Which tax credits apply to my business in 2016?

Posted on December 12, 2016July 23, 2024 by Debra Barcuch

Business tax credits are particularly beneficial for planning because they reduce tax liability dollar-for-dollar. The Protecting Americans from Tax Hikes (PATH) Act of 2015 has made permanent the research credit and extended but not made permanent other credits, including the Work Opportunity credit (through 2019). Let’s explore a few details of these business tax credits.

Research credit

Also known as the Research & Development (R&D) credit, it gives businesses an incentive to step up their investments in research and innovation. The PATH Act permanently extends the credit, allowing businesses to earn a credit for pursuing critical research into new products and technologies. Plus, in 2016 businesses with $50 million or less in gross receipts can claim the credit against AMT liability. Certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax. While the credit is complicated to compute, the tax savings can be worth the effort.

Work Opportunity credit

This credit is for employers that hire from a “target group.” It has been extended through 2019. Starting this year, target groups are extended to include individuals who’ve been unemployed for 27 weeks or more. The size of the tax credit depends on the hired person’s target group, the wages paid to that person and the number of hours that person worked during the first year of employment. The maximum tax credit that can be earned for each member of a target group is generally $2,400 per adult employee. But the credit can be higher for members of certain target groups, up to as much as $9,600 for certain veterans. Employers aren’t subject to a limit on the number of eligible individuals they can hire. That is, if there are 10 individuals that qualify, the credit can be 10 times the listed amount. Bear in mind that you must obtain certification that an employee is a target group member from the appropriate State Workforce Agency before you can claim the credit. The certification generally must be requested within 28 days after the employee begins work.

New Markets credit

This credit has been extended through 2019. It gives investors who make “qualified equity investments” in certain low-income communities a 39% tax credit over a seven-year period. Certified Community Development Entities (CDEs) determine which projects get funded — often construction or rehabilitation real estate projects in “distressed” communities, using data from the 2006–2010 American Community Survey. Flexible financing is provided to the developers and business owners.

Empowerment Zones

Empowerment Zones are certain urban and rural areas where employers and other taxpayers qualify for special tax incentives, including a 20% credit for “qualified zone wages” up to $15,000, for a maximum credit of $3,000. The tax incentive expired December 31, 2014, but it has been extended through December 31, 2016.

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas.

The President-Elect’s Tax Plan: What the Future Could Look Like

Posted on December 6, 2016 by Debra Barcuch

With Donald Trump as the president elect and Republicans holding a majority in the U.S. House and Senate, GOP tax reform appears likely in 2017. While campaigning, Mr. Trump promised big tax changes. Here’s a digest of his proposals, according to his website.

Individual Tax Rates and Capital Gains Taxes

For individuals, President-elect Trump proposes fewer tax brackets and lower top rates: 12%, 25% and 33% — versus the current rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%.

Proposed Rate Brackets for Married-Joint Filing Couples

Taxable Income	Rate Bracket
Less than $75,000	12%
More than $75,000 but less than $225,000	25%
More than $225,000	33%

Proposed Rate Brackets for Unmarried Individuals

Taxable Income	Rate Bracket
$0 to $37,500	12%
More than $37,500 but less than $112,500	25%
More than $112,500	33%

The proposed plan would eliminate the head of household filing status, which could prove to be a controversial idea.

President-elect Trump would abolish the alternative minimum tax (AMT) on individual taxpayers.

Itemized/ Standard Deductions and Personal/ Dependent Exemptions

The president-elect’s plan would cap itemized deductions at $200,000 for married joint-filing couples and $100,000 for unmarried individuals.

The standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried individuals, the standard deduction would be increased to $15,000 (up from $6,350).

The personal and dependent exemption deductions would be eliminated.

Child and Dependent Care

Proposed new deduction: The Trump plan would create a new “above-the-line” deduction (meaning you don’t have to itemize to benefit) for expenses on up to four children under age 13. In addition, it would cover eldercare expenses for dependents. The deduction wouldn’t be allowed to a married couple with total income above $500,000 or a single taxpayer with income above $250,000. The childcare deduction would be available to paid caregivers and families who use stay-at-home parents or grandparents to provide care. The deduction for eldercare would be capped at $5,000 annually, with inflation adjustments.

