Maeda Palius
November 21, 2016

2016 Year-End Tax Planning for Businesses

Although tax planning is a 12-month activity, year-end is traditionally the time to review tax strategies from the past and to revise them for the future. Year-end has also become a time when there is an increasing need to take a careful look at what has changed within the tax law itself since the beginning of the year. Opportunities and pitfalls within these recent changes, as they impact your unique business situation, should not be overlooked. This is particularly the case during year-end 2016. Here are some of the many considerations that you should review as year-end 2016 approaches.

Change in Filing DeadlinesThe first important consideration, is that effective January 1, 2017 the federal filing deadlines have changed. This impacts both your business and our business. Please note the changes as outlined below:

Partnership and S Corporations: These returns are now due on March 15th. This should help businesses provide the necessary K-1 information to their partners and shareholders prior to the individual return deadline. Extensions will be granted for up to six months, allowing calendar year filers to complete their returns by no later than September 15th.

C Corporations: Businesses with a calendar year-end will receive a 30-day reprieve as their returns will now be due on April 15th instead of March 15th.  Five month extensions will be granted, allowing calendar year filers until September 15th to file their returns.

NOTE: The changes made to these filing deadlines makes it critical that Partnership and S-Corporation information be submitted to us by no later than February 1st with a completed business organizer. Information submitted after that date will likely result in your tax return being extended.

Year End Tax Planning StrategiesBusinesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and qualified real property, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make purchases before the end of 2016 will be able to currently deduct most, if not all, of their outlays for machinery and equipment. What is more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the full 50% first-year bonus write off is available even if qualifying assets are in service for only a few days in 2016.

Businesses may be able to take advantage of the “de minimis safe harbor election,” (also known as the book-tax conformity election), to expense the costs of lower-cost assets and materials and supplies, assuming the costs do not have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property cannot exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2016.

A corporation should consider accelerating income from 2017 to 2016 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2017 if it will be in a higher bracket this year.

A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2016. (Note: There is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.)

A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2016 (and substantial net income in 2017) may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.

If your business qualifies for the domestic production activities deduction (DPAD) for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2016, even if the business has a fiscal year.

To reduce 2016 taxable income, consider deferring a debt-cancellation event until 2017.

To reduce 2016 taxable income, consider disposing of a passive activity in 2016 if doing so will allow you to deduct suspended passive activity losses.

If you own an interest in a partnership or S-Corporation, consider whether you need to increase your basis in the entity so you may deduct a loss from it for this year.

If your company does not have a 401k, Simple IRA, or a SEP plan, now is the time to evaluate whether or not implementing or updating your plan is relevant.

Next Steps: Finally, please be advised that these are just some of the year-end steps which may be taken to save taxes. So, at your earliest convenience, please contact us so that we may strategize to develop a plan that will work best for you and your business needs.

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