Our recent post Year-End Tax Planning: Important as Ever for 2015 highlighted several tax breaks that could be relevant for individuals and businesses as they look toward the end of the year.
In this post, we offer a short list of year-end tax planning tactics that businesses and their owners might consider and discuss in more detail with their tax advisors.
- Businesses should consider purchasing equipment and machinery before the end of 2015 and secure a half-year of depreciation deductions this year.
- Unless retroactively modified by legislation, the business property expensing option is significantly reduced in 2015. Nonetheless, making expenditures that qualify can still lead to thousands of dollars of current deductions. For tax years beginning in 2015, the expensing limit is $25,000; the investment-based reduction in the dollar limitation takes effect when property placed in service in the tax year exceeds $200,000.
- Businesses might be able to take advantage of the “de minimis safe harbor election” to expense the costs of inexpensive assets and materials and supplies, assuming the costs do not need to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify, the cost of a unit of property must not be greater than $5,000 if the taxpayer has an applicable financial statement (AFS). Without an AFS, the cost of a unit of property must not exceed $500. Where UNICAP rules are not an issue, consider purchasing qualifying items before the end of the year.
- A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, the corporation is advised to consider deferring income until 2016 if it will likely be in a higher bracket this year.
- A corporation is advised to consider deferring income until next year if that will preserve its qualification for the small corporation AMT exemption for 2015.
- A corporation that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) should consider whether it would be worthwhile to accelerate enough 2016 income or defer enough 2015 deductions to create a small amount of net income for 2015. This will allow the corporation to base its 2016 estimated tax installments on the proportionally small amount of income shown on its 2015 return, instead of having to pay estimated taxes based on 100 percent of its much larger 2016 taxable income.
- If the business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50 percent of W-2 wages limitation on that deduction applies. If it does, look to find ways to increase 2015 W-2 income (e.g. through bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts). Note that the limitation applies to amounts paid for employment in calendar year 2015, regardless of whether the business has a fiscal year.
- If a debtor, consider reducing 2015 taxable income by deferring a debt-cancellation event until 2016.
- Consider disposing of a passive activity in 2015 if that would enable deducting suspended passive activity losses.
- For owners with an interest in a partnership or S corporation, consider whether it is worth increasing your basis in the entity in order to deduct a loss from it for this year.
While these are a sampling of ways by which businesses and business owners are able to reduce tax obligations, it is worth exploring other options as well and meeting with your professional tax advisor to ensure you are pursuing the strategies most impactful and relevant for you and your business. Meanwhile, the Daszkal Bolton tax professionals will continue to monitor the actions of Congress closely to stay abreast of which tax breaks are reinstated.
You might also be interested in reading 2015 Year-End Tax Planning Tactics for Individuals.