Ensure your year-end donations will be deductible on your 2016 return

Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. To ensure your donations will be deductible on your 2016 return, you must make them by year end to qualified charities.

When’s the delivery date?

To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Is the organization “qualified”?

To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.

© 2016

There’s still time to benefit on your 2016 tax bill by buying business assets

In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016.

Section 179 deduction

The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.

The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $200,010,000.

Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.

Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.

First-year bonus depreciation

For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture.

Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

Contemplate what your business needs now

If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.

© 2016

Setting sail into the global marketplace

For many of today’s companies, going global seems like a quick and trouble-free growth strategy. Technological advances and expansive supply chains make doing so easier than ever. But business owners who make this move impetuously may soon find themselves on stormy seas, taking on waves of debt and unanticipated expenses.

Chart your course carefully

Globalization strategies are typically based on two objectives: 1) selling to a new market overseas, or 2) lowering production or administrative costs with foreign supply chain partners. (Some companies try to do both.)

If you plan to sell to foreign businesses or consumers, consider conducting a market feasibility study in key target areas to gauge demand on a smaller scale. Also, learn regulations, customs and tax rules to determine whether you can actually turn a profit.

If minimizing production or administrative expenses is your aim, watch out for hidden costs. Examples may include:

• Inferior materials quality,
• Lower productivity rates and high employee turnover,
• Shipping delays and hidden tariffs,
• Foreign currency fluctuations,
• Intellectual property theft,
• Fraud, data privacy violations and other unethical behaviors, and
• Reduced goodwill from negative customer experiences.

In addition, labor, materials and taxes may initially seem cheaper in a foreign country. But wages in some countries, such as China or India, are rising. And the pool of skilled workers sometimes may be limited overseas — especially in high-tech industries.

Prepare your crew

You may be ready to go global, but are your employees? Unexpected red tape can abound. For example, accounting for foreign subsidiaries requires an understanding of international financial reporting standards and complex transfer tax issues that may be beyond the capabilities of in-house accounting personnel.

It also may be unwise to leave accounting and record-keeping to the management of foreign subsidiaries. Lax oversight and informal controls may lead to mistakes, omissions, legal issues and even fraud. At this time, it’s also uncertain what impact the incoming presidential administration could have on foreign business operations.

Check the forecast

Will you find a treasure chest of higher revenues and cost savings overseas? It’s tough to say, matey. Please contact our firm for help reviewing your financials and forecasting your potential profitability to determine whether the trip would be worth it.

Accelerating your property tax deduction to reduce your 2016 tax bill

Smart timing of deductible expenses can reduce your tax liability, and poor timing can unnecessarily increase it. When you don’t expect to be subject to the alternative minimum tax (AMT) in the current year, accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which usually is beneficial. One deductible expense you may be able to control is your property tax payment.

You can prepay (by December 31) property taxes that relate to 2016 but that are due in 2017, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to 2017 and deduct the payment on this year’s return.

Should you or shouldn’t you?

As noted earlier, accelerating deductible expenses like property tax payments generally is beneficial. Prepaying your property tax may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.

However, under the President-elect’s proposed tax plan, some taxpayers (such as certain single and head of household filers) might be subject to higher tax rates. These taxpayers may save more tax from the property tax deduction by holding off on paying their property tax until it’s due next year.

Likewise, taxpayers who expect to see a big jump in their income next year that would push them into a higher tax bracket also may benefit by not prepaying their property tax bill.

More considerations

Property tax isn’t deductible for AMT purposes. If you’re subject to the AMT this year, a prepayment may hurt you because you’ll lose the benefit of the deduction. So before prepaying your property tax, make sure you aren’t at AMT risk for 2016.

Also, don’t forget the income-based itemized deduction reduction. If your income is high enough that the reduction applies to you, the tax benefit of a prepayment will be reduced.

Not sure whether you should prepay your property tax bill or what other deductions you might be able to accelerate into 2016 (or should consider deferring to 2017)? Contact us. We can help you determine the best year-end tax planning strategies for your specific situation.

Year-end tax strategies for accrual-basis taxpayers

The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill.

Record and recognize

The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:

• Commissions, salaries and wages,
• Payroll taxes,
• Advertising,
• Interest,
• Utilities,
• Insurance, and
• Property taxes.

