Year End Tax Planning for Businesses

November 4, 2016 by Jeremy Rufsvold
Copeland Buhl

Year End Planning for Businesses

With the election season coming to a close on November 8, we should have more clarity on the direction of tax policy in future years as we head into year-end planning season. With extreme differences in the tax positions of each of the major party candidates, it will make for an interesting planning season.

In recent years, year-end planning has been fraught with uncertainty.  The passing of the PATH Act in late 2015 has mitigated much of that.  Prior to this act many expensing and credit options historically were not made law until passed retroactively on an annual basis in November or December.  It was very difficult to plan when you did not know the law until the year was basically over.  However, the election of 2016 also presents tremendous uncertainty.  Depending on who is elected, we might be forced to look at tax planning options that we have not considered in a number of years.

Here are some strategies that may be worth considering before year end:

  •  Cash basis businesses, per usual, determine whether or not some bills should be paid early to get the deduction in 2016.  Depending on the outcome of the election, it may be more beneficial to push expenses into 2017.  The same can be said for invoicing.  Most years it is usually more beneficial to delay into the following year.  This year, it may be worth pulling that income into the current year.
  • 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.
  • Do you own an S Corporation that converted from a C Corporation with accumulated earnings and profits?  With the potential for increased rates in the future, it may be worth electing to distribute earnings and profits in 2016 to lock in the lower dividend rate.  Depending on who wins the election, the dividend rate could jump as much as 20% in the future.
  • If focusing on deductions in 2016, the PATH Act made permanent the Code Section 179 expensing limit of $500,000.  In addition, the PATH Act also extended bonus depreciation for an additional five years.
  • The potential for higher rates in the years ahead might make pushing deductions into future years an idea worth considering.  One way to do this is to make an election out of bonus depreciation on qualifying fixed assets placed in service in 2016.
  • Depending on the outcome of the election, S Corporations may need to analyze whether or not it makes sense to change entity status.  Converting to a C Corporation could make sense in a world where the maximum individual rate is significantly higher than the corporate rate.
  • Are you holding capital gain assets for investment purposes?  If you are thinking of selling these assets in the next year or two, it might be more beneficial to do it before year end.  One Clinton proposal has the capital gains rate going to 39.6% for assets held less than two years.
  • The PATH Act made the research credit permanent.  If you have spent money on research and development (R&D), consider if an R&D study would benefit you.

One item of note: It is not just phony IRS phone calls that are scams.  We are seeing more businesses receive official looking notices purportedly from state taxing authorities asking for payment of some small dollar amount, say $150, to stay in compliance with some state guideline.  Many of these notices are fraudulent, so it is a good idea to discuss any notices you receive with us.

One other item of note:  Tax filing deadlines for partnerships and C-corporations are changing starting with the 2016 returns.  Partnerships will now be due March 15th, and C-corporations will be due April 15th (for calendar year entities).

In this very polarizing election year, it may be more important than usual to contact us with any tax planning questions.  Even though there will more than likely not be any changes to the 2016 tax law, there could be other major changes coming down the road.  These changes may make you deviate from conventional thinking regarding year-end tax planning.