Rebates for child care expenses: The proposed Trump Plan would offer new rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit. The rebate would equal 7.65% of eligible childcare expenses, subject to a cap equal to half of the federal employment taxes withheld from a taxpayer’s paychecks. The rebate would be available to married joint filers earning $62,400 or less and singles earning $31,200 or less. These ceilings would be adjusted for inflation annually.

Dependent care savings accounts: Under the proposed plan, taxpayers could establish new Dependent Care Savings Accounts for the benefit of specific individuals, including unborn children. Annual contributions to one of these accounts would be limited to $2,000. When established for a child, funds remaining in the account when the child reaches age 18 could be used for education expenses, but additional contributions couldn’t be made. To encourage lower-income families to establish these accounts for their children, the government would provide a 50% match for parental contributions of up to $1,000 per year. Dependent Care Savings Account earnings would be exempt from federal income tax.

Affordable Care Act Taxes

President-elect Trump wants to repeal the Affordable Care Act and the tax increases and employer penalties that it imposes — including the 3.8% Medicare surtax on net investment income and the 0.9% Medicare surtax on wages and self-employment income.

Estate Tax

His plan would also abolish the federal estate tax. But it would hit accrued capital gains that are outstanding at death with a capital gains tax, subject to a $10 million exemption.

Business Tax Changes

The president-elect proposes major changes to the taxes paid by businesses. Trump would cut the corporate tax rate from the current 35% to 15%, but eliminate tax deferral on overseas profits.

Under the proposed plan, a one-time 10% tax rate would be allowed for repatriated corporate cash that has been held overseas where it’s not subject to U.S. income tax under current rules.

The plan would also allow the same 15% tax rate for business income from sole proprietorships and business income passed through to individuals from S corporations, LLCs, and partnerships, which could cause a significant decrease in tax revenues.

Without getting very specific, the proposed plan proposes the elimination of “most” corporate tax breaks other than the Research and Development (R&D) credit. At-risk tax breaks could include unlimited deductions for interest expense and a bevy of other write-offs and credits.

On the other hand, the proposed Trump plan would allow manufacturing firms to immediately write off their capital investments in lieu of deducting interest expense.

What about Congress?

In addition to President-elect Trump’s proposed plan, House Republicans released the “Better Way Tax Reform Blueprint” earlier this year and Republicans in the Senate proposed their own tax plans. These proposals — which in some cases, differ from Trump’s — would make numerous changes to cut taxes and simplify filing. Despite some differences, members of Congress have expressed support for Trump’s plans and have vowed to act quickly.

When Might Changes Happen?

Democrats in Washington are likely to oppose any meaningful tax cuts, and they can attempt to stall things in the Senate where the Republicans won’t have a filibuster-proof majority. However, the Republicans can use the same procedural tactics that the Democrats used in 2010 to enact the Affordable Care Act. It’s possible that Trump’s tax plan (or parts of it) may pass in the first 100 days of his new presidency. If that happens, we could see major tax changes taking effect as early as next year.

Stay tuned.

TAX QUIZ on the Annual Exclusion for Gifts

Posted on December 6, 2016July 22, 2024 by Debra Barcuch

In 2017, the amount you can give to one person without triggering a gift tax return is $14,000 per donor, per recipient. It is unchanged from 2016.

You might be able to give someone more than this amount for certain expenses. For example, tuition or medical expenses that you pay on behalf of another person do not count.

Don’t expect the annual gift exclusion amount to rise every year, since it only increases in increments of $1,000 and is indexed to inflation.

Here’s a little history on the gift tax exemption: In 1932, the gift tax was made lower than the estate tax in order to encourage people to transfer their wealth during their lifetimes. A lifetime exemption was established, and the first annual gift exclusion was set at $5,000 per recipient.

But in the decades that followed, numerous changes came in quick succession, most of which resulted in higher gift and estate taxes. The incentive to transfer wealth through gifts was greatly diminished. It wasn’t until 1982 that the annual gift exclusion amount was raised to $10,000 (accompanied by other changes). The per donee amount remained at $10,000 for two decades.

The Taxpayer Relief Act of 1997 stipulated that the exclusion become indexed to inflation and increase in increments of $1,000. Even so, it took until 2002 for inflation to push the value of a dollar far enough to justify raising the exclusion to $11,000. On January 1, 2006, the amount rose to $12,000, then rose to $13,000 on January 1, 2009 and $14,000 on January 1, 2013 (where it remains).