You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.

Look at prepaid expenses

Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.

Miscellaneous tax tips

Here are a few more year-end tax tips to consider:

• Review your outstanding receivables and write off any receivables you can establish as uncollectible.
• Pay interest on all shareholder loans to or from the company.
• Update your corporate record book to record decisions and be better prepared for an audit.

Consult us for more details on how these and other year-end tax strategies may apply to your business.

© 2016

How Giving to the Community Helps Build Your Practice

ACCOUNTING TODAY

By Roger Russell    
November 17, 2016

            

With Thanksgiving approaching, we’re reminded of the goodness of giving to help the less fortunate by food banks, clothes for the needy, and many other worthy charitable organizations.
And just a bit later, we’ll see bell-ringers on street corners collecting donations for their organizations’ charitable programs. Giving back to the community is not only good for the community, it’s good for the soul—and it can help grow your practice, according to Chuck McCabe, president of Peoples Income Tax and The Income Tax School.
“Outside of preparing taxes and participating in business networking organizations, how involved are you in your community?” he asks. “While those are fine for relationship building, they don’t count as giving back to the community.”

“One of the advantages a local practitioner has over a national franchise is that it can market to the community as a local business owner,” he said. “So why not embrace your local roots by digging in and giving back to the community that you live and work in? Giving back is not just a good thing to do, it can help your business a great deal.”
Here are some of McCabe’s suggestions on ways of giving back:
• Offering your services free of charge to an underserved population in your community.
• Donating to a local charity that is connected to your company or team.
• Volunteering your time or expertise.
• Mentoring small business owners and startups.
“Business owners who are involved in their local community earn the respect and backing of the very community they give back to,” McCabe said. “Not only do you build strong relationships with the people you are giving back to, you begin meeting and building relationships with other leaders in the community who share the same passion for that cause or organization as you do. When you give to the community, you get back respect and loyalty. People within the community tend to back and support businesses that support the community.”
“When community members take ownership of their community, it helps to improve the community and the lives of people living within the community,” McCabe said. “Whether it’s helping raise funds for a park or helping people directly within the community, you are making your community a better place to live.”
Making community stewardship a part of your culture helps improve your work environment, he suggested. “Volunteerism gives employees a purpose and takes them away from the daily grind to remind them of issues that are important,” McCabe said. He quoted a study by the University of Exeter that found volunteers had a 22 percent lower mortality rate than non-volunteers, and they also had higher levels of self-esteem and happiness. Moreover, it improves morale and helps develop more respect for the company and its leaders. Volunteering also creates cohesion between everyone in the company as they work together to enrich the community.
“Getting involved in community events is also a way to meet people and build relationships outside of typical networking events,” McCabe observed. “And it is also a way to get local press coverage of your business. If you plan to host an event to raise money for or build awareness around a cause or a charity, make sure your local media outlets know about it. It makes a great story.”
And of course, the main reason to give back to your community? “It’s just the right thing to do,” McCabe said.

Are your employees trained to guard against risk?

 

Many companies, especially smaller ones, minimize in-house training to cut costs. But the current business environment — with its hard-to-predict changes, external threats and regulatory demands — is causing some owners to rethink this strategy. A strong training program can not only help you attract and retain quality talent, but can also help you reduce operational risk.

Renewed emphasis

Today’s companies face many challenges beyond simply turning a profit. Many industries are highly regulated, and just about every type of business has become, in some sense, technology-dependent. This has brought a renewed emphasis on risk management.

One of the keys to managing operational risk is well-trained personnel at all levels. After all, no matter how carefully a business designs its policies, procedures and controls, they’re only as reliable as the employees entrusted to implement them.

2 examples to consider

Here are just a couple of examples of operational risks that can be reduced with good training:

1. Compliance. As mentioned, many businesses are now more heavily regulated. (This may change with the incoming presidential administration, but it’s hard to say when or how any deregulatory measures may occur.) Failure to comply with federal, state or local regulations can expose your company to penalties ranging from monetary fines, to rescission of loans or other contracts, to criminal liability. Train your employees to avoid breaking the rules and to spot compliance threats when they arise.

2. Cybersecurity. As companies’ reliance on technology and automation continues to increase, so does the risk of cyberattacks. Although the techniques cybercriminals use are becoming more sophisticated, many businesses also remain vulnerable to simple tactics, such as email phishing.

