Are Your Year-End Tax Plans “Taxing?”
A Quick Look at 2016 Year-End Tax Planning Ideas for Business Owners and Other Executives
The end of the summer doesn’t just signal the start of a new football season. No, in fact, this is the time of year when many tax professionals turn their thoughts to best practices for year-end tax planning for their clients, businesses and practices. Dean Johns, CPA and Principal at John D. Dovich & Associates, LLC, recently chatted with a few peers from Flynn & Company, a local CPA and business consultancy located in Blue Ash, to discuss the subject. Rick Flynn, CPA and President of Flynn & Company, along with co-workers, CPAs Stephanie Pape and Kent Owen, offer a few key focus areas.
Depreciation: Finally some clarity
Section 179 deduction – Up to $500,000 annual deduction is allowed with a phase out once the cost of the eligible business property (now including air conditioning and heating units) exceeds $2 million for the year. This deduction is now permanent along with the allowance of deducting the cost of computer software and qualified real property. The limits are indexed for inflation for tax years beginning after 2015. In addition, the $250,000 limitation of deducting qualified real property is eliminated for tax years beginning after 2015.
Bonus depreciation – Certain business property is eligible for bonus depreciation at 50 percent for property placed into service in 2016 and 2017; 40 percent for property placed into service in 2018 and 30 percent for property placed into service in 2019. The bonus depreciation only applies to certain eligible property, including “qualified improvement property.”
Research and development credits
The basic R&D credit allows for businesses to invest in ongoing research activities while taking a direct credit against income tax for expenditures made. The credit is available for a variety of expenditures including, but not limited to, costs to test products; acquiring another person’s patent, process, or model; costs to develop a new or improved business; and costs that constitute elements of experimentation. These costs can range from salaries, contractors, machinery and supplies.
The IRS made two positive changes beginning in 2016:
• The first allows new small businesses (less than $5 million gross receipts and having been in business less than five years) to use the credit against the employer’s portion of Social Security taxes. The credit must first offset income tax before it can be used to offset the payroll tax.
• The second change allows for businesses with $50 million or less in gross receipts to use the credit against the alternative minimum tax.
Qualified retirement plans
Small to mid-sized business owners have a number of qualified retirement plans to consider, including SEPs, SIMPLEs, 401(k)s, profit sharing and defined benefit plans. We encourage you to periodically review the efficiency of your plan and whether there are any missed opportunities. For profitable businesses with good cash flow, profit sharing and defined benefit plans can be structured to maximize benefits to owners/key management while being efficient in the cost company-wide. Although there is a cost to profit sharing, wouldn’t you rather pay your employees than the government? Also, don’t be scared off from the perceived complexities of a defined benefit plan. These plans can be structured to maximize benefits to owners/key management while possibly excluding other employees with minimal costs. It all comes down to your employee demographics and having the right retirement plan consultant to help guide you.
Ohio small business income tax deduction
Beginning in 2013, small business owners in Ohio enjoyed a significant reduction in the amount of state income taxes in what has been described as the largest overall tax reduction in the country. Sole proprietorships, partnerships, S-corporations, LLCs and owners of rental properties are allowed to take a deduction on income earned and enjoy a special rate on business income. Effective 2016, the first $250,000 of income earned is exempt from Ohio tax with income earned above that threshold being subject to a 3 percent tax.
Employment of family members
A potentially easy way to maximize your retirement plan contributions is to employ your spouse in the business. For those with 401(k) plans, this could mean another $18,000 (or $24,000 if over age 50) of contributions into the plan plus any company match and/or profit sharing. Of course, compensation must be reasonable and work and hours documented.
Another possibility is the employment of children. While they likely would not be eligible for the retirement plans given their age, they could earn enough to make annual Roth IRA contributions of $5,500. Again, compensation must be reasonable and work and hours documented.
There are ample opportunities for business owners to save on taxes, but it does require careful thought and consultation with your financial advisors as the rules can be complex. We encourage you to bring your team of collaborative advisors together soon to begin your year-end tax planning. Be sure to take a look at an upcoming issue of Venue Magazine (in 2017) for personal tax planning ideas and strategies.
John D. Dovich & Associates, LLC is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.jdovich.com.
Flynn & Company is located at 7800 E. Kemper Road, Suite 150, Cincinnati, OH 45249. For more information, call 513.530.9200 or visit www.flynncocopa.com.