Spotlight on Finance
By Ryan Case, Senior Vice President, Business Banking, KeyBank
For the first time in years, taxpayers don’t have to wait for congressional action on late-year extenders. A number of the traditional tax extender provisions have either been made permanent or been extended through the end of 2016 under the Protecting Americans from Tax Hikes (PATH) Act of 2015. While this certainly makes year-end tax planning for 2016 a little easier, the election year clouds the future—making “now” a good time for business owners to take advantage of opportunities to reduce their tax burden.
If you are a business owner, a number of planning strategies are available that can help you minimize taxes and retain or transfer your wealth more efficiently. Early planning ensures that you can take advantage them. So as the year comes to a close, here are seven ideas to consider.
- Review retirement plan options. Qualified retirement plans can be a powerful way to defer business income and lower current tax liabilities. If you already have these plans you should use the end of the year as an opportunity to fully fund your plans, and if you don’t you should gather information about various plans and calculate tax savings. Along with defined contribution plans, you might consider defined benefit plans, cash-balance plans or combinations of the two.Deductible contributions to these plans might dwarf the limits of IRAs, 401(k)s or other defined contribution plans. You can also use nonqualified deferred compensation plans to attract and retain talent.While there is no current deduction when the plan is funded, tax can be deferred on the growth of the assets that fund the plan by using cash value life insurance.
- Assess whether your income and brackets are likely to change. If your business has had a strong year, you can benefit from accelerating deductions at the end of 2016 and deferring income to the first quarter of 2017. Conversely, if your business expects a stronger year in 2017, you may consider doing the reverse.Compiling year-to-date financial reporting and projecting the remainder of the year is crucial for year-end planning. It’s also a useful test of the your business’s accounting systems and controls.
- Coordinate your business and personal situations. If you own S corporations and other pass-through entities that have had a strong year, consider accelerating not only business deductions but also personal deductions into 2016.Deductions that can offset business income in 2016 include: fulfillment of 2016 state income tax, prepayment of real estate tax or mortgage payments and accelerating charitable pledge payments.
- Take advantage of business measures that have been modified under the PATH Act of 2015. The Section 179 expensing election has been made permanent. This allows your small business to immediately deduct up to $500,000 of capital expenditures. The 50 percent bonus depreciation has been extended through 2019, and the research and experimentation tax credit has been made permanent.Also, if your corporation wants to convert to S corporation status, you can now plan with more certainty because the five-year period for recognizing the built-in gains tax has been made permanent.
- Review your exit strategy in light of proposed IRS family business valuation regulations. On August 4, 2016, the IRS released newly proposed regulations that may dramatically affect the estate, gift and generation skipping transfer taxation of closely held businesses. If passed, it will result in a substantial tax increase due to how the value of closely held businesses is calculated for transfer tax purposes.The new rules are expected to go into effect in early 2017. If you own a family business with taxable estates and wish to transfer the business to family members, you have a limited window of opportunity to move forward with planning strategies that exploit the current valuation rules.
- Review compliance with the employer healthcare insurance mandate. Now is the time to review healthcare insurance and coverage and verify that you are in compliance with the Affordable Care Act (ACA).In 2016, the healthcare provisions kicked in for companies with 50 or more full-time employees. (Some states have adopted the one-to-100-employee definition of small employer.)If your organization was close to the 50 or more full-time employee threshold at the end of 2015, you should determine sooner, rather than later, if they are subject to the shared responsibility requirements. You should also prepare for an earlier deadline for informational return filings for 2016.
- Split the tax bill among family members. If you are a family business owner, you can take advantage of ways to shift income to lower overall taxes. Paying reasonable salaries to family members reduces the amount of business income. The salary would also be earned income, thus allowing children to establish and contribute to a Roth IRA or retirement plan.
These are just a few options that may be available to you to help with your year-end tax planning. For more options, schedule an appointment with your financial advisor and tax professional.
Ryan Case is a senior vice president at KeyBank and leads the Capital Region’s Business Banking team. He may be reached at either 518-375-3044 or [email protected]. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice.
Overlooked tax deductions for your small business
A variety of tax planning strategies area available to your small business as mentioned above, but don’t forget the various business deductions that you may qualify for when it comes time to file your 2016 business tax return. The following deductions can help you save come tax time:
Startup costs. These expenses are incurred before you open for business. If you are a new company, it is important to understand your startup costs—what you can and can’t claim for 2016.
Of course, you want to maximize your deductions, but doing it right the first time will save you in the long run. This may mean spreading out deductions over time.
Mileage and travel expenses. If traveling to meet with clients is part of your job, don’t forget to claim your mileage. There are two methods for doing this: standard and actual. The standard method for calculating mileage in 2016 is 54 cents per business mile (down from 57.5 cents per business mile in 2015) plus tolls and parking.
The actual method is to add up all automobile expenses—including gas, repairs, oil change, car insurance and car washes—and then multiply it by your business percentage, which is determined by dividing your business miles by total miles for the year.
Depreciation deduction. Consult with your tax advisor on newly purchased office furniture, property, and equipment for your business. You can depreciate these assets over time. You may even qualify for a full write-off using the section 179 depreciation deduction. This allows you to deduct the entire amount of the purchase instead of increments of annual depreciation each year.
Insurance premiums. You can deduct all premiums that you pay for your business owner’s policy, liability, malpractice, workers’ compensation insurance and others.
Health insurance deductions or credits. If you are self-employed you may be eligible to deduct your health and dental insurance premiums as a personal expense on your 1040 (not as a business expense).
If you are a small business employer you are eligible for the small business health care credit if you employ fewer than 25 full-time equivalent employees; the average annual wages of your employees are less than $52,000; and you pay a uniform percentage for all employees that is equal to at least 50 percent of the premium cost of employee-only insurance coverage.
Also, don’t forget the Affordable Care Act. Small businesses need to make sure they are adhering to and complying with the ACA to avoid fines.