End-of-Year Tax Planning Tips for Businesses by Laurence Bernstein, CPA
With the start of the fourth quarter, business owners have little time before the end of the year to take action and maximize their tax efficiency for 2016.
Accelerate Deductions in 2016 and Delay Income until 2017. Business owners expecting to remain in their current tax bracket or move into a lower bracket in 2017 should consider postponing taxable income until after January 1, 2017. This may involve delaying year-end bonuses or waiting to bill clients for products or services after the New Year. Similarly, businesses should consider pre-paying expenses in 2016 and identifying deductions, credits and other breaks that can reduce their taxable income. This can be accomplished by prepaying real estate taxes and interest payments, selling loss-generating assets or using credit cards to pay deductible expenses in the current year.
Alternatively, a thriving business that expects a substantial increase in income in 2017 might consider taking the opposite approach of accelerating income in 2016 and delaying the recognition of deductible expenses until 2017.
Invest In Equipment and Other Long-Term Assets. Section 179 of the Internal Revenue Code allows businesses to deduct up to $500,000 of the cost to acquire qualifying equipment and property used in a trade or business during the tax year. That amount is reduced, dollar for dollar, by all section 179 property put into place exceeding $2 million. Combining the Section 179 deduction with a first-year 50 percent bonus-depreciation deduction provides businesses investing in needed assets with a significant tax benefit for 2016.
Revisit Your Capitalization Policy and Boost Year-End Deductions. The tangible property capitalization regulations (also known as the tangible property regulations) contain a safe harbor election that allows taxpayers to expense rather than capitalize certain lower costs assets if they are treated the same way for book purposes – commonly referred to as book-tax conformity. For 2016, taxpayers can expense rather than capitalize up to $2,500 per item per invoice (or $5,000 if covered by applicable financial statement). Businesses should spend the time now reviewing their capitalization policies and considering the impact any increase to these policies will have on their financial statements. When providing financial statements to banks or investors, a business may decide that a threshold lower than the maximum is more appropriate for its situation.
Accelerate Property Depreciation with a Cost Segregation Study. Taxpayers who own real property should consider conducting a cost segregation study to break down the property’s total cost into separate and distinct components that may be depreciated over shorter lives than the building itself. The result of the study often translates into accelerated depreciation deductions and a dramatic decrease in income taxes.
Take Bonus Depreciation and an Abbreviated Cost Recovery for Qualified Building Improvements. The 2015 PATH Act introduced a new category of depreciable property called Qualified Improvement Property (QIP), which includes most improvements to the interior portions of a nonresidential building after the building is first placed in service. Fifty percent bonus depreciation is available for QIP with the remaining cost depreciable over 39 or 15 years. Qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eligible for the shorter 15-year depreciation period. The expanded definition of bonus depreciation for qualified improvement property allows taxpayers to claim bonus depreciation starting in 2016. Previously, bonus depreciation was limited to qualified leasehold improvements, which required the building to be at least 3 years old and the improvements to be made subject to a lease.
Invest in Research. The now permanent research and development (R&D) tax credit is available to businesses with $50 million or less is gross receipts that invest time and resources to design, develop or improve products, processes, techniques or technology. Qualifying businesses may claim the deduction against their alternative minimum tax (AMT) liabilities while small, start-up businesses may apply the credit to offset payroll taxes. New for 2016 is the ability for companies to apply the credit for certain software they develop for their own internal use “in general and administrative functions that facilitate or support the conduct of the taxpayer’s trade or business.” Businesses may also elect to deduct research expenditures as they are incurred, or they can may defer and amortize those costs.
Don’t forget other Deductions for Business Owners. Self-employed taxpayers may deduct up to 100 percent of health insurance costs for themselves, their spouses and their dependent children age 26 or younger, depending on their self-employment income. Above the line deductions may also be applicable to retirement plan contributions, health savings account contributions, home office expenses, and the employer portion of Social Security and Medicare tax.
Consider a Grouping Election to Reduce Tax Liabilities and Leverage Passive Losses. Taxpayers may avoid the 3.8 percent Net Investment Income tax on passive income, or rental real estate income for non-real estate professionals, when they can demonstrate material participation in a trade or business activity. Taxpayers that previously made elections to group together separate trade or businesses activities (and avoid the passive loss limitations and deduct passive losses from passive income), should review their new activities for 2016 and consider adding them to the prior groupings.
Plan for an Eventual Retirement. Business owners have until April 15, 2017, to establish and contribute to retirement savings accounts, including a plethora of 401(k) and IRA programs, which provide taxpayers with big tax breaks. For the 2016 tax year, a taxpayer can contribute up to $18,000 ($24,000 for individuals age 50 and older) into a 401(k) plan. The contribution is made with pre-tax dollars, meaning that individuals may deduct the contribution amount from their taxable income in the current year and defer paying taxes until they take withdrawals after retirement, when they will often be in a lower tax bracket. Depending on taxpayers’ filing status and adjusted gross income, they may be permitted to contribute up to $5,500 in a traditional IRA ($6,500 for individuals age 50 and older) or a Roth IRA and escape taxes on the contribution or a withdrawal in retirement.
Meet with your Accountant Now. The tax laws are constantly changing, leaving many business owners adrift in a sea of complicated regulations and missed opportunities. Before making financial decisions that can affect their businesses and their personal lifestyles, taxpayers should take the time at the end of the year to meet with their accountants to review actions they already took in 2016 and identify tax-efficient strategies for the remainder of the year and into 2017.
The advisors and accountants with Berkowitz Pollack Brant work with domestic and international businesses to meet regulatory compliance obligations, optimize profitability and maintain tax efficiency. The firm’s Accounting Intelligence group provides cloud-based accounting services that enable it to dive deep into the books and records of entrepreneurial businesses and develop performance reports that identify emerging trends, risks and opportunities that influence management’s decision-making processes.
About the Author: Laurence Bernstein, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he provides tax and consulting service to entrepreneurs and privately held business owners. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.