Individual Tax Planning Tips: It’s Time for Individuals to Plan for Taxes in 2016 and Beyond

Posted on December 3, 2016July 22, 2024 by Debra Barcuch

Year end is rapidly approaching. It’s now time to consider making some moves that will lower your 2016 tax bill and get you into position for tax savings in future years. This article offers some year-end planning tips for individuals — while keeping the results of the recent election in mind.

Tax Reform Plans for Individuals

Both proposals set forth by President-elect Trump and the House Ways and Means Committee would reduce the number of tax brackets and lower top rates. In particular, the President-elect’s proposal calls for the following federal income tax rates for married-joint filers:

12% on taxable income below $75,000, 25% on taxable income of at least $75,000 but less than $225,000, and 33% on taxable income of $225,000 or higher. The bracket thresholds for unmarried individuals would be half these amounts, and the head of household filing status would be eliminated. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%.

Under the President-elect’s plan, the alternative minimum tax (AMT) would be eliminated for individual taxpayers. And he has proposed capping itemized deductions at $200,000 for married joint-filing couples ($100,000 for unmarried individuals).

In addition, the standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried individuals, the standard deduction would be increased to $15,000 (up from $6,350). But personal and dependent exemption deductions would be eliminated.

There’s no way to tell what will happen in 2017. These proposed changes are significant and controversial to some, so it’s uncertain what will actually change — or when. The President-elect’s proposal differs somewhat from the House’s Tax Reform Blueprint, and some concessions may eventually be made to appease congressional Democrats.

Current Federal Tax Scene

The 2016 federal income tax rate picture for individuals is the same as last year, except the rate brackets have been adjusted slightly for inflation. Specifically, the tax rates remain 10%, 15%, 25%, 28%, 33% and 35%. The highest-income individuals face a top rate of 39.6%, but that rate only affects singles with 2016 taxable income above $415,050, married joint-filing couples with income above $466,950, and heads of households with income above $441,000.

For most individuals, the 2016 federal income tax rate on long-term capital gains and dividends will be either 0% or 15%. The 0% rate applies to gains and dividends that would otherwise fall within the 10% or 15% brackets. However, the maximum rate on long-term capital gains and dividends rises to 20% for singles with taxable income above $415,050, married joint-filing couples with income above $466,950, and heads of households with income above $441,000. (These are the same thresholds as for the 39.6% maximum rate on ordinary income.)

Note: President-elect Donald Trump’s current tax plan is similar to the proposal published by the House Ways and Means Committee earlier this year. Both call for reducing the number of brackets, lowering the top individual and business tax rates, eliminating the estate tax and making various other changes. (See “Tax Reform Plans for Individuals” at right.)

It’s unknown when (or if) these tax reform proposals will be enacted. With the Republicans in control of Congress and the White House, it wouldn’t be unreasonable to expect some of the proposals to pass and go into effect next year, however.

ACA Surtaxes

Under current tax law, high-income individuals may be subject to an additional 0.9% Medicare tax on wages and self-employment (SE) income. The 0.9% tax is charged on salary and/or net SE income above $200,000 for an unmarried individual and salary and/or net SE income above $250,000 for a married joint-filing couple.

Net investment income, including long-term capital gains and dividends, may also be hit with the 3.8% Medicare surtax, also known as the net investment income tax (NIIT). However, the NIIT doesn’t apply unless your modified adjusted gross income (MAGI) exceeds $200,000 if you are unmarried or $250,000 if you are married and file jointly with your spouse. The NIIT applies to the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

Note: The President-elect’s proposed 100-day plan would repeal the Affordable Care Act (ACA). If his plan succeeds, the ACA-related surtaxes may be repealed in 2017.

Itemized Deduction Phaseouts

Under the phaseout rule for itemized deductions, you can potentially lose up to 80% of your write-offs for mortgage interest, state and local taxes, charitable donations and miscellaneous itemized deductions. However, the phaseout rule applies only if your adjusted gross income (AGI) exceeds the applicable threshold.

For 2016, the AGI thresholds for the itemized deduction phaseout are $259,400 for singles, $311,300 for married joint-filing couples and $285,350 for heads of households. The total amount of your affected itemized deductions is reduced by 3% of the amount by which your AGI exceeds the applicable threshold. However, the reduction can’t exceed 80% of the affected deductions that you started off with.

Personal and Dependent Exemption Phaseouts

Under the phaseout rule for personal and dependent exemptions, your write-offs can be reduced or even completely eliminated. However, the phaseout rule applies only if your AGI exceeds the applicable threshold. The thresholds are the same as for the itemized deduction phaseouts listed above.

Note: The President-elect’s tax plan would eliminate personal and dependent exemptions.

Expiring Tax Breaks

These popular federal income tax breaks for individuals are scheduled to expire at the end of 2016, unless they’re reinstated by Congress:

1. Higher education tuition deduction. This write-off can be as much as $4,000, or $2,000 for higher-income individuals.

2. Tax-free treatment for forgiven principal residence mortgage debt. Forgiven debts generally count as taxable cancellation of debt (COD) income. However, a temporary exception applies to COD income from canceled mortgage debt used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that’s canceled from 2007 to 2016 can be treated as a tax-free item.

3. $500 credit for energy-efficient home improvements. Homeowners can claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The $500 cap must be reduced by any credits claimed in earlier years.

Year-End Planning Tips

Now that we’ve covered the basics, here are eight tax-saving strategies to consider between now and year end:

1. Exceed the standard deduction allowance. If your total itemized deductions for 2016 would be close to the standard deduction amount, consider making enough additional expenditures for itemized deduction items to exceed this year’s standard deduction. That will lower this year’s tax bill.

For 2016, the standard deduction is $12,600 for married joint-filing couples, $6,300 for singles and $9,300 for heads of households. For 2017, the standard deduction amounts will be $12,700, $6,350 and $9,350 under current law.

Note: The standard deduction amounts for 2017 could be significantly higher if tax reform legislation is approved. If you expect an increase, plan to itemize this year, and then claim the more generous standard deduction next year. Your taxes will be lower in both years.

2. Consider prepaying deductible expenditures. If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2016 write-offs makes sense if you expect to be in the same or lower tax bracket next year. That’s more likely with Republican tax reform proposals now on the table.

Perhaps the easiest deductible expense to prepay is included in the house payment due on January 1. Accelerating that payment into this year will give you 13 months of deductible home mortgage interest in 2016. You can use the same prepayment drill with a vacation home. However, if you prepay this year, you’ll have to continue the policy in future years. Otherwise, you’ll have only 11 months of interest in the first year you stop using this strategy.

Another option is to prepay state and local income and property taxes that are due early next year. Prepaying those bills before year end can decrease your 2016 federal income tax bill, because your itemized deductions will be that much higher.

In addition, you may prepay expenses that are subject to deduction limits based on your AGI, such as medical expenses and miscellaneous itemized deductions. Medical costs are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be age 65 or older as of year end, the deduction threshold for this year is a more-manageable 7.5% of AGI. (In 2017, this threshold will increase to 10% of AGI for people age 65 or older.)

Miscellaneous deductions — for investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses — count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you’ll have a greater chance of clearing the 2%-of-AGI hurdle and receiving some tax savings.

Note: The prepayment drill can be a bad idea if you owe the alternative minimum tax (AMT). That’s because write-offs for state and local income and property taxes, as well as for miscellaneous itemized deductions, are completely disallowed under the AMT rules. Therefore, prepaying these expenses may not save much tax for people who owe AMT.

3. Prepay tuition bills. If your 2016 AGI qualifies you for the American Opportunity credit (maximum of $2,500 per eligible student) or the Lifetime Learning credit (maximum of $2,000 per family), consider prepaying tuition bills that aren’t due until early 2017 if it generates a bigger credit on this year’s tax return. Specifically, you can claim a 2016 credit based on prepaying tuition for academic periods that begin in January through March of next year.

The American Opportunity credit can be reduced or completely eliminated if your MAGI is too high. Here are the current MAGI phaseout ranges:

$80,000 to $90,000 for unmarried individuals, and
$160,000 to $180,000 for married joint filers.

The Lifetime Learning credit is subject to lower phaseout ranges. The 2016 MAGI phaseout ranges for this credit are only:

$55,000 to $65,000 for unmarried individuals, and
$111,000 to $131,000 for married joint filers.

