Small businesses have options in the final days and weeks of the year that can save time and money. Being flexible about income and expense planning can change the final income amount for tax purposes. Also, reporting deadlines for the IRS are changing in 2017, so using available time to clean up data or delegate administrative tasks is more important now than in the past. Here are four ways to prepare now for 2017:
1. Defer income
If possible from a cash flow standpoint, delay invoices so that the business doesn’t receive payment until January 2017 (for cash accounting systems). Businesses on accrual accounting may postpone delivery of goods or services until January 2017 to defer income (if agreeable to customers).
2. Accelerate purchases
Larger expenditures reduce profitability, and therefore, tax liability. The vast majority of business equipment is eligible for a Section 179 deduction. This means that businesses can expense/immediately deduct the cost of most equipment up to $500,000 for the first $2,010,000 of property (that doesn’t exceed taxable business income). Qualifiers: Businesses must purchase equipment and place into service prior to midnight on December 31, 2016. The deduction phases out dollar for dollar above $2,010,000, and does not apply to expenses that exceed $2.5 million. Examples of eligible property:
- Equipment/machines for business use
- Computers and off-the-shelf software
- Office equipment (copiers, etc.) and furniture
- Certain business vehicles
- Tangible personal property used for business
Such business equipment or property may also be eligible for 50% bonus depreciation based on type of property and timing. (A tax professional is a good source of advice for depreciation matters.)
Remember that if paying for a purchase with a credit card (for cash accounting businesses), the credit card must be paid by year-end for 2016 deductions.
3. Make repairs and take care of maintenance
Repairs and maintenance are business expenses that also reduce income and qualify as a tax deduction. The repair or maintenance cost must be considered an ordinary and necessary expense that is common to the type of business.
4. Get a jump on administrative details
January is a very busy month, and for 2016 reporting, January 31, 2017 is the deadline to provide Forms W-2 and certain 1099’s to employees, contractors, and the IRS. The rule changed effective with 2016 tax reporting to reduce tax fraud. (The previous gap in time between employee receipt of a Form W-2 and company reporting allowed time for criminals to receive a refund before the IRS was able to verify the data.) Therefore, it’s a good idea to task someone with making sure that employee information (and information for those who left the company during the year) is correct for Form W-2, and that records are up-to-date for contractor and supplier Form W-9 information. Unrelated to the January 31 deadline is the need to document personal use of a company vehicle. The personal use of a company auto is technically income. In the absence of documentation, the full expense of the vehicle use becomes taxable income to the employee who drives the vehicle.
Please give us a call if you want assistance sorting through options for the strongest outcome.