30 Nov Year-End Business Tax Planning
The Protecting Americans from Tax Hikes (PATH) Act of 2015’s many provisions also include a permanent increase in the amounts allowed under IRC Section 179, which permits rapid deduction (expensing) of funds spent for business equipment. For 2015, expensing up to $500,000 of equipment was allowed with no phaseout beginning at $2 million of purchases. For 2016, the inflation adjusted amount is $2,010,000. In addition, the PATH Act makes permanent the treatment of off-the-shelf computer software as Sec. 179 property.
The bottom line is that small companies can confidently purchase equipment and software this year. As long as total outlays do not top $2.01 million, expenses up to $500,000 can be deducted for 2016 rather than spread over several years. To qualify for the IRC Section 179 tax break, the equipment or software must be purchased, financed, or leased, and placed into service by December 31. The deduction will equal the full purchase price.
For companies that spend more on equipment than the IRC Section 179 deduction allows, the PATH Act’s extension of ‘bonus depreciation’ may help. For 2016 as well as 2017, a taxpayer may generally deduct 50 percent of qualifying equipment’s cost (reduced by the amount of any Sec. 179 expense deduction taken for the cost of the equipment). However, bonus depreciation applies only to new equipment while the first-year IRC Section 179 deduction applies to new and used equipment.
Paperwork now, payment later
The end of the year also is a good time to review your company’s retirement plan situation. If you have one, should you make a change? If you do not have a company-sponsored retirement plan, do you want to establish one? Such a plan not only will benefit your employees, it will enable you to put aside funds for your own retirement on a tax-favored basis.
Today, a 401(k) can be considered the ‘standard’ company plan. Many prospective employees expect to have a 401(k) at work, so offering such a plan may enable you to attract good people and retain valued workers. Contributions generally are funded by the employees themselves, but many companies provide matching contributions in some form.
December 31 is the deadline for establishing a 401(k) plan for 2016, assuming your company uses a calendar year. Employee contributions for 2016 must be withheld from 2016 paychecks and must be sent to the relevant financial firm as soon as possible. Employer contributions, deductible for 2016, can be made up to the company’s tax return due date, including extensions.
A variation of the basic 401(k) is often known as the solo 401(k) or the individual 401(k). Other names may apply. However the plan is titled by the financial firm involved and is open only to business owners and their spouses who are employed by the company. For 2016, the maximum contribution to a solo 401(k) is $53,000 per participant, if certain conditions are met, or $59,000 for those age 50 or older. Basic 401(k) plans have contribution limits of $18,000 or $24,000 before any employer match.
Again, the deadline for establishing a solo 401(k) in 2016 is December 31 of this year. Some tax deductible contributions may be made up to the tax return deadline, including extensions, in 2017.
Other retirement plans for small businesses also have a December 31 deadline for signing the forms to receive tax benefits in 2016. These plans also have an extended due date for making contributions. They include profit sharing plans, which are funded by the employer. Profit sharing plans may motivate employees to help the company’s earnings grow. Annual employer contributions are discretionary so companies are not locked in.
Yet another option is a defined benefit plan, which can provide a traditional life-long pension. These plans are offered mainly by public employers and some large companies but small firms also may benefit. The best prospects might be companies where the principal is, say, 50 or older, with few employees. In such situations, the business may make extremely large, tax-deductible contributions to the principal’s retirement account. Again, the plan must be established by December 31 for 2016 tax benefits.
Our office can help you choose among various retirement plans for your business and let you know about any year-end deadlines.