The end of the year is approaching, and so is another tax season. The good news is that some of the uncertainty about deductions for small businesses has been lifted this year thanks to the Protecting Americans from Tax Hikes (PATH) Act, which Congress passed in late 2015. Here are some tips to square your bill so you – and your business – will benefit.
Consult the pros – Because the rules are complex and ever-changing, it’s a good idea to schedule a meeting with a knowledgeable accountant and your other professional advisors, who know your specific financial situation.
Maximize depreciations via Section 179 – This tax break, extended in the PATH Act, allows your business to deduct the price of qualifying equipment or software purchased or leased during 2016. The expensing limitation is $500,000 and applies to items including office furniture and vehicles. Then there’s bonus depreciation, which lets business owners depreciate 50% of the cost of new equipment purchased and placed into service in 2016. This provision was extended through 2017 and can be used in conjunction with Section 179. Learn more at IRS.gov.
Discuss whether to defer income and accelerate deductions –There are several ways to put off income into the next tax year and increase deductions now if you expect your income to be at the same or a lower rate next year. For example, you can plan to send your bills out a few days later in the last month of the year, which means getting paid a few days later in January of next year. You can also prepay some bills to take the deduction now.
Consider a retirement plan redesign – If your business has changed significantly since you first started a retirement plan, it’s a good idea to make sure this important employee incentive is still the right fit. There are several options to choose from, including SIMPLE IRAs, profit-sharing, and safe harbor 401(k)s. A qualified plan offers a deduction for your contributions, and you defer tax on earnings on contributions.
Reconsider your business structure carefully – Some businesses can gain an advantage by changing the ownership structure. Owners with an LLC can still elect to be taxed as an S-corporation retroactively at year’s end.
Find the silver lining of a net operating loss – If your business losses exceed your income for the year, the excess loss can lower your income and cut your tax bill in another year. You can apply the loss to prior years’ taxes and get a refund or use it in the future. The rules and formulas for this maneuver are complex, so make sure to consult an expert.
Check changes due to the Affordable Care Act – Businesses that have fewer than 25 workers and cover 50% or more of health premiums might qualify for the Small Business Health Care Tax Credit. Keep these tips in mind at tax time and keep your accountant and professional advisors up to date on any changes to help make the best decisions for your business.
Don’t hesitate to talk about some of these strategies with your advisor and your accountant.
Material prepared by Raymond James for use by its financial advisors.