As we come to the end of another tax year, it is time to start planning for 2016. If you have not implemented proper tax strategies throughout 2015, it is not too late to take some last-minute action.
Tax year 2015 did not bring much in the way of tax legislation. Given the dysfunction in Congress and the Executive Branch, that is not too surprising. Many provisions of the Internal Revenue Code that expired at the end of tax year 2014 need extender legislation to continue them into tax year 2015.
As of late November, that tax extender legislation had not been enacted, so we are in a guessing game as to if and when Congress will pass a tax extender bill applicable to tax year 2015. Hopefully Congress gets on this soon so individuals and businesses can plan properly.
Typically, when planning at the end of the year, individuals and businesses want to defer income and accelerate deductions. Year-end planning is an inexact process. However, a review of planning options can produce benefits for taxpayers by postponing or accelerating items of income and deduction.
Tax planners may use the following strategies to assist both individual and business clients:
When to defer income
If you’ll be in the same or lower tax bracket next year, you probably want to delay the receipt of year-end income until early next year, provided the delay does not jeopardize your prospect of collecting the income.
Strategies to defer income include:
- Delay collections;
- Defer compensation;
- Take year-end bonus in the next tax year;
- Maximize retirement plan contributions;
- Close capital transactions in the next tax year to gain the deferral of time to report the gain.
Additionally, if you are close to being subject to the Net Investment Income tax, you may also want to defer the receipt of additional income.
When to accelerate income
A rule of thumb says you should defer income if at all possible. But in the following situations, it may be better to accelerate income:
- Change in income level or tax bracket;
- Liability for Alternative Minimum Tax (AMT);
- Itemized deductions exceed taxable income.
You can accelerate income by
- Collecting receivables;
- Taking your year-end bonus in current tax year;
- Treating restricted stock as vested;
- Disposing of your incentive stock options;
- Taking IRA or retirement plan distributions if over 59 ½;
- Disposing of installment notes; Taking dividends;
- Selling capital assets.
If you need to accelerate deductions, you can use the following techniques:
- Doubling up on charitable contributions by paying next year’s with this year’s;
- Realizing losses on investments;
- Taking bad debt deductions;
- Accelerating purchases of business equipment;
- Prepaying state and local income taxes (but be sure to consider AMT issues);
- Prepaying property taxes.
Business taxpayers can take advantage of the foregoing strategies as well. A major tax planning strategy for businesses is the purchase of equipment to take advantage of bonus depreciation or Section 179 expensing. The 2014 Code Section 179 expensing has not been extended for tax year 2015, but the general consensus is that it will.
An additional, but frequently overlooked, tax benefit for businesses is the Code Section 199 domestic activities deduction. Many types of businesses can take advantage of the Section 199 deduction including manufacturing, construction, oil related work, film production, agriculture and many other activities.
Another tax benefit to be explored is the de minimis safe harbor threshold amount under the final “repair regs.” Currently, a de minimis safe harbor under the repair regs allows taxpayers to deduct certain items costing $5,000 or less and that are deductible in accordance with the company’s accounting policy.
The regulations also provide a $500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.
In closing, realizing benefits from tax planning starts with putting in the time and effort to meet with your certified public accountant or tax attorney to review your particular situation and provide a complete analysis.
– Jason W. Harrel is a partner at Calone & Harrel Law Group, LLP. He is a certified specialist in taxation. Mr. Harrel may be reached at [email protected]