We are quickly approaching the end of 2016. Now is the time to consider some year-end tax savings strategies for your business, before the year – and the opportunity – slips away.
Good News Bad News
The good news is that we have more certainty from a tax perspective this year because Congress made permanent many long-favored tax breaks (called extenders) late last year. The national elections, however, bring a fair amount of uncertainty to tax and financial planning.
No matter the results of the election, though, there are important considerations to keep in mind as your business plans for year-end:
- Effective tax planning requires a multi-year approach to make sure that strategies intended to save 2016 taxes won’t cost additional money in future years.
- Businesses, particularly those that operate for tax purposes as flow-through entities, must consider the effects of their tax strategies on the individual owners as well.
Defer or Accelerate?
Since tax rates in 2016 and 2017 are the same, in many cases it might make sense to plan ahead to defer income into 2017 and accelerate deductions into 2016. You will, of course, need to confer with your business tax advisor and take into consideration your tax accounting method and other elements of your tax planning process.
Section 179 Expensing and Bonus Depreciation
If you are contemplating the purchase of business assets, consider using the Section 179 expense deduction to claim significant write-offs for the cost of new and used equipment, software additions, and improvements to interiors of leased nonresidential buildings. The maximum amount of qualifying property that a business can expense for 2016 is $500,000. If the total of qualifying property purchased in 2016 exceeds $2,010,000, the amount of the Section 179 limitation is reduced dollar for dollar equal to the amount of excess purchases.
A couple of cautions to keep in mind:
- Property must be “placed in service” prior to December 31, 2016 in order for the property to be eligible for the Section 179 expense deduction.
- Section 179 deductions may be limited if your business has a loss for 2016, so be sure to contact your tax advisor to determine the tax benefit from using the Section 179 deduction.
The 50% bonus depreciation deduction is also available for new property purchased in 2016. The combination of Section 179, 50% bonus depreciation and normal first year depreciation provides significant possibilities for reducing taxable income.
There are many factors that go into the decision to acquire business assets—many of them non-tax factors. However, the Section 179 deduction and other depreciation deductions should play a role in your decision making process and could enable your business to obtain property you need earlier and at reduced after-tax costs.
We can help
If you are uncertain about what steps make sense for your business to take before year-end, call us. We can discuss your particular situation and offer advice on what makes sense for you and your business.