Thursday, December 24, 2015

Last Minute 2015 Business Tax Planning

Businesses have another week until December 31, 2015, to implement any “last minute” income tax planning strategies. Here is a checklist of several strategies applicable to businesses: 

·       50% first-year bonus depreciation has been extended to include qualified property acquired and placed in service by December 31, 2015 (previously expired after 2014 and expiring once more after a phase-out period of 2018-2019).  The property’s original use must begin with the taxpayer (new property).
·       The higher Section 179 business expensing limits have been extended to include qualifying property (new or used) acquired and placed in service in tax years beginning in 2015 (previously expired for tax years beginning after 2014 but now made permanent).  The expensing limit is restored to $500,000; phasing out dollar for dollar as purchases exceed $2,000,000.  These limits are now indexed for inflation beginning in 2016.  Previously these limits would have been $25,000 and $200,000 respectively.
·       Adopt a qualified retirement plan, such as a profit sharing plan, a 401(k) plan, or a defined benefit plan by December 31st.  Alternatively, a simplified employee pension (SEP) plan can be adopted by the due date of the tax return (with extensions).
·       Estimate the business’ marginal income tax rate for 2015 and 2016 and shift income and deductions as appropriate to allow more income to be taxed at lower tax rates, or to allow more deductions to be claimed at higher tax rates.
·       Personal service (in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting) C corporations (PSC) are subject to a flat income tax rate of 35% where substantially all of the shareholders are employees.  Such corporations and shareholders will generally save income taxes by zeroing out corporate taxable income by year-end bonuses to the shareholder-employees.
·       Cash basis taxpayers should pay and mail all outstanding bills and payroll by December 31st.
·       Accrual basis corporations should declare and accrue bonuses by December 31st as long as actual payment occurs no later than March 15, 2016.  A special rule applies to shareholders owning directly or indirectly more than 50% of a C corporation’s stock.  The special rule also applies to any PSC shareholder-employee and to any S corporation shareholder-employee.  Under the special rule, bonuses must be paid by December 31st to be deductible in 2015 (essentially being placed on the cash method).
·       Write-down the value of subnormal inventory items.  Subnormal items are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes.  You can take a deduction for any write-downs provided you offer to sell the items at the new price within 30 days of your inventory date. However, the inventory does not actually have to be sold within the 30-day time frame.
·       If you own an interest in a partnership or an S corporation, you may need to increase your tax basis in the entity in order to deduct a loss from it for this year.
·       If you do not already have an existing policy, be sure that a written capitalization policy is in place by December 31, 2015 for the 2016 tax year.  This policy permits low-cost asset purchases ($2,500 or up to $5,000 for audited financial statements) to be expensed in the income statement instead of capitalized on to the balance sheet and depreciated.  Your financial accounting records must also treat these low-cost asset purchases as expenses.  While an annual election in the income tax return must be made each year to claim the deduction, it does not appear that a new capitalization policy must be adopted each year.  Rather, a written capitalization policy simply must be in place before the start of the tax year for which you are making the tax return election.  Technically the accounting policy only needs to be in writing for the $5,000 limit for audited statements, but it is a good practice for all businesses to follow.

No comments: