November 17, 2016
The fourth quarter of 2016 is a smart time for individuals and businesses to review their estimated income, deductions and tax liability for both 2016 and 2017. By considering tax planning strategies now, you could decrease tax liability for 2016, positioning you and your business for additional tax savings in 2017.
Analyze timing of income and expenses
Compare the anticipated tax brackets for 2016 and 2017. If you expect to be in a higher tax bracket next year, consider accelerating revenue into 2016 and postponing deductible expenses until 2017.
If the opposite is true, postpone revenue into next year while accelerating deductible expenses into this year.
Benefit from depreciation and expensing rules
Take advantage of the various options to write-off or depreciate the cost of assets purchased in the year.
- The 179 expense deduction is available for the cost of new or used machinery, equipment and off-the-shelf software, up to $500,000. The assets must be financed/purchased and placed into service by the end of the year. Remember that a spending cap of $2 million decreases the deduction dollar for dollar.
- Further optimize the depreciation rules by using 50 percent bonus depreciation on qualifying new equipment purchased when the 179 deduction spending cap has been reached. Unfortunately, this technique is not available for used equipment.
- Consider an election under the “de minimis safe harbor for tangible property,” which allows for a taxpayer to expense (rather than capitalize) property less than $500 per item/invoice. This requires a written policy to support the position upon audit.
- If you have or are planning on renovating a building, certain leasehold improvements may qualify for a reduced depreciation period, from 39 to 15 years.
A tax-advantaged retirement plan is beneficial for businesses and employees alike. The most popular retirement structure is a 401(k) plan, however other retirement options include a profit-sharing plan, simplified employee pension (SEP), or a defined benefit plan. Each allows for tax deductions for employer contributions.
Reduce exposure to additional taxes
Over the past few years, legislation has imposed additional special taxes on higher wealth individuals. Structuring the timing of income, if under your control, to avoid these new tax items could be a useful exercise in decreasing the overall tax owed.
- Additional Medicare surtax: Taxpayers are assessed an additional 0.9 percent tax on wages and self-employment income exceeding $200,000 per year. Deferring bonuses or income into a deferred compensation plan, or deferring the exercise of options, may offer some opportunity to reduce exposure to the surtax, and other similar items may be available.
- Net investment income tax: Certain investment income is taxed at an additional rate of 3.8 percent, including but not limited to, interest, dividends, capital gains, royalties and rental income. The tax applies to the lesser of your net investment income (NII) amount or the excess of your modified adjusted gross income over an applicable threshold amount ($250,000 married filing jointly/$200,000 single). Focus on income deferral strategies that will directly reduce income subject to the NII tax.
Considering these and other tax-saving strategies could make a significant impact in both 2016 and 2017. Note that the Alternative Minimum Tax rules may impact your specific tax situation, so seek advice from an advisor and consider modeling your planning steps into a forecast before taking action on any tax planning strategies.