While many factors complicate tax planning this year, including political and economic uncertainty, and Congress's all too familiar failure to act on a number of important tax breaks that will expire at the end of 2016, there are still actions you can take to cut taxes for your business this year.
Based on current tax rules, the following tips can save your business tax dollars if you act before year-end. While not all actions will apply in every business situation, your company will likely benefit from many of them.
1. Consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and midsize businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time the asset is in service during the year. These rules open up significant year-end planning opportunities.
2. Consider making expenditures that qualify for 50 percent bonus first-year depreciation if bought and placed in service this year. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50 percent first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2016.
3. Take advantage of the “de minimis safe harbor election.” Also known as the book-tax conformity election, this election enables you to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (or UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (or AFS, such as a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, purchase such qualifying items before the end of 2016.
4. Consider accelerating income from 2017 to 2016 if your corporation will be in a higher tax bracket next year. Conversely, it should consider deferring income until 2017 if it will be in the same or a higher bracket this year.
5. Consider deferring income until next year if doing so will preserve your corporation's qualification for the small corporation AMT exemption for 2016. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
6. Accelerate just enough of your 2017 income to create a small amount of net income for 2016. A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2016 (and substantial net income in 2017) may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100 percent of its much larger 2017 taxable income.
7. Consider ways to increase 2016 W-2 income. If your business qualifies for the domestic production activities deduction (DPAD) for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income (for example, by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts). Note that the limitation applies to amounts paid with respect to employment in calendar year 2016, even if the business has a fiscal year.
8. Consider deferring a debt-cancellation event until 2017 to reduce 2016 taxable income.
9. Consider disposing of a passive activity in 2016 to reduce 2016 taxable income if doing so will allow you to deduct suspended passive activity losses.
10. Consider whether you need to increase your basis if you own an interest in a partnership or S corporation, so you can deduct a loss from it for this year.
A word of caution: Year-end tax planning must take into account each business’s particular situation and planning goals with the aim of legally minimizing taxes to the greatest extent possible. While many businesses will come out ahead by following the traditional approach of deferring income and accelerating expenses, all companies need to consider whether that particular approach applies to them.