By Barbara Weltman
With only a few weeks left in the year, there may still be time for you to take actions that can favorably impact your tax bill for 2016 and get you ready for 2017. Here are some key areas to focus on:
Your Staff’s Compensation
Now is the time to make certain decisions that may impact your staff:
- Will you give employees year-end bonuses, and how much? Keep in mind that if your business uses the accrual method of accounting, you can deduct bonuses for rank-and-file employees declared before year-end as long as they're paid within 2-and-a-half months after the close of the year; different rules apply to bonuses paid to owners.
- Will you give raises for 2017? This is something to budget for, taking into account not only the raises but also payroll taxes and employee benefits tied to compensation.
- How might the Department of Labor's final overtime rule impact your compensation planning, if it does not change after the court injunction? This may require you to review your budget, redesign your payroll, and make staffing changes.
Your Staff’s Employee Benefits
There are some actions you can take now for 2016 and 2017:
- Do you want to set up a qualified retirement plan for 2016? For most plans, you have until the end of the year to sign the paperwork. Then you have until the due date of the company's return (including extensions) to make employer contributions which are deductible for this year.
- Do you offer health coverage to full-timers? Under the Affordable Care Act, if you're an ALE, which stands for Applicable Large Employer, you must offer adequate and affordable coverage to full-time employees and their dependents or risk a potential penalty. In general, an ALE has 50 or more full-time and full-time equivalent employees in the proceeding calendar year (new employer rules differ). Whether you're an ALE for 2017 coverage depends on the size of your payroll in 2016.
Do you need new machines, furniture, or tablets? Buying new items may help you and your staff work more efficiently while providing tax savings. There are several ways to write-off the cost of purchases, as long as you place the items in service this year (meaning they're ready for use in your business and not merely on order).
- Elect to expense them using the Sec. 179 deduction. The 2016 limit on this deduction is $500,000, and you have to be profitable to benefit from it. This dollar limit phases out if your company buys more than $2,010,000 this year.
- Opt for the de minimis safe harbor. This rule lets you treat equipment purchases as if they were supplies, which means you can deduct them now up to $2,500 per item or invoice (assuming you don't have an audited financial statement or certain other government filing). If you use this option, you cannot put the items on your balance sheet and must attach your own election statement to your return.
- Use bonus depreciation and regular depreciation. If you need the items but aren't profitable or expect to be in much higher tax brackets in the future, you might prefer to spread deductions for purchases beyond the current year. Fifty percent can be deducted now, assuming the item is new (not pre-owned). The balance of the cost is depreciating over a period of years fixed by the tax law.
Key: The write-offs for equipment purchases can be taken even if you finance them in whole or in part. Discuss which write-off option is best for your situation with your CPA or other tax advisor.
If you maintain inventory, determine whether you need to take actions to cut costs, unload items that aren't selling, or take other steps.
- Put slow-moving or outdated items up for sale. This will allow you to write-down inventory costs and come out ahead tax-wise.
- Schedule a physical inventory. If your busy season is the upcoming holidays, then wait until you've cleared your shelves.
Meet with your tax advisor to consider what actions to take before the end of the year to help you optimize your tax position and get a jump on 2017.
About the Author
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser’s Tax Deductions for Small Business as well as 25 other small business books. She has been named a Small Business Influencer from 2011 to 2013.