The end of the year is quickly approaching and that means businesses and business owners should be thinking about taxes. Businesses have many money-saving strategies at their disposal and many times it’s just a matter of scheduling a meeting with an advisor to discuss options. As always, the sooner you can initiate these strategies, the better as the holidays will be here soon.
It’s for this reason, that we have put together our list of the Top 5 tax-saving strategies that businesses should be considering:
- Defer Income and Accelerate Deductions
Businesses need to evaluate their current and future tax situation to decide whether or not to defer income or accelerate deductions. If possible and reasonable, deferring income and accelerating deductions for business owners is an effective way to reduce taxable income for the current year. If you expect to be in a similar or lower tax bracket in 2017, you may want to consider delaying billings and sending invoices to customers until 2017.
In addition, paying off and prepaying certain bills for cash basis businesses is another way to lower income in the current year.
- Make a Purchase to Utilize Section 179 and Bonus Depreciation
Yes, the highly popular accelerated depreciation methods of Section 179 and bonus depreciation offer tremendous tax savings for businesses. The Section 179 deduction was permanently extended in 2016, and bonus depreciation was extended through 2019.
Section 179 allows businesses to expense the cost of new and used qualified property that is purchased and placed into service in the current tax year. Bonus depreciation is a 50% depreciation deduction on qualified new property purchased and placed into service in the current tax year.
The maximum Section 179 deduction allowed for 2016 remains at $500,000 and phase out limitations occur if asset purchases exceed $2 million. For instance, buying a heavy SUV, pickup truck, or van before year end is an option for business owners to reduce their taxable income.
To qualify for a full or partial Section 179 expense, the heavy vehicle must weigh over 6,000 pounds and be used at least 50% in the business. Also, the vehicle can be bought outright or financed with certain leases and loans.
- Utilize the “De Minimis Safe Harbor” Election
For tax year 2016, the IRS allows businesses to immediately expense the cost of tangible property below the threshold of $2,500 for businesses without an audited financial statement. The threshold is $5,000 for businesses with an audited financial statement. This threshold reduces the administrative burden for small businesses to comply with capitalization requirements. In addition, this new tax relief allows businesses to immediately deduct assets that were traditionally capitalized, such as computers and high-end furniture.
Before year end, businesses should review their capitalization policies and consider documenting the $2,500 safe harbor election policy. Also, assuming the safe harbor election is made, businesses should review their asset purchases to ensure that all items under $2,500 have been properly expensed rather than capitalized or included in Section 179 or bonus depreciation.
- Research & Development Credit
The R&D credit was permanently extended in 2016, and it continues to offer tax incentives to business innovations. Expenses associated with qualified research is eligible for this credit. Qualified research is defined as developing or improving a business component with regard to its performance, functionality, reliability and quality. The business component must be intended for sale, lease, or license. Business owners should consider this credit and also be aware that, for 2016, small businesses with less than $50 million in sales may claim the credit against alternative minimum tax liability (AMT), which eliminates a major restriction on the use and applicability of this credit in the past.
- Ohio Business Deduction and 3% Business Tax Rate
For Ohio businesses, do not forget about the 100% business deduction for 2016. The deduction is limited to $250,000 for single and married filing joint taxpayers and limited to $125,000 for married filing separate. Eligible individuals for this deduction are owners and investors in Ohio businesses structured as sole proprietorships and pass-through entities, including partnerships, S-Corporations, and limited liability companies.
In addition, Schedule E rental properties are eligible for this deduction. Finally, any potential business income is taxed at a maximum 3% business tax rate, providing further relief to taxpayers.
Don’t wait until the end of the year to identify which options you would like to take for your business! Whether you’re a current client or prospect, our team of experts will discuss the best options for your business. If you have questions on any of these deductions or would like to discuss your specific business situation, contact us by email at email@example.com or call at 216.524.8900.