If your MAGI is too high to be eligible for these higher education credits, you might still qualify to deduct up to $2,000 or $4,000 of tuition costs. If so, consider prepaying tuition bills that aren’t due until early 2017 if that would result in a bigger deduction this year. As with the credits, your 2016 deduction can be based on prepaying tuition for academic periods that begin in the first three months of 2017.

4. Defer income recognition. It may also be beneficial to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2017 (which, again, is more likely with Republican tax reform proposals on the table). For example, if you’re in business for yourself and a cash-method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive payment for them until early 2017.

You can also defer taxable income by accelerating some deductible business expenditures into this year. Both moves will postpone taxable income from this year until next year, when it might be taxed at lower rates. Deferring income can also be helpful if you’re affected by unfavorable phaseout rules that reduce or eliminate various tax breaks, such as the child tax credit or the higher education tax credits.

5. Sell loser underperforming stocks held in taxable accounts. By selling off loser investments (currently worth less than what you paid for them) held in taxable brokerage accounts, you may be able to lower your 2016 tax bill, because you can offset the resulting capital losses against capital gains from earlier in the year.

If losses exceed gains, you’ll have a net capital loss for the year. You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) on this year’s return against ordinary income from salary, self-employment activities, alimony, interest, and other types of income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2017 and beyond.

6. Consider postponing Roth IRA conversions until next year. The best scenario for converting a traditional IRA into a Roth account is when you expect to be in the same or higher tax bracket during retirement. Even if the tax laws are reformed in 2017, you might eventually wind up in a higher tax bracket during retirement, so conversions can still be a smart tax-planning move.

But there’s a current tax cost for converting, because the conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. If you don’t convert until next year, the tax cost could be much lower if tax rates are cut by tax reform legislation.

After the conversion, qualified withdrawals (including income and gains that accumulate in the Roth account) will be federal-income-tax-free. In general, qualified withdrawals are those taken after:

You’ve had at least one Roth account open for more than five years, and
You’ve reached age 59-1/2 or become disabled or died.

With qualified withdrawals, you (or your heirs if you pass on) avoid having to pay higher tax rates that might otherwise apply in future years. While the current tax hit from a Roth conversion is unwelcome, it could be a relatively small price to pay for future tax savings.

7. Donate appreciated stock to charity. If you own appreciated stock or mutual fund shares that you’ve held for over a year, consider donating them to IRS-approved charities. If you itemize deductions, you can generally claim a deduction for the market value at the time of the donation and avoid any capital gains tax hit.

On the other hand, don’t donate stocks or mutual fund shares that have decreased in value while you’ve owned them. Sell the underperforming investments, book the resulting capital losses and then donate the cash proceeds from the sales. That way, you can generally claim an itemized deduction for the cash donation while keeping the tax-saving capital loss for yourself.

8. Make charitable donations from IRAs. IRA owners and beneficiaries who have reached age 70-1/2 are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions (QCDs) are federal-income-tax-free, but you can’t claim an itemized deduction for the charitable donation. That’s okay, because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs.

QCDs have other tax advantages, too. If you’re interested in taking advantage of the QCD strategy for 2016, you’ll need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities before year end.

Need Assistance?

These are just some of the tax-planning strategies available to help individuals lower their taxes. Before implementing any of these strategies, consult your Cornwell Jackson tax advisor to discuss the details and limitations, as well as other creative tax-saving alternatives. Your tax advisor is closely monitoring any tax law changes and will let you know when (and if) circumstances change.

Year-End Tax Strategies for Small Businesses

Posted on December 1, 2016 by Debra Barcuch

It’s not too late to take steps to significantly reduce your 2016 business income tax bill and lay the groundwork for tax savings in future years. Here’s a summary of some of the most effective year-end tax-saving moves for small businesses under the existing Internal Revenue Code. After President Obama hands over the baton to President-elect Trump and new members of Congress are sworn into office in January, the tax laws could change. But here’s what we know now.

Take Advantage of Net Operating Losses (NOLs)

NOLs received some bad press during the 2016 election season. But they can be an effective — and perfectly legal — way for small business owners to lower taxes in the future. NOLs happen when a business’s deductible expenses exceed its income for the year.

With the exception of the Section 179 depreciation deduction, the business tax breaks and strategies discussed in the main article can be used to create or increase a 2016 NOL. You can then choose to carry a 2016 NOL back for up to two years in order to recover taxes paid in those earlier years. Or you can choose to carry the NOL forward for up to 20 years if you think your business tax rates will go up.

