It's that time of the year again; time to evaluate your business's end of the year tax planning strategies. Business owners can and should be evaluating and planning for strategies to utilize throughout the year but that can be challenging with uncertainty of how the year is going to progress. The end of the year provides a clearer picture. Here are some things to consider now.
Code section 179 expensing and bonus depreciation
These popular provisions allow businesses to expense all or a portion of new business assets placed in service during the year. Section 179 expensing allows businesses to expense up to $500,000 or, 100% of the cost of new or used assets placed in service during the year. The $500,000 expense limit begins to phase out after $2 million of assets are placed in service in a year. Section 179 is also limited to business income before accounting for the expense, with any unused amount available to be carried forward to future years. This provision was made permanent in 2016 after uncertainty of whether it would be renewed at the end of 2015. In contrast, bonus depreciation allows for additional first year depreciation equal to 50% of the cost of only new assets. This provision will begin to phase down in 2018 to 40% and 30% in 2019.
De minims safe harbor
The IRS issued new tangible property regulations in 2013. These regulations cover the costs to acquire, repair, or improve tangible property. One of the provisions within these regulations allows businesses to deduct the cost of material and supplies on an item by item basis, up to $500. Beginning in 2016, the safe harbor increased to $2,500 for businesses without audited financial statements. Businesses must have a written policy in place at the beginning of the year indicating the threshold of when items will be expensed or capitalized. Keep in mind that the safe harbor does not limit businesses from deducting otherwise allowable repairs and maintenance costs that exceed the $2,500 safe harbor, it just establishes the threshold where items $2,500 or less can be deducted without IRS scrutiny. Businesses that have this policy in place should evaluate that it has been followed in their books and records to maximize tax deductions.
Employee bonuses and discretionary profit-sharing contributions
A couple of other great tools that can be utilized to minimize tax liability are declaring bonuses to employees or additional contributions to employees' retirement accounts. Bonus amounts can be declared by accrual taxpayers and deducted in the current year as long as they are paid by 2 1/2 months after the close of the year. Bonuses accrued to "related parties" cannot be deducted until paid. For example, a bonus accrued to a 50% shareholder of a C corporation.
If your company's retirement plan allows for it, discretionary profit-sharing contributions can be another great tool to utilize. Profit-sharing contributions allow for even more flexibility, allowing businesses to deduct the contribution as long as it is paid by the due date (including extensions) of the business tax return. Perhaps cash flow does not allow for a contribution to be paid in February but will be available in September. In contrast to employee bonuses, cash basis taxpayers can claim this deduction and still defer payment until the due date of the tax return. Additionally, there is no rule disallowing the deduction due to related parties.
• Andrew Schmidt is an accountant with the Wheaton-based firm of Dugan & Lopatka CPAs PC. Give Andrew a call for additional answers to your year-end tax planning questions at (630) 665-4440.