A recent National Federation of Independent Business (NFIB) survey reports that five out of the top 10 small business concerns relate to state and federal tax issues. Tax planning will continue to be difficult because lawmakers may or may not extend over 50 expired tax provisions by Dec. 31.
If Congress does not act before this deadline and extend certain provisions, students and parents will no longer be able to deduct above-the-line tuition expenses. For clients in Washington, Texas, Florida and other states without an income tax, they will lose the ability to deduct state sales taxes. Businesses will not get a credit for research activities. Also, businesses will not be able to deduct as much for new equipment and immediately deduct one-half of the cost of new business equipment.
Regardless if extenders are again extended for the 2015 tax year, here are a few tax planning tactics to provide your clients, which may require action before year-end:
- Consider which of your small business clients are pass-through entities (partnership, LLCs or S corporations), and remind them that their business income is reported on their 1040. The individual federal income tax rates are scheduled to be the same for 2016 as they are for 2015. Therefore, clients could save taxes by deferring revenue into 2016, while accelerating deductible expenses into 2015. If a client expects to be in a higher tax bracket in 2016, advise using the opposite approach, accelerating income into 2015 and deferring deductible expenses to 2016.
- If feasible, certain clients may defer bonuses, consulting income or self-employment income. On the deduction side, clients may accelerate state and local income taxes, interest payments, and real estate taxes. Clients can accelerate or defer capital gains or losses based on the selling date, keeping in mind that capital losses are limited to $3,000 a year that’s applied against other income.
- Since itemized deductions can only be deducted if they exceed a certain percentage of adjusted gross income (AGI), accumulating itemized deductions into one year may help clients exceed their respective AGI levels. In order to exceed the 2 percent AGI level for miscellaneous expenses, and the 10 percent of AGI needed for medical expenses (7.5 percent for taxpayers age 65 and older), have clients incur professional fees, such as legal advice and tax planning, and schedule non-urgent medical procedures in a single year. They may exceed the AGI levels to obtain an itemized deduction this year and take the standard deduction the following year.
- My personal favorite tactic for business owners who withhold taxes is to avoid the estimated tax payments underpayment penalty by increasing their own withholding amount before year-end. Unlike estimated tax payments, withholding is considered to have been paid throughout the year. Many small business clients don’t know how much profit they will make until year-end. The key is to make sure they have a reasonable idea before Jan. 1.
- Small business clients using the cash method of accounting for tax purposes have the flexibility to minimize taxes over a two-year period. Cash-basis clients can deduct expenses in the year checks are mailed. They may not be cashed or deposited until next year, but the client obtains the deduction for 2015. If clients make equipment purchases to utilize Section 179 write-off election, they must implement the equipment before year-end. Make sure clients use their in-house postage meter to prove the checks were mailed in 2015, or consider certified mail at the post office. Another method of accelerating deductions, recommended by tax attorney Ronald J. Cappuccio, is to prepay the first three months of next year’s office rent or prepay the premium for property insurance coverage for the first half of next year.
- Accrual-basis taxpayers can defer revenue until next year, if they defer preparing invoices to next year for work completed in late December until 2016. If clients expect to pay higher taxes in 2016, reverse these strategies and suggest they invoice services by Dec. 31, and delay sending checks to vendors until after Jan. 1.
- If a client had a particularly bad year, don’t forget to recommend how to use a 2015 net operating loss (NOL). Clients can carry a 2015 NOL back for up to two years, in order to recover taxes paid in earlier years or carry the NOL forward for up to 20 years. No one has a crystal ball, but if your client thinks his business will improve in the coming years, the NOL deduction could save more taxes in the future.
If Congress does allow some or all of the 52 tax extenders, pray they take action before year-end.