Taxes are something business owners usually start thinking about early in the year as they get ready for the April 15 tax-filing deadline. However, waiting until then can be a costly mistake — because many tax strategies must be implemented before year-end to be most effective.
There are a number of tax moves you can make between now and December 31 that could save your company money when you file your 2016 return next April. That’s why you should plan to meet soon with your tax advisor to discuss these and other strategies.
Income and Expense Timing
The tried-and-true year-end tax strategy for cash-based businesses is to defer income into next year and accelerate deductible expenses into this year. This will lower your business income this year and thus reduce your 2016 tax liability.
To defer 2016 income into 2017, wait until next January to send out some of your December invoices. Doing so will enable you to defer paying tax on the income generated by these invoices for a full year. Of course, you probably don’t want to defer all of your December income to January — this would make it difficult to meet year-end business expenses. In November, analyze your December expenses and payables and plan accordingly.
Important note: If you receive payments in December, you’re considered to be in constructive receipt of the cash and must pay taxes on it this year — even if you wait until January to deposit the checks.
On the flip side, if you plan to make any deductible purchases early next year, make them in 2016 if your cash flow allows. This will accelerate the expense (and the deduction) into this year, once again lowering your 2016 income and tax liability. Computers, office furniture and supplies, software, and telecommunications equipment are a few of the deductible purchases to consider accelerating into this year.
Deducting Fixed Assets
There’s some good news this year when it comes to deducting fixed asset purchases and equipment. The Protecting Americans from Tax Hikes (or PATH) Act permanently extended the increased Section 179 expensing limit of $500,000. Before this legislation, the Section 179 expensing limit was only $25,000.
The PATH Act also extended first-year bonus depreciation through 2019. You can expense and deduct 50 percent of the cost of qualifying fixed assets purchased and placed in service this year, 40 percent of the cost of such assets next year, and 30 percent of the cost of such assets in 2019.
You might realize big tax benefits by writing off (or expensing) fixed assets during the year in which they are placed in service. Doing so enables you to realize larger deductions during the early years of asset ownership than depreciating the assets over a number of years.
But remember: In order to take advantage of these tax breaks on your 2016 return, you must purchase or finance the assets and place them in service by Dec. 31, 2016. So meet with your tax advisor now to strategically plan your upcoming asset acquisition strategies.
Year-end Contributions and AMT Considerations
Making retirement plan contributions before year-end is one easy way to lower your taxes while also and boosting your retirement savings. Any money you contribute to your 401(k) before Dec. 31, 2016, could reduce your 2016 taxable income. Also, matching contributions your company makes to your employees’ 401(k) accounts will reduce your business’ 2016 taxable income.
The same goes for making charitable contributions. If you’re planning to contribute money to qualified 501(c)(3) organizations early next year, accelerate these contributions into December if possible to benefit from the deduction a full year earlier.
Now is also a good time to work with your tax advisor to determine if you will be subject to the Alternative Minimum Tax (AMT) in 2016. The AMT calculates what’s referred to as AMT income by making adjustments to taxable income for certain items. You then have to pay whichever tax is higher: your regular tax or the AMT.
The sooner you find out whether or not you will be subject to the AMT, the better. If you determine early enough that are going to have to pay the AMT on your 2016 tax return, you might be able to adjust some of your deductions, exemptions and exclusions to avoid this.
Start Planning Now
December will be here before you know it, so don’t delay. Make plans now to meet with your tax advisor and discuss how implementing these and other year-end strategies could help reduce your taxes next April.
Please contact us to schedule a meeting to discuss year-end tax strategies for you and your business.