Small Business Taxes & Management

Special Report

Year-End Planning--Part 1--2016 Basics


Small Business Taxes & ManagementTM--Copyright 2016, A/N Group, Inc.



As opposed to prior years, we won't have to worry about "extenders" legislation at the end of 2016. The Protecting Americans from Tax Hikes Act (PATH Act) passed at the very end of 2015 dealt with virtually all of the expiring provisions, making some permanent, and extending some only for a limited time. For example, the deduction for mortgage insurance premiums expires at the end of 2016, but the deduction for state and local sales tax is now permanent. While it is possible Congress might change its mind and extend some provisions that expire at the end of 2016, that seems unlikely.

What about legislation in 2017? What will a new president do? Much of tax planning is about taking a deduction in the right year. If tax rates decline next year, you want to postpone income to next year and accelerate deductions to 2016. Speculating on the outcome of the election is foolish at this point. What's more, major tax legislation could take more than a year to get through Congress unless one party is in control of both houses and the presidency, and even then it might be tight. That, coupled with effective dates most likely means 2017 won't look much different than 2016, at least on the tax front.  

Extended Provisions

Here's the abbreviated list of provisions that were extended (either permanently or temporarily) at the end of 2015:

For more information, go to our article Congress Renews Tax Extenders.


General Comments

The theory behind business tax planning is similar to planning for your personal return. You want to defer the income to a low tax rate year. If you do business as a sole proprietorship (i.e., file a Schedule C), S corporation, partnership, or LLC (limited liability company), income and losses of the business are passed through and reported on your personal tax return. Thus, your approach to year-end planning is similar to that for individual planning. (There are some factors that can complicate the issue; they're discussed below.) And, yes, while it's true you can save taxes by making equipment and other purchases, you're out-of-pocket cost is still more than 50%. For example, you purchase a $1,000 laptop. If you're in the 39.6% bracket for federal purposes and 10% for state, you're effective tax rate is probably about 46% (you get a deduction for your state taxes on your federal return). That means the government is picking up $460 of the cost; you're paying for the other $540. If you're self-employed or doing business as a partnership or LLC, your rate will be slightly higher when you add in the self-employment tax. (Want to get a better idea of the cost? Go to What's a Deduction Worth? on our Frequently Asked Questions page.) Best suggestion? As always, economic considerations come first. Don't buy what you don't need; don't buy more than you need.

We mentioned above that 2017 is likely to be very much like 2016 from a tax standpoint. While there are some provisions that will expire (e.g. the deduction for mortgage insurance premiums), their effect is likely to be minor. Based upon the way Congress has been dealing with issues, major tax legislation is unlikely, at least until closer to yearend 2017 and changes almost assuredly won't be retroactive. If Congress does pass major reforms, it's likely to take the form of lower rates accompanied by a cutback in "expenditures". That's tax-speak for deductions. If you're a small business owner, you'll most likely be pleased with any new legislation. From an individual standpoint, you may be less happy, particularly if your annual income is large. You're probably most at risk in having your deductions or credits cut back if you're taking advantage of "loopholes" or tax benefits that only apply to a limited number of taxpayers.

What's the take away? Rates could be lower in the future, but you could lose deductions. Unless you expect to have substantially more income next year, you should probably defer income to next year and take deductions this year.

For a list of tax rates, facts on alternative minimum tax, standard deduction, credits, etc. go to our Tax Tables page for the details.


Projecting Your Income-Business

Before going any further you've got to have a good handle on the income from your business. Your accounting records are a good starting point, but more than likely you'll have to adjust them to conform to the tax accounting rules. Here are some possible adjustments:

Check with your accountant on these issues. Hopefully, the differences will be slight, and, if so, can be ignored. Annualize your income (e.g., take the first 10 months, divide the income by 10 and multiply by 12) to figure your full-year profit or loss. Don't forget to account for any variations during the year. For example, if you're a retailer, the Christmas season is important and simply annualizing won't work. Same if you run a concession stand at the beach.

Businesses that operate as a sole proprietorship, LLC, partnership, S corporation, etc. have their income (or losses) passed through to the owners and reported on the owners' individual tax returns. That means you'll have to project both the businesses income and your personal income to evaluate your tax bracket. See below.


Projecting Your Income-Personal

If you do business as an S corporation, sole proprietorship, etc. your share of profits or losses are passed through and taxed on your personal return. (If you, or you and your spouse are the only shareholders in an S corporation, taking a smaller or larger salary won't change the outcome materially. A larger salary will just mean the pass-through income from the S corporation will be reduced and vice versa.) That means you'll have to do a projection of your personal as well as business income before you can do any serious planning. Assemble your records for the first 10 months of the year. If you record income and expenses on a regular basis, this should be a snap. The purpose of this article is to determine if it makes sense to make any last minute capital expenditures to take advantage of bonus depreciation, etc. While we've included a list of items to take into account at the personal level, you can cheat and estimate some of them. For example, your charitable contributions usually run $500 to $1,000. For now your best guess is good enough. Concentrate on the bigger numbers.

Caution!--If you turned 70-1/2 this year you'll have to start taking distributions (required minimum distributions or RMD) from your IRA and certain other plans if you're a business owner or retired. Check the rules with your accountant or the plan trustee. You don't want to incur a penalty--its 50% of the amount that should have been distributed.

Estimating your expenses and deductions. You've also got to come up with an estimate of your deductions. The items below are common deductible expenses.

Finding your tax bracket. If you've got a good handle on your income and expenses you can net the two to arrive at your taxable income. Be sure to also subtract out personal exemptions (use $4,000 each for yourself and spouse and dependent children). If your AGI exceeds certain thresholds your personal exemption and itemized deductions may be limited.

If you're pretty confident of your computations, you can find your tax bracket by using the Tax Tables in our Reference File. Keep in mind that long-term capital gains and qualifying dividends are taxed at a lower rate. Go to our Tax Tables for the details.

Caution. There's a good possibility you'll be subject to the alternative minimum tax (AMT) and the net investment income tax. That can make the computations much more complex. If you don't want to talk to your tax adviser, get a computer program. Initial or planning versions of popular programs are available or should be shortly.


More to Come

We'll discuss specifics of tax planning for businesses in the next article and planning for individuals in the final article.


Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536

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--Last Update 10/31/16