There is a familiar saying that there are very few constants in life, but one thing we can always count on is change.
That statement has never been more true than it is in today’s political environment. As the year came to an end, we had many discussions with our clients regarding acceptable ways of pushing income into the next year in hopes that we might see lower tax rates in 2017 and beyond. We might not know for several months what those new tax rates will look like, but I think most of us share the same general opinion and expectation they will be lower. While many details are still to come, this belief is based on the tax proposal from President Donald Trump and a similar proposal from House Republicans.
So, now that we are well into the first quarter, how can taxpayers take advantage of some of these opportunities? The following is a short list of ideas to consider, depending on individual circumstances.
1. If you recently purchased or built a new building or inherited a building used for business, consider having a cost segregation study prepared for it. This study analyzes the cost of a building and breaks down the cost into different asset classes with different depreciation lives. For example, the exterior wall, roof, windows and elevator are depreciated over 39 years. Equipment in the building, such as shelving and cabinets, would be depreciated over five or seven years. If this equipment were in a showroom or facility open to the public, it could be depreciated over five years. The landscaping and parking lot pavement are depreciated over 15 years.
Without the study, the whole building and everything in it will typically be depreciated over 39 years.
For instance, if you build a new building and $3.9 million of the purchase price is allocated to the building, you would get the benefit of a $100,000 depreciation expense tax deduction. If you have a cost segregation study prepared and some of the $3.9 million is allocated to assets with a depreciation lifespan of five, seven or 15 years, the depreciation deduction would increase. If the depreciation deduction increased by $50,000 to $150,000, and if you were in the highest 39.6 percent tax bracket, your tax bill would go down by $20,000.
2. If you build or purchase a new building and you are able to claim the 50 percent bonus depreciation deduction for a portion of the cost, the savings could increase substantially. Additionally, beginning in 2016, certain improvements made to existing buildings also are eligible for the 50 percent bonus depreciation deduction.
3. If the purchase is not a new building, you could still claim the first-year expense deduction under Code Section 179, which allows for a deduction of up to $500,000 of trade or business property placed in service during the year.
4. Other common strategies include reviewing accounts receivable and writing off accounts that are not going to be collected. Review inventory and identify any obsolete or unsalable inventory that can be written down or, if you qualify, write down inventory to its market value if it is less than the cost.
5. If you are an accrual-basis taxpayer, see if you qualify to expense any prepaid expenses, such as insurance, in full at the time of payment. To qualify, the expenses need to be used up in the following year.
6. A final word: Nearly every day, I get a warning regarding scammers and identity theft. These thieves are becoming more sophisticated and devious at an alarming pace. This is a disease that is going to plague our society with no cure or end in sight. So, protect your personal and business information. While this is not a tax savings idea, if your business or personal information is compromised, it could cost you more than all of the above ideas will save.
Meet with your tax return preparer to explore if any of these and other strategies might be available and of benefit to you.
Chris Wilcox is the tax partner at Eide Bailly in Las Vegas. Eide Bailly has 29 offices in 13 states.
