Year-End Planning for Businesses

November 4, 2015 by Alisa Rogers
Tax Services

As year-end planning season begins, we are once again faced with some uncertainty surrounding tax rules.  We have come to expect retroactive laws being passed late in the year, which does not allow much time to react.  There are a number of provisions that may be extended again before the filing season begins.  Last December, several provisions were extended only through 2014, making it difficult to plan for 2015.  Those provisions included higher Section 179 limits, bonus depreciation, the R&D Credit, the Work Opportunity Credit, and shorter lives on qualified leasehold improvements.  Hopefully these benefits will be extended again, but we won’t know until a bill is signed.

In spite of the uncertainty, there are still some strategies that are worth considering before year end.

  • Is your business cash basis? Consider how you want the year to finish – should you pay some bills early, to get the deduction this year instead of next?  Should you delay invoicing customers until January to defer the income into next year?
  • Does your business have a fiscal year end?  Given the history of late tax bills, consider extending your return to take advantage of any changes that get passed late in the year.  In addition, for fiscal year flow through entities, while the company can take a Section 179 deduction up to $500,000 for its 2014 return, individual owners will be limited to the 2015 rules.  Currently that would mean the owner would only be allowed $25,000 of the $500,000, trapping the rest of the deduction.
  • Have you made all the fixed asset purchases you wanted?  Section 179 allows you to deduct qualified fixed assets in the first year, instead of depreciating them over several years.  Currently for businesses with overall taxable income, you can take advantage of an immediate write off up to $25,000 for the year (as long as your total qualified fixed asset additions do not exceed $200,000).  However these thresholds are something to watch as the last few years Congress has increased those amounts substantially, and there is speculation that will happen again.
  • Thinking of getting a new business vehicle?  Consider whether trading in a vehicle would be more beneficial than separately selling the current vehicle and buying a new one.    Another consideration for vehicle acquisitions is the depreciation limit.  Currently the 2015 depreciation deduction for most automobiles is limited to $3,160; trucks and vans are limited to $3,460.  Vehicles weighing over 6,000 pounds are not subject to these restrictions, however most are subject to a maximum Section 179 deduction of $25,000.  These amounts could change if new legislation is passed for 2015.
  • Have you completed significant repairs or improvements to your fixed assets?  Consider talking with us now for guidance on what needs to be capitalized and what can be expensed.
  • Do you have a new building?  Consider segregating costs into different classes of assets to accelerate the depreciation expense when applicable.  We can help determine what costs qualify for shorter depreciation lives.
  • Acquiring a significant amount fixed assets in the fourth quarter?  Be aware that if more than 40% of your fixed assets (other than real property) are acquired in the last quarter of the year, mid-quarter rules may apply for calculating the depreciation allowed.  Mid-quarter rules reduce the percentage of depreciation allowed for assets acquired in the third and fourth quarter (however it does increase the percentage for first and second quarter acquisitions).  The calculation to determine if mid-quarter rules apply is done excluding real property and any property for which you elect Section 179.  Strategically selecting which assets to elect 179 for can help you avoid the mid-quarter rules.  If there are increases to the 179 limitations, you may have even more opportunity to acquire assets in the fourth quarter while avoiding the mid-quarter rules.
  • Does your business provide health insurance to its employees and/or owners? Given all the changes and rules surrounding the Affordable Care Act, consider discussing your situation with us to make sure everything is being accounted for and reported correctly before year end.
  • Thinking about giving employee bonuses?  For cash basis taxpayers, make sure to pay them out before the end of the year.  For accrual basis, make sure you have determined a total “pool” amount by year end, and pay that total amount to employees within 2½ months of year end (amount per employee does not need to be determined, but any amount determined for an employee who leaves before it is paid needs to be reallocated to the remaining employees.  The total pool amount must be paid).
  • Thinking about starting a retirement plan?  Consider setting one up before year end.
  • Have you spent money on research & development?  Consider if an R&D study would benefit you.  There could be an opportunity to amend prior year returns to claim the credit, and although current law does not allow a credit in 2015, this credit has consistently been extended retroactively, so it is worth considering.

Keep in mind these are only strategies to consider.  Given the complexities of the tax code, we recommend discussing your specific situation with us before moving forward on these ideas, to make sure your plans produce the intended result.