Certain business-related deductions such as the R&D tax credits, bonus depreciation, and Section 179 accelerated depreciation expired at the end of 2014 and have not yet been extended. Extension of these deductions to 2015 is possible, but at this time uncertain. However, there are still a number of year end tax planning strategies available to help businesses reduce their 2015 taxes.
Section 179 Depreciation. While bonus depreciation which expired at the end of 2014 will not be available in 2015 (unless extended by Congress), businesses can still take advantage of Section 179 accelerated depreciation this year. In 2015, calendar year businesses can elect to immediately deduct the entire cost of new equipment, up to a maximum of $25,000, for the first $200,000 of property placed in service during 2015.
Small Business Health Care Credit. Small businesses with 25 or fewer full-time equivalent employees (average annual wages of $51,600 in 2015) may qualify for a tax credit to help pay for their employees’ health insurance. The credit is 50% of the health care cost.
Business Energy Investment Tax Credit. Business energy investment tax credits are available for eligible systems placed in service on or before December 31, 2016. These energy credits include solar energy systems, fuel cells, microturbines, small wind-energy systems, geothermal heat pumps, and combined heat and power systems.
Immediate Deduction of Repair Expense. Repair expenses can be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements are able to take advantage of the de minimis safe harbor election and deduct smaller purchases ($500 or less per purchase invoice). Businesses with applicable financial statements are able to deduct up to $5,000 per purchase invoice. Small business with gross receipts of $10 million or less can also take advantage of other safe harbors for repairs, maintenance, and improvements to eligible buildings.
Partnership or S-Corporation Basis. Owners of an entity treated as a partnership or “S” corporation that have a loss for 2015 can deduct that loss only up to their basis in the entity. However, the owners can take steps to increase their basis and thereby get a larger loss deduction. Basis in a partnership or “S corporation can be increased by lending money to the entity or making a capital contribution to the entity by the end of the entity’s tax year.
Section 199 Deduction. Businesses with manufacturing activities may qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts into 2015, businesses can increase the amount of this deduction.
Income Deferral. Businesses that use the cash method of accounting can defer income into 2016 by simply delaying end-of-year invoicing so payments are not received until 2016. Businesses that use the accrual method of accounting can defer income by postponing the delivery of goods or services until January 2016.
Retirement Plans. Self-employed individuals who have not yet done so can set up self-employed retirement plans before the end of 2015. If you already participate in a plan, you should consider upping your retirement contributions to the maximum allowed amount. Annual contribution limits into common plans like 401(k), 403(b), or 457 plans are $18,000 in 2015. If you are over the age of 50, you can make a catch-up contribution of an additional $6,000. For a simple IRA, the limits are $12,500 for anyone below age 50 and $15,500 for those over age 50. The contribution limits are $5,500 for a traditional or Roth IRA, but if you are over 50 you can contribute an additional $1,000.
Charitable Giving. Charitable contributions may be made until the end of the calendar year. If you itemize your deductions, you can deduct up to 50 percent of your adjusted gross income, although 20% and 30% limits apply in some cases. Contributions of appreciated assets can be particularly beneficial since you can deduct the appreciated value of the asset while avoiding capital gains on the appreciation.
Recharacterize IRA Transfers. If you converted assets in a traditional IRA to a Roth IRA earlier in the year, and the assets in the Roth IRA account have declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. To avoid this, you can back out of the transaction by “recharacterizing” the conversion. You do this by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. Next year you can reconvert to a Roth IRA.
RMDs. Be sure to take the required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must generally begin by April 1 of the year following the year you reach age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2015, you can delay the first required distribution to 2016. But if you do, you will have to take a double distribution in 2016, and bunching income might push you into a higher tax bracket in 2016.
The above are some of the year-end planning tax moves that you might take advantage of to reduce your 2015 tax bill. But you should always talk with your accountant or tax attorney to discuss your specific tax and financial needs. If you have questions about your tax or business matters, please call one of our attorneys at 937-223-1130 or Jsenney@pselaw.com.