rather than depreciate) most furniture and equipment bought in 2013 (certain conditions apply). Contrast this to the fact that, presently, for 2014 and forward, the maximum expensing amount is $25,000 with the phase-out limitation being $200,000.

S-corporation owner-employees must review their compensation for the year to ensure they have met IRS guidelines for reasonable compensation. They also must include any eligible health insurance premiums on their Forms W-2 for the health insurance premiums to be deducted as self-employed health insurance. Medicare premiums paid may generally be deducted as self-employed health insurance premiums. It is suggested that the S-corporation reimburse the owner-employee for the premiums paid. Please consult with your adviser concerning what premiums qualify for this deduction.

The end of the year is also a good time to review your county real estate tax bills to determine if the tax base (property valuation) upon which the applicable tax rate is applied is an accurate reflection of the value of your property. If not, you should file an appeal with the applicable county. Rules for such appeals can be complicated, and timing is very important.

Corporate records and business relationships. As we all know, to maintain its liability shield, a corporation must adhere to corporate formalities, including keeping organized and up-to-date corporate records (the same goes for other business entities). The end of the year is a good time to review your code of regulations (aka by-laws) to ensure that requisite meetings of the shareholders and directors have been held and documented. Further, any other actions taken during the year that have not otherwise been documented should be ratified and confirmed.

As a part of a year-end review, it is good practice to actually read your code of regulations, articles of incorporation, etc., to determine whether they are in need of updates and to ensure that operations are in compliance therewith. Ensure that stock records and ledgers accurately reflect the capitalization of the corporation. Likewise, in the context of a partnership or limited liability company, the partnership agreement or operating agreement, respectively, should be reviewed annually.

Generally speaking, year-end is also a good time for business owners to evaluate their relationships with financial institutions. Review your operating lines of credit and other debt instruments. Restructuring debt at the end of a high-performance year (when times are good and you do not need financing) is ideal, rather than when you are in need and at the mercy of your lender.

Succession planning. Succession planning is an attempt to ensure the continuation of your business when you and/or fellow owners face certain circumstances (i.e., death, disability, divorce, retirement, termination of employment, etc.). A properly structured buy-sell agreement is one tool often utilized by privately held businesses to address such contingencies. Said agreements also provide a process to handle situations where an owner desires to sell his/her shares (to third parties or other owners), transfer certain interests to heirs or trusts, or where inevitable owner disputes arise.

Properly structured buy-sell agreements consider appropriate valuation metrics (based on the nature of your business) and may provide for valuation penalties in the event certain frowned-upon circumstances arise (i.e., breach of restrictive covenants, “for cause” termination events, etc.). Other considerations involve the funding of buy-outs (cash, promissory note, life insurance, etc.) and the structure of the buy-out (redemption versus cross-purchase). The purpose of a buy-sell agreement is to provide certainty and continuity – a backstop in the event the parties cannot agree. Like other corporate instruments, a buy-sell agreement should be reviewed periodically to ensure compliance and appropriateness.

Gift and estate tax planning. While the end of the year is a good time to consider estate and gift planning, whether involving interests in closely held businesses or other assets, solid plans can take years to implement and will evolve with you and your business throughout your life.

Under the 2013 Act, the gift and estate tax exemption amounts remain unified with one another for 2013 and stand at $5.25 million. The exemption amount for the generation-skipping transfer tax also stands at $5.25 million for 2013. The annual exclusion for 2013 is $14,000.

Closely held businesses, by their nature, lend themselves to many advanced planning techniques that may be used to benefit spouses, children, grandchildren and generations to come. Valuation discounts reflecting lack of marketability, lack of control, etc., provide useful leverage in planning. The ability to separate ownership from control and control distributions makes closely held businesses ideal for this type of planning. Nelson Rockefeller was once quoted as stating that “The secret to success is to own nothing, but control everything.” In this planning arena, by separating ownership from control, transferring wealth in the form of closely held business interests does not necessitate that one relinquish control. Rather, this can be effectuated via a restructuring that entirely separates ownership from control.