Juggle Pass-Through Income and Deductible Expenditures

If your business operates as a sole proprietorship, S corporation, limited liability company (LLC) or partnership, your share of the net income generated by the business will be reported on your Form 1040 and taxed at your personal rates. If the new Congress maintains the status quo, individual federal income tax rate brackets for 2017 will be about the same as this year’s brackets (with modest increases for inflation).

Under that assumption, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2016 until 2017.

On the other hand, if your business is healthy, and you expect to be in a significantly higher tax bracket in 2017 (say, 35% vs. 28%), take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2017. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

Important note: The results of the election could affect tax rates and regulations in the future. Individual tax rates in 2017 and beyond could be higher or lower than under current law.

Defer Corporate Income and Accelerate Deductible Expenditures (or Vice Versa)

If your business operates as a regular C corporation, corporate tax rates for 2017 are scheduled to be the same — again, assuming the new Congress makes no tax law changes. So, if you expect your corporation to pay the same or lower rate in 2017, you should plan to defer income into next year and accelerate deductible expenditures into this year. If you expect the opposite, accelerate income into this year, while postponing deductible expenditures until next year.

Looking for easy ways to defer income and accelerate deductible expenditures? If your small business uses cash-method accounting for tax purposes, it can provide flexibility to manage your 2016 and 2017 taxable income to minimize taxes over the two-year period. Here are four specific cash-method moves if you expect business income to be taxed at the same or lower rates next year:

Before year end, charge on your credit cards recurring expenses that you would otherwise pay early next year. You can claim 2016 deductions even though the credit card bills won’t be paid until next year. However, this favorable treatment doesn’t apply to store revolving charge accounts. For example, you can’t deduct business expenses charged to your Sears or Home Depot account until you actually pay the bill.
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, send checks via registered or certified mail. That way, you can prove they were mailed this year.
Prepay some expenses for next year, as long as the economic benefit from the prepayment doesn’t extend beyond the earlier of: 1) 12 months after the first date on which your business realizes the benefit, or 2) the end of 2017 (the tax year following the year in which the payment is made). For example, this rule allows you to claim 2016 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.
On the income side, the general rule for cash-basis taxpayers 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, hold off sending out some invoices at year end. That way, you won’t get paid until early next year. Of course, you should never do this if it raises the risk of not collecting the cash.

When should you take the opposite approach? If you expect to pay a significantly higher tax rate on next year’s business income, try to use the opposite strategies to raise this year’s taxable income and lower next year’s. Be sure to factor into the equation your expectations about how the election results will affect taxes in future years.

Buy Heavy Vehicles

Purchasing a gas-guzzling SUV, pickup or van for your business may be seen by some as bad for the environment. But these vehicles can be useful if you need to haul people, equipment and other things around as part of your day-to-day business operations. They also have major tax advantages.

Under the Section 179 election, you can elect to immediately write off up to $25,000 of the cost of a new or used heavy SUV that’s: 1) placed in service by the end of your business tax year that begins in 2016, and 2) used over 50% for business during that year.

If the vehicle is new, 50% first-year bonus depreciation allows you to write off half of the remaining business-use portion of the cost of a heavy SUV, pickup or van that’s: 1) placed in service in calendar year 2016, and 2) used over 50% for business during the year.

After taking advantage of the preceding two breaks, you can follow the “regular” tax depreciation rules to write off whatever is left of the business portion of the heavy SUV’s, pickup’s or van’s cost over six years, starting with 2016.

To cash in on this favorable tax treatment, you must buy a “heavy” vehicle, which means one with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. First-year depreciation deductions for lighter SUVs, light trucks, light vans and passenger cars are much skimpier. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door where the hinges meet the frame.

Example 1: New Heavy Vehicle

Your business uses the calendar year for tax purposes. You buy a new $65,000 Cadillac Escalade and use it 100% for business between now and December 31. On your 2016 business tax return or form, you can elect to write off $25,000 under Sec. 179.

Then you can use the 50% first-year bonus depreciation break to write off another $20,000 (half the remaining cost of $40,000 after subtracting the $25,000 Sec. 179 deduction).

