It’s December, which means it’s officially crunch time for everything you wanted to finish before the year draws to a close. Even so, if “tax planning” doesn’t appear on your year-end to-do list, you may want to add it. Certain planning moves could save you significant tax dollars.
Here are five tax-planning moves every business owner should consider before Dec. 31:
Think about moving ahead with equipment, software and property upgrades
For tax years beginning in 2016, the expensing limit is $500,000, and the investment ceiling limit is $2,010,000. By making qualifying purchases before year-end, businesses can deduct these costs on their 2016 taxes. It’s important to note that the expensing deduction is not prorated for the time the asset is in service during the year, meaning it’s not too late to act.
Most depreciable property, including qualified restaurant property, qualified retail improvement property, and qualified leasehold improvement property, will qualify for the business property expensing option.
Don’t forget about 50 percent bonus depreciation
Businesses should also consider making expenditures that qualify for 50 percent bonus depreciation. This bonus depreciation deduction is permitted as long as the asset is bought and placed into service this year—there’s no proration for service time. In other words, it’s available even if the qualifying assets are in service for only a few days in 2016. The 2015 PATH Act extended and expanded this important tax provision, but it phases down to 40 percent in 2018 and 30 percent in 2019. With this in mind, it may be wise to forge ahead with qualifying expenditures sooner rather than later.
Reevaluate your company’s capitalization policies under the tangible property regulations
Businesses without audited financial statements are allowed to expense purchases of up to $2,500 per item under the “de minimis safe-harbor.” By increasing your capitalization policy threshold, you effectively increase your company’s expensing limit of $500,000 for other larger asset purchases.
Businesses with audited financial statements are allowed to expense up to $5,000 per item.
Consider accelerating or deferring income
If your business is going to be in a higher tax bracket next year, you may want to accelerate income from 2017 to 2016. On the other hand, if it’s going to be in a higher tax bracket this year, you may wish to defer income or deductions to 2017.
Explore options for reducing 2016 taxable income
Businesses that are on the accrual method of accounting should consider prepaying certain services that will be utilized within the next three-and-a-half months.
Year-end bonuses to most owners and relatives of owners should be paid by companies year-end.
If you own an interest in a partnership or S corporation, determine whether you need to increase your basis in the entity so you can deduct either current-year or suspended losses for 2016.
Choose the tax planning moves that work best for you
The planning steps I’ve mentioned here are just a few of the ways you can save on your taxes. Some may be more beneficial to your business than others, so it’s important to do your research. Your tax advisor can help—don’t hesitate to give us a call if you have questions.