Ten Year End Tax Planning Tips for Businesses

September 30, 2015 By Sheri Lewis

Planning-TipsAs a follow up to the ten tips for individual I wanted to add ten tips for business owners. Make sure you always consult your tax professional before implementing these tips.


    First and most important is keep accurate records. It is surprising how many businesses struggle just to generate accurate financial information for tax preparers. There are many inexpensive accounting programs to assist small business account for their business transactions. QuickBooks is the easiest software to learn and implement and works well for most industries. In addition to accurate accounting is the substantiation requirements required to prove income or deductions. Maintaining customer invoices, vender receipts, and mileage logs are all important to be prepared for in the event of an IRS audit. Many audit adjustments are made due to the inability for the taxpayer to substantiate the deductions taken.


    IRS Section 179 allows a taxpayer to deduct the entire cost of personal property (furniture, equipment, vehicles, etc.) assets in the year of purchase against business income. The deduction limit for 2015 is $25,000 (Congress may act to reinstate the $500,000 limit allowed in 2014 but to date this has not occurred). The taxpayer can elect any amount they choose up to the limit. However, Section 179 deprecation cannot be taken if it results in a net operating loss for the tax year. The deduction is phased out when the taxpayer equipment purchases exceed $200,000 during the year ($2,000,000 if 2014 limit reinstated).

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    For 2015 there is no bonus deprecation deduction. If the bonus depreciation deduction is reinstated by Congress, then bonus depreciation can be taken on “original use assets” (meaning new assets). The deduction is 50% of the purchase price plus the normal depreciation percentage applicable for the asset class. For example XYZ Construction Company acquires a new backhoe costing $100,000. Utilizing the bonus depreciation the taxpayer is entitled to a $58,500 depreciation deduction for the backhoe. ((*100,000*.5=50,000) + (50,000*.17=8,500) =58,500))


    Many businesses who domestically produce or manufacture a product may qualify for a Domestic Product Activities Deduction. The types of activities that qualify are manufacturing, producing, growing and extracting tangible personal property, computer software, sound recordings, construction and renovation or real property. The deduction equals 9% of the lesser of (a) qualified production activities income or (b) taxable income for the taxable year. The deduction is also limited to 50% of the W-2 wages paid by the taxpayer during the taxable year.


    Many businesses who carry inventory can elect to use the “Lower Cost or Market” method valuing inventory. If the business employs this method of valuing inventory they can make an adjustment to ending inventory each year to the lower of the original cost of the inventory or market value of the inventory. For example if an auto dealership purchased a car to sell for $25,000 in October and at year end (December 31st) the current value of the car is now $20,000 the dealership can claim a current tax deduction on the decrease in value. In order to employ this inventory method the taxpayer needs to make this election on the tax return for the initial year or obtain permission from the IRS to switch.


    401(k) plans allow businesses to provide benefits to employees in which the business can deduct a payment made on behalf of the employee and the employee can avoid paying tax on the benefit. Simply stated a business may pay an amount to an investment account for the benefit of employees. The business can pool the funds for a group of employees or set up individual accounts for each employee. Many businesses encourage their employees to save their own monies for retirement by contributing matching funds to the employee’s accounts. Employees age 49 years and under can contribute up to $18,000 as a salary deferral for 2015. Employees age 50 years and older can contribute up to $24,000 for 2015. Businesses can contribute up to 25% of an employee’s compensation in addition to the individual employee’s salary deferrals. The maximum employee contributions for 2015 are $53,000 for age 49 years and under and $59,000 for age 50 and older.


    Cost segregation studies allow a business to depreciate their real estate facilities much faster than applying the normal deprecation life allowed by law. Normally a property is depreciated over a 39 year life. Performing a cost segregation study allows the taxpayer to depreciate components of a building over 5, 7, 15, and 39 years, drastically reducing the time required to depreciate the property.


    The tax credit for Research & Development activities has not been renewed for 2015. If reinstated by Congress, the tax law allows a tax credit for research and development activities. The credit is based on the amount of wages paid to employees performing research activities along with materials and supplies used in the research process.


    Deducting expenses for meals and entertaining clients, associates, and customers is allowed if the substantiation requirements are met. In order to protect yourself during an audit each deduction is documented with a receipt and a log referring to the business purpose of the entertainment, the date of the event, and the names of the parties involved. The deduction allowed is 50% of the expense. However, if you are providing meals on-site for employee meetings 100% of the cost may be deducted.


    Selecting the best business structure can be an important method for saving taxes and limiting liability. Many small businesses organize themselves as flow-through entities. S-corporation and limited liability companies are most commonly used. In many cases using a combination of the structures yields the best results. Careful consideration must be given to the type of business and the activities of the business to determine the best structure. Seeking the advice of an attorney and CPA are critical during the process.

If you have additional questions regarding QuickBooks or QuickBooks files, please feel free to reach out to us with any questions.


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