Phishing involves sending emails to employees or customers that appear to be from a legitimate source. By tricking recipients into clicking on links that install malware, cybercriminals can gain access to company assets or customers’ sensitive personal information. Teach your staff how to deal with suspicious emails and other technology-related threats.

On the lookout

It’s not enough to be aware of risks to your business at the ownership or management level. You’ve got to train your employees to be on the lookout, too. Please contact our firm for help.

© 2016

A brief overview of the President-elect’s tax plan for individuals

Now that Donald Trump has been elected President of the United States and Republicans have retained control of both chambers of Congress, an overhaul of the U.S. tax code next year is likely. President-elect Trump’s tax reform plan, released earlier this year, includes the following changes that would affect individuals:

• Reducing the number of income tax brackets from seven to three, with rates on ordinary income of 12%, 25% and 33% (reducing rates for many taxpayers but resulting in a tax hike for certain single filers),
• Aligning the 0%, 15% and 20% long-term capital gains and qualified dividends rates with the new brackets,
• Eliminating the head of household filing status (which could cause rates to go up for some of these filers, who would have to file as singles),
• Abolishing the net investment income tax,
• Eliminating the personal exemption (but expanding child-related breaks),
• More than doubling the standard deduction, to $15,000 for singles and $30,000 for married couples filing jointly,
• Capping itemized deductions at $100,000 for single filers and $200,000 for joint filers,
• Abolishing the alternative minimum tax, and
• Abolishing the federal gift and estate tax, but disallowing the step-up in basis for estates worth more than $10 million.

The House Republicans’ plan is somewhat different. And because Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, they may need to compromise on some issues in order to get their legislation through the Senate. The bottom line is that exactly which proposals will make it into legislation and signed into law is uncertain, but major changes are just about a sure thing.

If it looks like you could be eligible for lower income tax rates next year, it may make sense to accelerate deductible expenses into 2016 (when they may be more valuable) and defer income to 2017 (when it might be subject to a lower tax rate). But if it looks like your rates could be higher next year, the opposite approach may be beneficial.

In either situation, there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. We can help you create the best year-end tax strategy based on how potential changes may affect your specific situation.

© 2016

A quick look at the President-elect’s tax plan for businesses

The election of Donald Trump as President of the United States could result in major tax law changes in 2017. Proposed changes spelled out in Trump’s tax reform plan released earlier this year that would affect businesses include:

• Reducing the top corporate income tax rate from 35% to 15%,
• Abolishing the corporate alternative minimum tax,
• Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate rate rather than their own individual income tax rate, although there seems to be ambiguity on the specifics of how this provision would work,
• Eliminating the Section 199 deduction, also commonly referred to as the manufacturers’ deduction or the domestic production activities deduction, as well as most other business breaks — but, notably, not the research credit,
• Allowing U.S. companies engaged in manufacturing to choose the full expensing of capital investment or the deductibility of interest paid, and
• Enacting a deemed repatriation of currently deferred foreign profits at a 10% tax rate.

President-elect Trump’s tax plan is somewhat different from the House Republicans’ plan. With Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely. That said, Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, which means they may need to compromise on some issues in order to get their legislation through the Senate.

So there’s still uncertainty as to which specific tax changes will ultimately make it into legislation and be signed into law.

It may make sense to accelerate deductible expenses into 2016 that might not be deductible in 2017 and to defer income to 2017, when it might be subject to a lower tax rate. But there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. Plus no single strategy is right for every business. Please contact us to develop the best year-end strategy for your business.

© 2016

3 ways to get started on next year’s budget

 

As the year winds down, business owners have a lot to think about. One item that you should keep top of mind is next year’s budget. A well-conceived budget can go a long way toward keeping expenses in line and cash flow strong. The question is: Where to begin? Well, to answer this question, we don’t have just one suggestion — we have three:

1. Investigate your income statement. A good place to start on next year’s budget is with the numbers you put on paper for last year, as well as your year-to-date results. In your income statement, you’ll see information on sales, margins, operating expenses, and profits or losses.

One specific factor to consider is volume. If sales have slipped noticeably in the preceding year, your profits may be markedly down and regaining that volume should likely play a starring role in your 2017 budget.

