Year-End Tax Planning for Businesses
The end of 2015 introduced changes to the tax code that may affect your business this year. While planning for 2017 and beyond will provide uncertainty until after the elections, strategic year-end tax planning is key to running a successful business, as it will minimize taxes owed and keep that money growing in your business.
Research Credit Expansion
Many businesses along the central coast utilize the research credit, which applies to technology, engineering, manufacturing and research companies. As part of the Protecting Americans from Tax Hikes (PATH) Act of 2015, the research credit was extended and expanded. Not only did the PATH Act retroactively extend the research credit to cover 2015 (which expired after 2014), it also brought the highly-anticipated news that it has finally been made permanent.
This expansion will now benefit eligible start-up companies, allowing them to apply the credit against their payroll tax liabilities. Many start-ups begin operating at a loss and therefore have minimal or no income tax liabilities but most will still incur payroll taxes for their employees. Under the new provisions, small businesses with less than $5 million in gross receipts will be able to apply up to $250,000 per year against their payroll taxes for up to 5 years. This expansion does not include tax exempt companies that fall under Section 501. Eligible businesses include corporations, partnerships and individuals. Most of this can be handled by the best payroll software on the market, and these calculations are automatically done most of the time.
Another important change is that businesses with less than $50 million in annual gross receipts may now offset their alternative minimum tax (AMT) with the research credit. In the past, a company could not reduce their tax liability below AMT; therefore, many companies could not benefit from the credit.
Companies should start planning for this credit now in order to determine the benefits available, prepare the calculations and supporting schedules, and make the appropriate elections on originally-filed tax returns.
New Class of Property Eligible for Bonus Depreciation
In last year’s tax extender package, Congress also renewed bonus depreciation and extended it through 2019. For property placed into service in 2015, 2016 and 2017, the extension provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is put into service, decreasing to 40% in 2018 and 30% in 2019. Additionally, they introduced a new class of property. Under section 168(k), “qualified improvement property” is now eligible to utilize this provision as well.
So what is considered a “qualified improvement property”? It is a new classification of nonresidential real property eligible for bonus depreciation as early as 2016, whereas in the past, it was only applicable to qualified leasehold improvements and to buildings at least three years old.
It is important to note that section 168(k) defines “qualified improvement property” as any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. It does not include expenditures for the enlargement of a building, any elevator or escalator, or the internal structural framework of the building.
Expansion and Permanency of Section 179
Section 179 was also expanded as part of the PATH Act and permanently included the $500,000 limitation for expensing of section 179. The $2 million phase-out amount was extended and made permanent as well. Additionally, for tax years starting after December 31, 2015, both the abovementioned amounts have been indexed for inflation.
For the upcoming tax season, the expensing limit stayed at $500,000, and the phase-out amount increased slightly to $2,010,000. Section 179 now includes off-the-shelf computer software and air conditioning and heating units among the list of qualifying assets for 2016.
Remember a key component of the recent “repair regulations” is that businesses may expense items up to a $2,500 threshold even if otherwise required to be capitalized. These expensed items are not considered as part of the §179 deduction or investment limits, so by using both benefits strategically, your business can maximize your business deductions while also reducing the record keeping by carrying less assets on your depreciation schedules.
Changes in Filing Deadlines
Another important consideration for businesses is to remember that the usual federal filing deadlines have changed. These changes are a result of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“the Highway Act”) and applicable for taxable years beginning after December 31, 2015. Please note the following changes:
- Partnership and S Corporations: Returns will be due on March 15 instead of April 15. This change should help the businesses provide the necessary K-1 information to their partners and shareholders prior to the individual return deadline.
- C Corporations: Businesses with a calendar year-end will receive a 30-day reprieve, as their returns will be due on April 15 instead of March 15. Please note: C corporations with a June 30 year-end will not have a change in their filing date until the year 2026.
Traditional Tax Planning Methods
There are the tried and true tax planning methods that businesses can utilize in their year-end tax strategy, such as deferring or accelerating income and deductions. If your business is able to estimate income for this year and the next, one method to consider is to defer income into the next year, thus deferring the tax on that income.
If your business uses the cash method of accounting, this strategy can be used by reducing year-end billing for goods and services. On the other hand, if your business operates on the accrual method, then delaying the shipping of goods or delivery of services can be used to defer taxable income.
Businesses can also look at the structure of the business when developing a year-end tax planning strategy. For an S corporation, one consideration is for shareholders/employees to keep their salary at a lower, yet reasonable, rate and increase corporate distributions of company income, thus lowering the businesses payroll taxes. Distributions at the corporate level aren’t usually taxed and aren’t subject to the Medicare tax on net investment income.
C corporations shareholders/employees may consider year-end bonus payouts instead of dividends, since salary is deductible and dividends are not. As with an S corporation, it is important that the salaries are at a reasonable rate to avoid additional scrutiny.
There are many year-end tax strategies available to businesses and only a few have been highlighted in this article for your consideration. Please feel free to contact me at (805) 963-7811 or email@example.com should you have any questions about the topics covered in this article and other strategies that could be available to you. As an additional resource, you can access BPW’s Web Tax Guide at http://www.webtaxguide.net/Bartlett/.