Finally, you can follow the regular depreciation rules to depreciate the remaining cost of $20,000. (That’s the amount left after subtracting the Sec. 179 deduction and the 50% bonus depreciation deduction.) For this asset, regular depreciation will generally result in a $4,000 deduction (20% x $20,000) in the first year.

When all is said and done, your first-year depreciation write-offs amount to $49,000 ($25,000 + $20,000 + $4,000). That represents a whopping 75.4% of the vehicle’s total cost.

In contrast, if you spend the same $65,000 on a new sedan that you use 100% for business between now and year end, your 2016 depreciation write-off will be only $11,160.

Example 2: Used Heavy Vehicle

Your business uses the calendar year for tax purposes. You buy a used $40,000 Cadillac Escalade and use it 100% for business between now and December 31. On your 2016 business tax return or form, you can elect to write off $25,000 under Sec. 179. Bonus depreciation isn’t allowed on used vehicles.

But you can generally write off another $3,000 under the normal depreciation rules. That’s equal to 20% of the remaining cost of $15,000 ($40,000 – $25,000).

Your first-year depreciation deductions add up to $28,000 ($25,000 + $3,000).

In contrast, if you spend the same $40,000 on a used passenger car and use it 100% for business, your 2016 depreciation write-off will be only $3,160.

You may not be eligible to claim Sec. 179 deductions if you have a tax loss for the year (or close to it). Sec. 179 can’t be used to create an overall business tax loss. This is the so-called business taxable income limitation.

Elect Sec. 179 on Other Fixed Asset Purchases

Sec. 179 is even more generous for other types of fixed assets, such as equipment, software and leasehold improvements. For tax years that begin in 2016, the maximum Sec. 179 first-year depreciation deduction is $500,000. This amount will be adjusted for inflation in future years.

Thanks to this tax break, many small and medium-size businesses can immediately deduct most (or all) of their new and used fixed asset purchases in the current tax year. This can be especially beneficial if you buy a new or used heavy long-bed pickup and/or heavy van to be used over 50% in your business. Unlike heavy SUVs, these heavy vehicles aren’t subject to the $25,000 Sec. 179 deduction limitation. That means you can probably deduct the full business percentage of the cost on this year’s federal income tax return.

Real property improvements have traditionally been ineligible for the Sec. 179 deduction. However, an exception that started in 2010 has been made permanent for tax years beginning in 2016. Under the exception, you can claim a first-year Sec. 179 deduction of up to $500,000 (adjusted for inflation in future years) for the following qualified real property improvement costs:

Certain improvements to interiors of leased nonresidential buildings,

Certain restaurant buildings or improvements to such buildings, and

Certain improvements to interiors of retail buildings.

Important note: Deductions claimed for qualified real property costs count against the overall $500,000 maximum for Sec. 179 deductions.

Take Advantage of 50% First-Year Bonus Depreciation

For qualified new assets (including software) that your business places in service in calendar year 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available for the cost of new computer systems, purchased software, machinery and equipment, and office furniture.

Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building was first placed in service. However, qualified improvement costs don’t include expenditures for the enlargement of a building, any elevator or escalator, or the internal structural framework of a building.

Important note: Under the current rules, 50% bonus depreciation will also be available for qualified assets that are placed in service in 2017. In 2018 and 2019, bonus depreciation rates will fall to 40% and 30%, respectively. The bonus depreciation program is set to expire in 2020, unless Congress revives it.

Sell Qualified Small Business Corporation (QSBC) Stock

For QSBC stock that was acquired after September 27, 2010, a 100% federal gain exclusion break is potentially available when the stock is eventually sold. That equates to a 0% federal income tax rate if you sell the shares for a gain.

To qualify for this break, you must hold the shares for more than five years. In addition, this deal isn’t available to C corporations that own QSBC stock. Finally, many companies won’t meet the definition of a QSBC in the first place, and the gain exclusion break could be on the chopping block when the new Congress convenes early next year.

Consult a Tax Pro

These are just some of the tax-planning strategies available to help small business owners lower their taxes. Before implementing any of these strategies, consult your tax advisor to discuss the details and limitations, as well as other creative tax-saving alternatives. Your tax advisor is closely monitoring any tax law changes and will let you know when (and if) circumstances change.

Get Ready Businesses: Some Filing Due Dates Are Changing

Posted on December 1, 2016 by Debra Barcuch

Thanks to recent legislation, the due dates have been changed for some information returns and related statements and for some business tax returns. Here’s what you need to know.

