by: Pat Lysobey, CPA
Before you close the books on 2015, we’ve compiled a few important ways to lower your business tax bill. You only have a few weeks, so no time to waste! Let us know if you have questions or need to find out if you can take advantage of any of these below.
- Buy a heavy SUV, pickup, or van
Big SUVs, pickups, and vans are useful for hauling people and stuff around for your business, and they also offer major federal income tax advantages. Thanks to the Section 179 expensing deduction, you can probably claim a current-year write-off for up to $25,000 of the cost of a new or used heavy SUV that is placed in service before the end of your business tax year.
50% first-year bonus depreciation for new (not used) vehicles expired at the end of 2014, but we expect Congress to restore this valuable break for new vehicles that are placed in service by Dec. 31, 2015. If that happens, your allowable first-year depreciation write-off for a new vehicle can be even higher.
To qualify for these tax-saving deals, you must buy a “heavy” vehicle. That means one with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You must also use the vehicle over 50% for business.
- Defer income and accelerate deductible expenditures through year end
If you are a cash basis sole proprietorship, LLC, partnership, or S corporation, your share of net income generated by the business is reported on your Form 1040 and taxed at your personal rates. Since the 2016 individual federal income tax rate brackets will not be much different from this year’s brackets, consider the time-honored strategy of deferring income into next year while accelerating deductible expenditures into this year–if you expect to be in the same or lower bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2015 until 2016.
On the other hand, if your business is doing well, you might expect to be in a significantly higher tax bracket in 2016 (say 35% versus 25% for this year). In this scenario, take the opposite approach: accelerate income into this year (if possible) and postpone deductible expenditures until next year. That way, more income will be taxed at this year’s lower rate instead of at next year’s higher rate. Since you may be subject to the alternative minimum tax, you should consult with your tax adviser before making any of these moves.
Now, how do you defer taxable income and accelerate deductions with two weeks to go?
If you expect your business income will be taxed at the same or lower rate next year, here are specific cash basis accounting moves to defer some taxable income until 2016.
- Charge recurring expenses that you would normally pay early next year on major credit cards and not store credit cards. You can claim 2015 deductions even though the credit card bills won’t actually be paid until 2016.
- Pay expenses with checks and mail them a few days before year end. The tax rules say you can deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, consider sending checks via registered or certified mail, so you can prove they were mailed this year.
- Before year end, prepay some expenses. As long as the economic benefit from the prepayment does not extend beyond the earlier of: (1) 12 months after the first date on which your business realizes the benefit or (2) the end of the next tax year. For example, this rule allows you to claim 2015 deductions for prepaying the premium for property insurance coverage for the first half of next year.
- On the income side, the general rule for cash-basis businesses is that you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near year end to send out some invoices to customers. That will defer some income until 2016, because you won’t collect until early next year.
- Utilize the “De minimis Safe Harbor” Election
Take advantage of the “de minimis safe harbor” election to write-off supplies and small equipment. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an audited financial statement (AFS). If there is no AFS, the cost of a unit of property can’t exceed $2,500.
- Stay tuned for news about restored depreciation breaks
Last year’s super-favorable depreciation rules will not apply this year, unless Congress resurrects them. The good news: we strongly expect that to happen. If it does, the following beneficial depreciation rules will be available for asset additions that are placed in service before the end of your business’s current tax year. Be prepared to act fast around year end to take advantage.
Generous Section 179 deduction rules
Under current tax law, the maximum Section 179 deduction is only $25,000, and the deduction cannot be claimed for off-the-shelf software. We expect Congress to restore the generous $500,000 cap (from tax years 2010-2014) and the allowance for off-the-shelf software for 2015 in end-of-the-year legislation.
Real property expenditures have traditionally been ineligible for the Section 179 deduction privilege. However, there was an exception for so-called qualified real property that your business placed in service in tax years that began in 2010-2014. Specifically, your business could claim a Section 179 deduction of up to $250,000 for the following types of real property expenditures:
- Interiors of leased non-residential buildings.
- Restaurant buildings.
- Interiors of retail buildings.
As the tax law currently reads, no Section 179 deduction is allowed for real property expenditures in tax years beginning in 2015. However, we also expect Congress to restore the $250,000 Section 179 deduction for 2015.
- Get ready for 50% first-year bonus depreciation?
As the tax law currently reads, no 50% bonus depreciation is allowed for assets placed in service in calendar year 2015. However, we expect Congress to restore the break for 2015 shortly.
- Stay tuned for news on other business ‘extenders’
Beyond the depreciation tax provisions, there is a list of other popular business tax breaks that Congress habitually allows to expire before ultimately extending them for another year or two. The tax credit for R&D expenditures is probably the most important example of these so-called “extenders.”
Meanwhile, be prepared to act fast around year end to take advantage of breaks that are extended for this year. And let us know what you need to help your 2015 tax bill before the clock strikes midnight. Contact us at 216.524.8900 or email your Hobe & Lucas contact.