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:
Deferral of Income
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. Businesses can elect to expense (deduct immediately) the entire cost of most equipment purchases up to a maximum of $500,000 of property placed in service by December 31, 2016. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The maximum allowable deduction is phased out dollar for dollar, if the amount of qualifying assets placed in service exceeds $2.01 million, and is completely eliminated if such asset additions exceed $2.51 million.
Bonus Depreciation. Businesses are able to deduct as bonus depreciation 50 percent of the cost of new equipment acquired and placed in service during 2016 and 2017. However, the bonus depreciation will be 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 do not recognize bonus depreciation, and, therefore, state tax authorities may require a separate depreciation computation.
Timing. If you plan to purchase business equipment this year, consider the timing. You might unintentionally reduce your depreciation deduction if you place too much equipment into service during the fourth quarter of your tax year.
If you’re planning on buying equipment for your business, call our 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.
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 not more than $51,800 in 2016) may qualify for a tax credit for premiums paid on employees’ health insurance. The credit is 50 percent (35 percent for non-profits). However, since the credit can be claimed for no more than two tax years after 2013, it may be beneficial to put a new health insurance plan in place in early 2017, rather than late in 2016, so a full year of premiums will be used in the credit computation.
Business Energy Investment Tax Credit. Business energy investment tax credits are still available for eligible property 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 may be claimed for solar energy systems (other and passive solar systems and equipment used to heat swimming pools), fuel cells, microturbines, small wind-energy systems, geothermal property (including heat pumps), and combined heat and power systems.
Repair Regulations. To the extent permissible, end of year repairs and expenses should be deducted immediately rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of the de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per item). Businesses with AFS may currently deduct $5,000 per item. Small business with gross receipts of $10 million or less may also be able to currently deduct the cost of building improvements rather than capitalize and depreciate them. Please call us, 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 us 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 us today, if you need help setting up a retirement plan.
Dividend Planning. In certain cases, it may be beneficial to reduce accumulated corporate earnings and profits by issuing 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 us.
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 and beyond. 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 we’ll work with you to develop a plan that suits the needs of your business.