Yes, February is here and tax filing deadlines are getting uncomfortably close. But there’s still time to make some savvy tax decisions that will pay off for you and your business. The actions that were taken in 2016 are already in the books, but how those actions translate into tax positions has yet to be determined. Small businesses have the opportunity to make certain tax elections and to treat various expenses in different ways, depending on which is most favorable in a particular situation.
Here are five tax choices that business owners should discuss with their CPAs or other tax advisors to optimize their 2016 tax returns.
How are you going to deduct the cost of equipment purchases you made in 2016?
Did you buy tablets for your staff, a cement mixer, office furniture, or other equipment and machinery? Regardless of whether you financed the purchases in whole or in part, there are four different rules that you can use to write off their cost; which one, or a combination of which, is up to you. Here are the options:
- First-year expensing: Deduct the cost of equipment purchases up to $500,000. However, if purchases in 2016 exceeded $2,010,000, the deduction limit is reduced dollar-for-dollar for excess purchases, and you must be profitable to benefit from this write-off option.
- Bonus depreciation: Deduct 50% of the cost of new (not pre-owned) equipment. This deduction can supplement first-year-expensing.
- Regular depreciation: Deduct the usual allowance for the item based on its recovery period (e.g., 20% allowance in the first year for equipment that is 5-year property).
- De minimis safe harbor: You can choose to treat it as material and supplies by not adding equipment to your balance sheet. For businesses without an applicable financial statement (AFS), such as an SEC filing or an audited financial statement, the deduction is up to $2,500 per item or invoice for companies in accordance with consistent accounting procedure. (Companies with an AFS have a $5,000 per item or invoice limit consistent with a written policy.)
Are you planning to add funds to your retirement plan?
If you were profitable in 2016, you can reduce your tax bill and provide a valuable employee benefit by contributing to a qualified retirement plan, such as a profit-sharing plan or pension (defined benefit plan). You have until the extended due date of the return to complete 2016 contributions, as long as the paperwork for the plan was signed by the end of the year. If no plan was in place at that time, it’s not too late to set up and contribute to a SEP. All funding for this plan is through employer contributions.
How will you use the research credit to your advantage?
If your company engaged in R&D to create marketable products or develop internal processes, the costs may generate a tax credit. The credit can offset tax liability dollar for dollar. Instead, small businesses (those with less than $5 million in gross receipts and no revenue in the prior five years) can use up to $250,000 of the credit to offset the employer’s share of Social Security taxes (part of FICA).
If you have a loss, will you carry it back?
While the economy has been improving, some businesses may have experienced losses. Those losses can be used to tax advantage by:
- Carrying back the loss. Usually the carryback period is two years (additional years apply in special situations). The offset to income in those years generates an immediate tax refund, creating cash to put back into the business.
- Carrying forward the loss. Any portion of the loss not used up in the carryback years can be carried forward for up to 20 years. Alternatively, you can waive the carryback entirely and merely carry forward the loss. This option makes sense if you expect to be in a higher tax bracket going forward.
What will your CPA advise you?
These and other tax choices need to be made for your 2016 tax return. Meet with your CPA as soon as possible to discuss which choices are most beneficial for your tax situation. Pending tax changes in Congress may influence the choices you make on your 2016 return. Consider requesting a filing extension so the choice of options need not be made until future tax rules come into focus.