2015 Year-End Tax Planning Tips for Small Businesses
Business owners who engage in proactive planning can take some of the “bite” out of their taxes. Here are some simple strategies for you to consider during the fourth quarter of 2015. These maneuvers require action before year end, so don’t delay.
Defer Income and Accelerate Deductible Expenses (or Vice Versa)
If your business is a sole proprietorship, partnership, limited liability company (LLC), or S corporation, your share of the business’s income is reported on your Form 1040 and taxed at your personal rate.
The individual federal income tax rates are scheduled to be the same for 2016 as they are for 2015. Therefore, deferring revenue into 2016 while accelerating deductible expenses into 2015 makes sense if you expect to be in the same or a lower tax bracket next year, enabling you to postpone part of your tax bill from 2015 until 2016.
On the other hand, if you expect to be in a higher tax bracket in 2016, take the opposite approach. If possible, accelerate revenue into 2015 and postpone deductible expenses until 2016. That way, more income will be taxed at this year’s lower effective marginal tax rate instead of next year’s higher rate.
If your business is a C corporation, and you expect your corporation to be in the same or a lower bracket in 2016, postpone revenue into next year while accelerating deductible expenses into this year. If you expect to be in a higher tax bracket in 2016, try the opposite approach by accelerating taxable income into 2015 and deferring deductible expenses to 2016.
How to Juggle Income and Expenses (for Cash-Basis Entities)
The cash method gives you flexibility to manage your 2015 and 2016 taxable income to minimize taxes over a two-year period. Let’s look at some specific cash method strategies to consider if you expect business income to be taxed at the same or lower rate next year.
First, before year end, use credit cards to pay recurring expenses that you would otherwise pay early next year. You can deduct the charges in 2015 even though the credit card bills won’t be paid until next year. Another trick is to pay expenses with checks and mail them a few days before year end. The tax rules say cash-basis entities can deduct the expenses in the year checks are mailed, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, send checks via registered or certified mail to prove they were mailed in 2015.
The tax code also allows you to prepay some expenses for next year. For example, you can claim 2015 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.
The general rule is that 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 rule, put off sending out some invoices for work completed in late December so that you won’t get paid until early next year. If you expect to pay a significantly higher tax rate on next year’s business income, try the reverse of these strategies to raise this year’s taxable income and lower next year’s. For example, a cash-basis taxpayer who expects to be in a higher tax bracket in 2016 might ship before year end (and invoice) products scheduled for delivery in early January in the hope that customers will pay by December 31 and hold off on sending checks to vendors until after January 1.
Take Advantage of NOLs
These business tax planning strategies also can be used to create (or increase) a 2015 net operating loss (NOL). You can then choose to carry a 2015 NOL back for up to two years in order to recover taxes paid in earlier years, or you can choose to carry the NOL forward for up to 20 years, if you think your business tax rates will go up and the NOL deduction could save you more taxes in the future.
Meet with Your Tax Adviser
These strategies only scratch the surface of proactive tax planning moves. Business owners who assess matters before year end have many more tax-planning strategies at their disposal than those who wait until after the start of the tax filing season.
What’s New for Businesses This Tax Year?
The Affordable Care Act (ACA) requires certain employers to report the cost of coverage under employer-sponsored group health plans. W-2 forms must be distributed to employees by February 1, 2016. But gathering the requisite information will be time consuming for most companies. Fortunately, your tax and accounting advisers can assist with W-2 reporting of employer health costs. Be sure to contact them as soon as possible if you need help.
Year-end tax planning for 2015 is particularly challenging because Congress has yet to act on tax breaks that expired at the end of 2014. It’s uncertain at this time whether the “extender” provisions will be extended by Congress on a permanent or temporary basis (and whether any such extension would be made retroactive to January 1, 2015). You should discuss the status of any extenders that may affect your business with your tax adviser before year end.