Prepare for 2016 Year-End with Tax Strategies for Businesses
With the holiday season upon us and 2016 winding down, it is time to start thinking about year-end tax planning strategies for your business. You’d rather spend more time focusing on Kris Kringle and less on Uncle Sam, right? If so, below are some action items to discuss with your tax advisor.
The Protecting Americans from Tax Hikes Act (PATH Act), passed in late 2015, made permanent some popular business-related provisions such as:
- The Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (indexed for inflation each year)—available for both new and used property
- Expensing of off-the-shelf computer software
- The research credit, which is also now more useful to small businesses
The PATH Act also extended other popular business-related provisions for five years such as:
- Bonus depreciation (50% for tax years 2015-2017)—only available for new/first-time assets
- The work opportunity tax credit (WOTC)—also expanded for greater use and applicability
De Minimis Safe Harbor
In 2013, the IRS issued tangible property regulations (“repair regs”) that are still having an impact for businesses. The de minimis safe harbor provision under the repair regs allows taxpayers to elect to deduct the cost of materials and supplies in the year incurred, if under the per-item dollar limit, rather than depreciating it over a period of years. Effective starting in 2016, the de minimis safe harbor limit increased from $500 to $2500.
Net Investment Income Tax
Self-employed individuals should be aware of the 3.8% Net Investment Income (NII) tax applying to unearned income. By making sure you “materially participate” in your business, your income derived from the business will not be classified as unearned. In some cases, grouping multiple activities/businesses together makes sense to achieve material participation and avoid the 3.8% surtax.
Of course, businesses can always try and accelerate deductions and delay income (or vice versa, depending upon projections for next year). There are income items and expenses you may be able to control when they occur. For a cash-basis business, consider delaying invoices and prepaying business expenses. An accrual-basis business can complete jobs next year, if possible, and receive shipment of office supplies and other items this year. Accrual-basis businesses can also take a deduction for current year bonuses not actually paid to employees until next year, if accrued properly on the books and paid within 2 ½ months following year-end.
Some year-end planning techniques take time to implement, so contact an Anders advisor now to get started before the New Year’s ball drops!