Businesses that have engaged in year-end tax planning know that as 2017 approaches, it is time to develop, finalize and undertake a year-end tax planning strategy. Businesses that have not yet explored year-end tax planning should take an immediate inventory of their situation and develop a year-end 2016 tax strategy. Our office is ready to assist you, whether it be refining past plans or delivering new plans, or a combination of both.
We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you may likely benefit from some of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.
We have also included an update on the new tax filing deadlines effective for 2016 tax year.
Code Sec. 179 expensing & Bonus Depreciation
Among the top two incentives for small businesses are bonus depreciation and the Code Sec. 179 small business expensing provision. Under current law, bonus depreciation has been extended through 2019 with a phase-down schedule and enhanced Code Sec. 179 expensing has been permanently extended. The two incentives are valuable additions to a year-end tax planning strategy.
Domestic Production Activities Deduction
Year-end planning benefits from the release of guidance on the Code Sec. 199 domestic production activities deduction. The Code Sec. 199 deduction, in comparison to some other business incentives, has been underutilized. The guidance provides many examples of what business activities qualify for the deduction. Recent IRS guidance highlights manufacturing, construction, oil related work, film production, agriculture, and many other activities. Our office can help you ascertain if your business activity may qualify for this potentially valuable incentive.
Repair capitalization Rules
Another valuable incentive for year-end planning is the de minimis safe harbor threshold amount under the final “repair regs” for taxpayers. Currently, a de minimis safe harbor under the repair regs allows taxpayers to deduct certain items costing $5,000 or less (per item or invoice) and that are deductible in accordance with the company’s accounting policy reflected on their applicable financial statement (AFS). IRS regulations also provide a $2,500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.
Research Tax Credit (“R&D tax credit”)
The Protecting Americans from Tax Hikes Act of 2015 not only retroactively extended the research and development tax credit to January 1, 2015, it also made the credit permanent. In addition to credit permanency, the legislation also expanded the research credit making it a much more effective tax planning tool for small and mid-sized businesses. Beginning in 2016, eligible taxpayers with an average of $50 million or less in gross receipts over the previous three years may claim the federal R&D tax credit against their alternative minimum tax liability. Also, certain qualified small businesses (taxpayers with less than $5 million in gross receipts and no more than five years of gross receipts can now) can now utilize up to $250,000 of the federal R&D tax credits to offset the FICA portion of their payroll taxes. Some common industries that qualify for the R&D tax credit include, but are not limited to Manufacturing & Fabrication, Software Development, Engineering, Architecture, Pharmaceutical, Machining, Aerospace & Defense, Food & Beverage, Tool & Die Casting, Foundries, Automobile, and Chemical & Formula. The Research and Development tax credit is one of the most lucrative incentives under current U.S. tax law because it is a dollar-for-dollar reduction in a tax liability. Depending on a company’s qualified research expenses, the credit can include eligible wages, supplies, and outside contractor expenses. In addition to the federal component, the vast majority of states also offer some form of the credit with many of those states offering a permanent form of the credit (please see https://www.kbkg.com/research-tax-credits for a list of states offering a research credit). Federal statutes are generally open for three years from the filing date of a return. As such, taxpayers which did not take advantage of the credit and are seeking to do so can amend previous years’ returns and claim the benefits. Federal statutes also allow for unused credits to be carried forward for 20 years. To see if your company qualifies or if you have any questions regarding the research credit, please contact one of our R&D tax credit professionals.
Affordable Care Act
Despite several delays and legislative tweaks, the basic structure of the ACA for businesses, both large and small, generally remains intact. If an employer is an applicable large employer (ALE), this triggers employer shared responsibility provisions and the employer information reporting provisions. Small businesses, too, are not unaffected by the ACA and should take the ACA into account in year-end planning. Some incentives under the ACA, including health reimbursement arrangements and small business health care tax credits, can help maximize tax savings for small businesses. Information reporting under the ACA continues to challenge all businesses.
Work Opportunity Tax Credit (“WOTC”)
Businesses considering expanding their payrolls before year end 2016 should take a look at the Work Opportunity Tax Credit (WOTC). The PATH Act has extended this program through December 31, 2019. Generally, the WOTC rewards employers that hire individuals from specified targeted groups, including veterans, families receiving certain government benefits, and individuals who receive supplemental Social Security Income or long-term family assistance. The WOTC is generally equal to 40 percent of the qualified worker’s first-year wages up to $6,000 ($3,000 for summer youths and $12,000, $14,000, or $24,000 for certain qualified veterans). For long term family aid and unemployment recipients, the credit is equal to 40 percent of the first $10,000 in qualified first-year wages and 50 percent of the first $10,000 of qualified second-year wages.
