April 15 may be the day most associated with accountants, but great CPAs know the fourth quarter is the most important time of year.
During the fourth quarter, business owners and CFOs can take action to minimize their tax impact come April 15 and evaluate budget and plans for the following year.
Below are five tax planning tips CFOs should consider in the fourth quarter:
Assess tax benefits for equipment purchases: Now may be a good time to purchase equipment to take advantage of depreciation rules and reduce your company’s tax liability, or to plan purchasing and putting into service some equipment in 2016 and some in 2017. Your CPA can help you develop a plan and projections on the optimal timing.
Late last year, Congress extended two major tax benefits for equipment purchases. The Section 179 expensing election is now permanent with a $500,000 maximum deduction, and you can take Bonus Depreciation on new asset purchases at a 50% level for 2016 and 2017, 40% in 2018 and 30% in 2019 before it expires on Dec. 31, 2019.
Net operating loss strategies: If it looks like your expenses will exceed your income this year, you can use that net operating loss for tax purposes. Take advantage of Net Operating Loss (NOL) flexibility – you can elect to carry back the NOL two years, recouping taxes paid in those earlier, profitable years; you may choose to carry the loss forward for up to 20 years and minimize future projected tax liability instead. Be sure to run projections and consult your CPA to understand how to best apply these rules for NOLs to your situation.
Facility upgrades: Late last year, Congress made permanent a benefit to reduce the depreciation period to recover the cost of some building improvements. Going forward, qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements may all be depreciated over 15 years, instead of prior longer periods.
If your facility qualifies and needs remodeling, you can now recoup the costs much faster. Your upgrades also might qualify for bonus depreciation discussed earlier. Fourth quarter planning can help determine the most advantageous methods to apply the rules.
Hire workers from certain target groups: Businesses can qualify for a Work Opportunity Tax Credit for hiring workers from several target groups, including food stamp recipients and certain veterans. The maximum credits range from $2,400 for the general target groups all the way to $10,000. You must go through the process to qualify the individuals before they start working.
Defer income and accelerate deductible expenses – or vice versa: If you use the cash method of accounting for tax reporting (as opposed to the accrual method), juggling year-end revenue and expenses may make sense. The cash method allows flexibility to manage your 2016 and 2017 by deferring or accelerating taxable income to minimize tax liability over a two-year period.
If you expect to be in the same or a lower tax bracket next year, you can defer revenue into 2017 while accelerating deductible expenses into 2016 to postpone part of your tax bill from this year to next.
Here are some cash method strategies to consider if you expect business income to be taxed at the same or lower rate next year:
- Before the end of the year, use credit cards to pay recurring expenses you would otherwise pay in early 2017. You can deduct those expenses this year, even if you don’t pay the credit card bills until 2017. However, you probably can’t use this option for revolving charge accounts issued by retailers – you can't generally deduct business expenses charged to your company account until you pay the bill.
- Another option is to pay expenses with checks and mail them a few days before December. Tax rules say cash-basis entities can deduct the expenses in the year checks are mailed, even if they are not cashed or deposited until the next year. For significant expenses, send checks through registered or certified mail to prove they were mailed in 2016.
- You can prepay certain expenses for the next year, as long as the economic benefit from the prepayment doesn't extend beyond the end of 2017 (the tax year following the year they’re paid). For example, you can prepay January’s rent in December.
- Regarding revenue, the standard rule is cash-basis taxpayers don't have to report revenue until the year they receive cash or checks in hand or through the mail. To take advantage of this option, put off sending out some invoices for work completed in late December so that you won't get paid until early 2017.
If you expect your business tax rate to increase next year, try the reverse of these strategies to increase your 2016 taxable income and lower your 2017 income:
- If business is booming, and you’re likely to be in a higher tax bracket in 2017 (say increasing from 28% to 35%) consider taking the opposite strategy. You could accelerate revenue into 2016 and postpone deductible expenses until 2017. Then more income will be taxed at your lower 2016 marginal tax rate instead of an anticipated higher rate in 2017.
Since the 1920s, Concannon Miller has been working with CFOs to help their businesses grow and is the proud sponsor of the Lehigh Valley Business CFO of the Year Awards. Seeking more advice on how to improve your company’s finances? Contact us here.