2. Check your cash flow statement. Look at where cash is coming from in terms of daily operations, as well as external financing and investment sources. The statement will also tell you where cash is going, as you finance business activities and investments.

Even profitable companies can struggle if their cash flow is weak. Where do they go wrong? Under- or unbudgeted asset purchases can have a major negative budget impact. Another culprit is one or two departments regularly going over budget.

3. Peruse your balance sheet. Here you’ll find your company’s assets, liabilities and owner’s equity within the given period. Your balance sheet should give you a good general impression of where your company stands financially.

Take a close look at how your liabilities compare with assets. If your debts are mounting, a good objective for 2017 might be cutting discretionary expenses (such as bonuses or travel costs) or developing a sound refinancing plan.

That’s right — to get started on next year’s budget, simply pull out your most recent set of financial statements, roll up your sleeves and get to work. But you don’t have to do it alone. Our firm can help you understand where your business stands as of today and what next year’s budget should look like.

It’s time to “harvest” investment losses

If you hold investments outside of tax-advantaged retirement plans, you may be able to take steps before year end to reduce your 2016 tax liability.

Offsetting gains with losses

Suppose you’ve sold investments at a loss this year but you have other investments in your portfolio that have appreciated. If you believe those appreciated investments have peaked in value, you may want to sell them before this year ends, at least to the extent that the gains from the sales will be offset by your losses.

What if you’ve sold investments and are fortunate to have gains this year? By the last business day of the year (Dec. 30 in 2016), consider selling some losing investments to absorb the gains.

Tax rates to consider

At the federal level, long-term capital gains (on investments held more than one year) are taxed at rates as high as 20% — 23.8% if you’re subject to the net investment income tax. The short-term capital gains rate (on investments held one year or less) is the same as the tax rate you pay on ordinary income and can go as high as 39.6%.

The netting rules

Before taking action, you need to keep in mind the netting rules for gains and losses, which depend on whether gains and losses are long term or short  term.

To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains. And you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.

Start planning now

Careful handling of your capital gains and losses can save you substantial amounts of tax. But make sure you fully understand all of the implications for your tax and investment situation. Contact us if you have questions.

© 2016

There’s still time to set up a retirement plan for 2016

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
2. Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

Contact us if you want more information about setting up the best retirement plan in your situation.

© 2016

Mentoring can make your succession plan better

The owners of many companies launch their enterprises with a business plan — a written document outlining the company’s strategic objectives and practical means of accomplishing them. Likewise, many owners leave their businesses via a succession plan, a written document outlining how the company’s ownership will transition.

Often, however, these two documents never cross paths, much less join toward a common goal. If this is the case with your business, and you’ve already identified your likely successor, mentoring can make your succession plan better by uniting it with your business plan.

Establish trust

One of the principles of mentoring is establishing a relationship based on mutual respect and trust. So, as your company evolves, you’ll need to ensure your successor is learning the skills and gaining the knowledge he or she will need to keep your business competitive and, ideally, take it to higher levels of success.

Let’s say, for example, that your company has always just sold widgets and is now expanding to help clients service the widgets. You’ll need to make both strategic and operational changes so that your successor and staff can handle a diversified business that’s both product- and service-based. Under a mentoring relationship, you can disclose these plans to your successor in a confidential setting and start laying the groundwork with him or her to move the business in the new direction.

Meet regularly

Another principle of mentoring is making a definite commitment of time and face-to-face contact. So meet with your successor often. The first days of running a company are particularly stressful. But coaching during the period leading up to the transition can help successors manage the pressures.

During this time, you can also provide a secure environment for your successor to apply these new abilities and assume more of your responsibilities. To maximize your mentoring efforts, have your successor meet monthly with key personnel to discuss current matters, growth and operations strategies, your and your competitors’ products and services, and industry trends.

Create an effective plan

These are but two of many principles of mentoring. Please contact our firm for more help maximizing the effectiveness of your succession plan.

© 2016

The tax-smart way to replace a business vehicle

Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value. This can be costly tax-wise, depending on how you dispose of the vehicle:

Trade-in. If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one — even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits.

Sale. If you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

For example, if you sell a vehicle you’ve used 100% for business and it has an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.

For details on the depreciation limits or more ideas on how to maximize your vehicle-related deductions, contact us.

© 2016