There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2016. Here are a few of them:
Businesses using the cash method of accounting can defer income into 2017 by delaying end-of-year invoices so payment is not received until 2017. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2017.
Purchase New Business Equipment
Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2016 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $500,000 for the first $2,010,000 million of property placed in service by December 31, 2016. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.01 million threshold and eliminated above amounts exceeding $2.5 million.
Bonus Depreciation. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019.
Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.
Please contact the office if you have any questions regarding qualified property.
Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here's a simplified explanation:
Conventions. The tax rules for depreciation include "conventions" or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.
If you're planning on buying equipment for your business, call the office and speak to a tax professional who can help you figure out the best time to buy that equipment and take full advantage of these tax rules.
The half-year convention: This convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores (see mid-month convention below) unless the mid-quarter convention applies. All property that you begin using during the year is treated as "placed in service" (or "disposed of") at the midpoint of the year. This means that no matter when you begin using (or dispose of) the property, you treat it as if you began using it in the middle of the year.
The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40 percent of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
The mid-month convention:This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.
Other Year-End Moves to Take Advantage Of
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees (average annual wages of $52,000 in 2016) may qualify for a tax credit to help pay for employees' health insurance. The credit is 50 percent (35 percent for non-profits).
Business Energy Investment Tax Credit. Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2016, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include solar energy systems (passive solar and solar pool-heating systems excluded), fuel cells and microturbines, and an increased credit amount for fuel cells. The extended tax provision also established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems. Utilities are allowed to use the credits as well.
Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.
Partnership or S-Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2016 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity's tax year.
Caution: Remember that by increasing basis, you're putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Section 199 Deduction. Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2016, businesses can increase the amount of this deduction. Please call to find out how your business can take advantage of Section 199.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2016. Call today if you need help setting up a retirement plan.
Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.
If you need help developing a budget for your business, don't hesitate to call.
Call a Tax Professional First
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2016. If you'd like more information about tax planning for 2017, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.
When Disaster Strikes
Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. With hurricanes, floods, and other natural disasters affecting so many homeowners and businesses throughout the US this year, here is some useful information about disaster-related tax relief that taxpayers should know about:
Immediate relief. If you have damaged or lost property in a location declared by the President as a major disaster area, you may be able to get some money back from the IRS right now. Please call the office for more information.
Tax filing and penalty relief. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.
Taxpayers who live outside the disaster area. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Don't hesitate to contact the office if you need assistance with this.
Disaster-related losses. Individuals and businesses who suffer uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2016 return normally filed next year), or the return for the prior year (2015).
Retirement plan hardship distributions. Finally, employees and certain members of their families who live or work in disaster area localities affected by Hurricane Matthew who participate in employee sponsored retirement accounts such as 401(k)s, 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible to take loans and hardship distributions without incurring the 10 percent early withdrawal tax penalty.
Tax Relief Specifically for Victims of Hurricane Matthew
Hurricane Matthew victims in much of North Carolina and parts of South Carolina, Georgia and Florida have until March 15, 2017, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for those with valid extensions that were due on October 17, 2016.
This expanded relief applies to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for either individual assistance or public assistance. In addition, taxpayers in counties that are added later to the disaster area will automatically receive the same filing and payment relief.
The tax relief postpones various tax filing and payment deadlines that occurred starting on October 4, 2016. As a result, affected individuals and businesses will have until March 15, 2017, to file returns and pay any taxes that were originally due during this period. This includes the January 17 deadline for making quarterly estimated tax payments.
For individual tax filers, it also includes 2015 income tax returns that received a tax-filing extension until October 17, 2016. However, because tax payments related to these 2015 returns were originally due on April 18, 2016, those are not eligible for this relief.
A variety of business tax deadlines are also affected including the October 31 and January 31 deadlines for quarterly payroll and excise tax returns. It also includes the special March 1 deadline that applies to farmers and fishermen who choose to forgo making quarterly estimated tax payments.
In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after October 4 and before October 19 if the deposits are made by October 19, 2016.
Ready to Help
Please call the office if you have any questions about the impact of a natural disaster on your tax situation or need assistance figuring out what you need to do next.