Pass-through Entities & Passive Losses
To reduce 2016 taxable income, consider disposing of a passive activity in 2016 if doing so will allow you to deduct suspended passive activity losses. If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
Enterprise Zone Credits
The Enterprise Zones are a series of geographic areas in California where companies can receive special tax breaks.
2014 was the last tax year for which businesses could engage in qualified Enterprise Zone hiring or purchasing made prior to 12/31/2013. Even though businesses may no longer qualified additional employees for the Enterprise Zone tax credit, they may still generate additional credits until the end of 2018.
California Competes Tax Credit
The California Competes Tax Credit is an income tax credit available to businesses that want to come to California or stay and grow in California. Tax credit agreements will be negotiated by GO-Biz and approved by a statutorily created “California Competes Tax Credit Committee,” consisting of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, one appointee each by the Speaker of the Assembly and Senate Committee on Rules.
For fiscal year 2016-17, GO-Biz will accept applications for the California Competes Tax Credit during the following periods:
• July 25, 2016, through August 22, 2016 ($75 million available)
• January 2, 2017, through January 23, 2017 ($100 million available)
• March 6, 2017, through March 27, 2017 ($68.3 million available plus any unallocated amounts from the previous application periods)
College Access Tax Credit
This credit is available through 2017 tax years for contributions made to the College Access Tax Credit Fund. The credit will be available to taxpayers who make cash contributions to the fund and who receive a credit certification and allocation from the California Educational Facilities Authority (CEFA) in the State Treasurer’s Office. The fund will be used to bolster the dwindling resources used to provide Cal Grants to low-income college students.
Taxpayers may claim credits in the following amounts:
• 50% of the amount contributed that is certified and allocated for the 2016 taxable year.
• 50% of the amount contributed that is certified and allocated for the 2017 taxable year.
The credit can be used to offset tax, including reducing the tax below tentative minimum tax.You must receive a certificate from CEFA before you can claim the credit on your state income tax return. You may also be able to claim a charitable deduction on your federal tax return. If you do this, you must add back the amount of the charitable deduction taken on your federal return as a state adjustment on your California tax return. You cannot claim a deduction and a credit for the same contribution.
You can get an application and more information about how to make a contribution on CEFA’s website.
New Employment Credit
For tax years beginning on or after January 1, 2014 and before January 1, 2021, a nonrefundable credit against corporation franchise and income and personal income taxes is available to qualified employers that hire qualified full-time employees to work in a designated census tract or economic development area (EDA) provided the taxpayer pays qualified wages and satisfies other procedural requirements. A “designated census tract” is a census tract determined by the Department of Finance to be in the top 25% of California census tracts in terms of civilian unemployment and poverty rates. For purposes of this credit, “economic development areas” are specified former enterprise zones or LAMBRAs. (Sec. 23626 (b) (7) and (8), Rev.& Tax. Code) A map and search tool with all of the designated census tracts and economic development areas is available on the FTB’s website at: http://maps.gis.ca.gov/gobiz/dga/default.aspx.
In addition, an annual certification of employment is required with respect to each qualified full-time employee hired in a previous taxable year. In order to be allowed a credit, the qualified taxpayer must have a net increase in the total number of full-time employees in California.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
Revised Due Dates
Tax Return Filing Due Dates Changed
The due date for filing partnership and C corporation returns have been changed. Generally applicable to returns for tax years beginning after December 31, 2015, both Form 1120S and Form 1065 are due on or before March 15th for calendar-year taxpayers. The due date for the filing of Form 1120 has changed to April 15th for calendar-year taxpayers. C corporations with a June 30th year end have a due date of September 15th. Extended due dates for calendar year corporations & partnerships remain unchanged (September 15th).
W-2 Reporting Filing Due Date Changed
The 2015 PATH Act provides that Forms W-2 and W-3 and any returns or written statements required by IRS (such as Form 1099) to report nonemployee compensation must be filed by January 31 of the year after the calendar year to which the returns relate.