No one wants to pay more taxes than they need to.
When it comes to year-end tax planning, timing can be critical to minimize your overall tax bill. The key to smart timing is to estimate your business’s income and expenses through the end of 2015 as well as a reasonable assessment for 2016. If the change in net income between the two years results in a different tax bracket, you should review the potential benefits from timing income or deductions or both with your CPA.
Some strategies to consider:
Deferring income
If you expect to be in the same or lower tax bracket in 2016, you may want to consider deferring income to 2016. For example, if your business reports using the cash method of accounting, you can delay billing your products or services provided. If your business reports using the accrual method of accounting, another option may be to delay shipping products or delivering services. These timing methods can defer reporting of taxable income into the next year, along with the related taxes.
Accelerating deductible expenses
If you expect to be in the same or lower tax bracket in 2016, you may want to look for opportunities to accelerate deductible expenses into 2015.
For example, if your business is reporting using the cash method of accounting, additional deductions can be created by paying incurred business expenses prior to year-end, rather than waiting until January.
Another opportunity to accelerate deductions into the current year may be to make any state estimated tax payments prior to Dec. 31, so you can deduct it this year rather than next. Businesses using either reporting method can charge business expenses on a credit card in December and deduct them in 2015, even though the credit card bill is not actually paid until the subsequent year.
Accelerating income
If you expect to be in a higher bracket in 2016, you may want to consider accelerating income into the current year and/or deferring deductible expenses into 2016. By doing so, you will have less taxable income in the higher 2016 tax bracket year, and more taxable income in the current year in a lower bracket. This strategy could decrease your combined tax liability over the two-year period. Keep in mind that while your two-year overall taxes may be reduced, your 2015 tax liability will increase.
Asset purchases
There are many temporary tax laws still up for renewal by Congress. One is Section 179 that affects business owners who are considering purchasing new or used machinery, furniture, off-the-shelf software, computers or other business equipment. Section 179 provided a significant opportunity for business owners to increase current-year deductions for up to $500,000 of additions placed in service by year-end (other than heavy SUVs). This item is one of many tax extenders that expired Dec. 31, 2014. While this item is likely to be extended for another year, it has yet to happen.
Bonus depreciation
For 2014, your business could claim a bonus depreciation deduction of up to 50 percent of “new” qualifying assets purchased and placed in service before Jan. 1, 2015. Under the previous extension of this provision, there was no limit on how much bonus depreciation could be taken. This is a significant planning opportunity allowing an immediate tax deduction in the year of purchase. This too expired Dec. 31, 2014. Currently, there is no provision for bonus depreciation after 2014. There has been much discussion about making bonus depreciation permanent. Nothing has been finalized, however, so stay tuned.
As with most tax law, there are some exceptions and limitations regarding Section 179 deductions and potential bonus depreciation. For more ideas on how your business can benefit from timing income or deductions, or both, at year-end, review available planning options with your CPA.
— Mike Dickinson, CPA, is a tax principal with Piercy Bowler Taylor & Kern in Las Vegas. He can be reached at dickinson@pbtk.com or found hiking Mt. Charleston in the snow, mountain biking or camping with his family.