Two Laws Are Responsible for the Changes

1. The Protecting Americans from Tax Hikes (PATH) Act.Enacted on December 18, 2015, the PATH Act extended or made permanent a number of “tax extenders” (provisions with expiration dates that had been routinely extended by Congress on a one- or two-year basis). It also contained a number of other provisions, including the changed due dates for W-2s and some 1099s.

2. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. This new law was primarily designed as a three-month stopgap extension of the Highway Trust Fund and related measures. But it includes a number of important tax provisions, including the revised due dates for partnership and corporation tax returns. President Obama signed it into law on July 31, 2015.

Earlier Due Dates for Forms 1099-MISC and W-2

When a business pays non-employee compensation aggregating to $600 or more to a single payee in a tax year, the business must file a Form 1099-MISC to report the payments to the IRS. Similarly, employers must report wages paid to employees on Forms W-2. Copies of these forms (called payee statements) must also be supplied to payment recipients.

Before a law passed last year, Forms 1099-MISC and W-2 were required to be filed with the IRS and the Social Security Administration (SSA) by the last day of February or by March 31 if filed electronically. (See “Two Laws Are Responsible for the Changes” at right.) Now, the due dates have been accelerated.

Starting with returns for the 2016 calendar year (which must be filed in early 2017), the due date for IRS and SSA filings is advanced to January 31 of the following year. The March 31 due date for electronic filings is no longer available. So the deadline for filing 2016 Forms 1099-MISC and W-2 with the IRS and the SSA is January 31, 2017.

Note: For filing 2016 Forms 1099-MISC and W-2 with the IRS and the SSA, one 30-day extension is allowed. To obtain an extension, you must file Form 8809, “Application for Extension of Time to File Information Returns,” by no later than January 31.

The deadline to supply payee statements to recipients remains January 31 with no extensions allowed.

Reason for the New W-2 and 1099 Deadline

The goal of the new earlier deadline is to:

Give the IRS more time to spot errors on tax returns.
Make it easier for the tax agency to verify the legitimacy of returns and properly issue refunds to taxpayers eligible to receive them.

Reducing tax refund fraud has been a priority of the federal government in recent years.

Later Due Dates for 2016 Corporate Federal Income Tax Returns

For many years, C corporation federal income tax returns on Form 1120 were due two and a half months after the end of the corporation’s taxable year (March 15, adjusted for weekends and holidays, for a calendar-year corporation). Form 1120 could be automatically extended for six months (through September 15, adjusted for weekends and holidays, for a calendar-year corporation).

However, a law passed last year established new due dates for Form 1120. For tax years beginning after December 31, 2015, the due date is generally moved back one month to three and a half months after the close of the corporation’s tax year (to April 15, adjusted for weekends and holidays, for a calendar-year corporation).

Automatic five-month extensions are allowed (to September 15, adjusted for weekends and holidays, for a calendar-year corporation). You must file Form 7004, “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns,” to obtain an automatic extension.

The Form 1120S due date for S corporations is unchanged.

Note: Under a special transition rule for C corporations with fiscal years ending on June 30, the due date change won’t kick in until tax years beginning after 2025. Until then, the traditional due date of September 15 (adjusted for weekends and holidays) for these corporations will continue to apply, with automatic seven-month extensions allowed.

Earlier Due Dates for 2016 Partnership and LLC Returns

For many years, partnership federal income tax returns on Form 1065 have been due three and a half months after the end of the partnership tax year. So for a calendar-year partnership, the filing deadline was April 15 of the following year (adjusted for weekends and holidays).

The Form 1065 due dates have also now been changed. For partnership tax years beginning after December 31, 2015, the Form 1065 due date is accelerated by one month, to two and a half months after the close of the partnership’s tax year (March 15 for calendar-year partnerships). The same deadline applies to limited liability companies (LLCs) that are treated as partnerships for federal tax purposes.

Automatic six-month extensions are allowed (to September 15, adjusted for weekends and holidays, for a calendar-year partnership or LLC). File Form 7004 to obtain an automatic extension.

Need Help with Compliance?

If you have questions about the new filing deadlines for tax returns or information returns, or you want to file an extension, contact your Cornwell Jackson tax advisor.

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