Small Business Tax Briefs 2nd Edition
There’s still time to set up a retirement plan for 2016
Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.
So if you haven’t already set up a tax-advantaged plan, consider doing so this year.
Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.
Here are three options:
1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
2. Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.
Contact us if you want more information about setting up the best retirement plan in your situation.
A quick look at the President-elect’s tax plan for businesses
The election of Donald Trump as President of the United States could result in major tax law changes in 2017. Proposed changes spelled out in Trump’s tax reform plan released earlier this year that would affect businesses include:
- Reducing the top corporate income tax rate from 35% to 15%,
- Abolishing the corporate alternative minimum tax,
- Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate rate rather than their own individual income tax rate, although there seems to be ambiguity on the specifics of how this provision would work,
- Eliminating the Section 199 deduction, also commonly referred to as the manufacturers’ deduction or the domestic production activities deduction, as well as most other business breaks — but, notably, not the research credit,
- Allowing U.S. companies engaged in manufacturing to choose the full expensing of capital investment or the deductibility of interest paid, and
- Enacting a deemed repatriation of currently deferred foreign profits at a 10% tax rate.
President-elect Trump’s tax plan is somewhat different from the House Republicans’ plan. With Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely. That said, Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, which means they may need to compromise on some issues in order to get their legislation through the Senate.
So there’s still uncertainty as to which specific tax changes will ultimately make it into legislation and be signed into law.
It may make sense to accelerate deductible expenses into 2016 that might not be deductible in 2017 and to defer income to 2017, when it might be subject to a lower tax rate. But there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. Plus no single strategy is right for every business.
Please contact us to develop the best year-end strategy for your business.
Go green, save green
There are a few tax incentives for going green in 2016, including the Residential Energy Efficiency Property Tax Credit, the Nonbusiness Energy Property Tax Credit, and the Plug-in Electric Drive Vehicle Credit.
Click here to take a look at our infographic detailing tax breaks to purchase efficient energy property and electric vehicle.
Year-end tax strategies for accrual-basis taxpayers
The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill.
Record and recognize
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:
• Commissions, salaries and wages,
• Payroll taxes,
• Insurance, and
• Property taxes.
You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.
Look at prepaid expenses
Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.
Miscellaneous tax tips
Here are a few more year-end tax tips to consider:
• Review your outstanding receivables and write off any receivables you can establish as uncollectible.
• Pay interest on all shareholder loans to or from the company.
• Update your corporate record book to record decisions and be better prepared for an audit.
Consult us for more details on how these and other year-end tax strategies may apply to your business.