The holiday shopping season is underway and the days remaining on the calendar for 2016 are few. Now is the time for taking actions to cut your tax bill for 2016. The following suggestions for actions are generalities, so be sure to tailor them to your particular situation.
2016 Year-End Tax Planning
Meet with Your Tax Advisor
Whether you do this on the phone, online, or in person, your CPA or other tax advisor should review your tax picture year-to-date so you can decide what moves to make before the end of the year.
Handle Income and Expenses Through Year-end
If your report on a cash basis (e.g., you’re service business), you have some flexibility when it comes to reporting income and expenses. You can, for example, delay invoicing for work you do in December so you’ll receive payment next year…and pay tax on that income next year (as long as you don’t have immediate cash flow concerns). Similarly, you can buy now the supplies needed for next year to maximize your deductions for this year.
Pay Year-end Bonuses
If you’ve had a good year, consider sharing your good fortune with your staff. In deciding how much to pay out, factor in the cost of payroll taxes on the bonuses.
Make Last-minute Equipment Purchases
If you need new equipment (e.g., tablets, machinery, furniture) or merely want to replace what you currently have, you’ll probably be able to write off the cost. This is so even if you finance the purchase in whole or in party. Find rules about deductible vehicle purchases from the IRS.
Get a New Vehicle
Do you need a new car, truck, or van for your business? Year-end sales may be enticing. Tax write-offs may influence your decision. For example, if you buy a heavy SUV, the first $25,000 of cost is fully deductible. Then 50% of the remaining cost is deductible via bonus depreciation. Finally 20% of the balance is also deductible through regular depreciation. Thus, if you buy a $74,000 Land Rover Discovery II and begin using it for business before the end of the year, you can deduct $54,400 ($25,000 + $24,500 + $4,900) this year. These write-offs don’t apply to leased vehicles. Find rules about deductible vehicle purchases from the IRS.
Set Up a Qualified Retirement Plan
If you don’t yet have a plan in place, you can sign the paperwork for a profit-sharing plan or other qualified retirement plan by the end of the year. Then you have until the extended due date of your tax return for 2016 to actually make deductible contributions. Note: For SIMPLE IRAs, the deadline for a 2016 plan has passed; for SEP IRAs, you have until the extended due date of the return to both set up and fund the plan. Find rules about retirement plans from the IRS.
Make Charitable Contributions
Tax rules govern the amount of deductions, which varies with what is being given (e.g., cash, inventory, appreciated property). Also, owners of pass-through entities (e.g., S corporations) deduct their share of the business’s contributions on their personal returns. C corporations’ deductions are limited to 10% of taxable income.
Address S Corporation Concerns
If you own an S corporation and it has not been a good year, you’ll only be able to deduct losses passed through to you to the extent of your basis in stock and loans you’ve made to the business. Consider increasing basis (e.g., making a capital contribution or loan) so you’ll be able to fully write-off the losses.
Adjust Estimated Taxes
Factor in the impact of the year-end moves you make on your estimated taxes for the year so you don’t have to wait until you file your return to receive a refund. Owners of pass-through entities pay the final installment of 2016 estimated taxes on January 17, 2017; C corporations’ final installment is due on December 15, 2016.
Factor in Tax Reform
As a result of the November election, the chances for significant tax reform next year are high. Temper year-end tax actions in light of possible changes. For example, if you are a high-income taxpayer of a pass-through entity, optimizing charitable contributions this year makes sense if you expect the proposed cap on itemized deductions to be implemented. Similarly, if you think your tax bracket will be lower next year, then deductions this year are more valuable. Unfortunately, no one knows what tax reform will look like … as yet.
Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.