With the start of 2016, many business owners are looking at the opportunities and challenges that lie ahead. But this may also be the right time to take a look back, especially when it comes to your income tax return.
Most CPAs will tell you to start your business and personal tax planning as early as possible. This month is a good time to begin thinking about 2016 and beyond. But even though calendar 2015 is already a closed book, business owners may still be able to squeeze in a few last-minute moves to lessen their income-tax bite.
There’s still time for tax-saving steps
“There are still some tax-savvy steps you can take this filing season,” says Jeffrey Schrader, CPA and shareholder of an eponymously named Trenton-based practice. “You can start by opening a traditional IRA or a Roth IRA. Either one must be established and funded by the initial deadline for tax filing — this year it’s April 18 for personal returns.” He notes that traditional IRAs may either be deductible or nondeductible, although even a nondeductible IRA can still serve as a retirement-funding “catch up” mechanism. It could also provide means for a near-immediate, tax-efficient conversion to a Roth IRA, which does not offer a tax deduction when funded — but any growth is generally tax free upon withdrawal after retirement. Schrader also advises reassessing your overall 2015 tax liabilities, and “carefully evaluating the need for any 2015 fourthquarter estimated tax payments. These are generally due by Jan. 15, 2016, at the federal and state levels. Also, start your cash-flow planning for 2016 estimated taxes, particularly at April 18, when both 2015 and first-quarter 2016 taxes are due.” He points out that taxpayers who converted a deductible IRA to a Roth IRA in 2015 still get a second chance to reconvert all or part of the IRA account if circumstances warrant it.
“You may wish to consider a re-characterization if the value of the IRA account has dropped significantly, if your taxable income is higher than expected and the conversion to a Roth bumps you p nto a higher tax bracket, or if you can’t afford to pay the additional taxes that arise from the conversion.” Tax planning deserves and merits time and attention, he adds. “Adopt a multiyear erspective, and consider engaging a trusted tax advisor,” Schrader says. “This is important because the outcomes you anticipate may be impacted by such issues as the Alternative Minimum Tax, or the Net Investment Income Tax.” “This late in the game there isn’t much you can do for 2015, but depending on your business structure, a few options may still be available to reduce your tax
bite,” says Richard Willinger, a principal and chairman of the tax department at Mercadien P.C., a Hamilton-based CPA firm. “If you’re an accrual-based business — reporting revenue when it’s earned and expenses when they’re incurred — you might look at your January 2016 utility and other business-related bills and see if any of them are related to 2015. If they are, you can generally deduct them as a 2015 expense, even if you pay them in 2016.”
“Adopt a multiyear perspective, and consider engaging a trusted tax advisor.”
–JEFFREY SCHRADER, CPA
Accrual vs. cash reporting
Some businesses, especially sole proprietors, often report on a cash basis, where revenue is reported when it’s received and expenses are reported when they’re paid. By the time January rolls around, they’re pretty much out of luck, Willinger explains. “For next year, though, you might consider prepaying some bills in 2016, even if they’re not due until 2017,” he advises. “Also, you may want to delay some of your December billings until very late in the month, to ensure you won’t receive payment until the new year. Before you do any of this, though, it’s a good idea to sit down
with your accountant or other advisor and consider the effect on your cash flow and other issues.” Sole proprietors, in particular, should also review their personal credit cards and checkbooks to see if they paid for tax-deductible business expenses from a personal account. “You’re supposed to keep business and personal accounts segregated, but it’s not unusual for an individual to occasionally mix them up,” says Willinger. “Also, consider whether you’ve used a personal vehicle for business travel, or if you took a trip that combined business and pleasure — in either case you may be able to allocate a percentage of the expense as a businessrelated deduction.”
In the case of business-related automotive expenses, individuals can generally choose between a flat, or standard rate of 57.5 cents per documented business mile, or actual expenses incurred,
which would mean keeping track of gas, repair, and other costs.
“For next year, you might consider prepaying some bills in 2016.” –RICHARD WILLINGER, CPA
Tax planning is more than just number crunching
Tax planning should be woven right into the body of your business plans. Richard Willinger, a principal in Mercadien P.C., notes that wages, salaries, and self-employment income beyond certain thresholds are subject to the Medicare surtax of 0.9 percent, but the pass-through income of an S Corporation is not subject to it. “Depending on your situation, you may want to consider converting to an S Corporation to avoid this tax in future years,” he says, although he adds that business owners should consider other issues in addition to taxes before doing so. “It is too late
to do this for 2015, but you could elect S Corporation status for 2016.” For a calendar year entity, an S Corporation election must be filed no later than two months and 15 days after the election is to take effect (March 15, 2016, for example, for a 2016 election). “There is also a separate state election for New Jersey and other states that you would not want to miss,” he adds.
Regardless of the particular tax strategy a company utilizes, business owners should double-check their calculations and scrutinize their business operations, particularly if they operate in more than one state, advises Carolyn Dolci, a tax partner with the Iselin-based CPA firm EisnerAmper. “The states are very aggressive in trying to bring more revenue into their jurisdiction,” she reports. “Be sure to review the states in which you are doing business, and apportion your income appropriately. In some cases where you have property or payroll in a state, it may be clear that you are considered to be “doing business” there; but in some states, just having some sales there can create a filing responsibility and a tax liability.” If a company is obligated to file a return in a state, but inadvertently did not file, the statute of limitations remains open and the state can theoretically go back for multiple years of back taxes, plus interest and penalties.
“If you self-audit and discover you have unfiled obligations and the dollars appear to be significant, you may want to do a voluntary disclosure,” she says. “A CPA or other financial advisor may be able to negotiate with the taxing authority to relieve some of the burden, when it comes to penalties.”
Uncle Sam has changed some due dates
Uncle Sam has made some changes to tax filing due dates, thanks to the recently passed Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.
- Beginning with 2016 returns, the due date of Partnership returns, Form 1065, will be accelerated by a month, to 2.5 months after the close of a partnership’s tax year (so that would be March 15, for calendar-year partnerships), according to Jeffrey Schrader, CPA and shareholder of an eponymously named Trenton-based practice. “A six-month extension — through September 15 for calendar year partnerships — will also be allowed,” he says.
- “The Form 1120 due date [for most corporate returns] will generally be deferred by a month, to 3.5 months after the close of the corporation’s tax year; for example, to April 15 for calendar year corporations.” A special transition rule provides certain exceptions, he adds. The deadline for Form 1120S, for an S Corporation, remains the same.
Either way, an individual needs to maintain detailed, contemporaneous records to support the deduction, Willinger notes. “So keep an updated diary or calendar, in either paper or electronic
format, and keep your receipts and other documentation.”
Uncle Sam may help you to squirrel something away
Putting something aside now for your future may not only help you in years to come, but may also help to reduce your current tax bite, notes Carolyn Dolci, a tax partner with the Iselin-based CPA firm EisnerAmper.
“Setting up a Keogh retirement plan or a SEP (Simplified Employee Pension) Plan saves tax dollars and also puts money away for the future,” she explains. “But Keogh plans need to be set up before year-end.” A SEP is still a viable option for 2015 and can be established until the due date of the return, including extensions, she adds. For either plan type, funding is not required until the due date of the tax return, including extensions. This is even true for a cashbasis taxpayer.
Keoghs generally have more administrative burdens and higher upkeep costs compared to a SEP, but the contribution limits may be higher, making Keoghs a popular option for many unincorporated business owners and sole proprietors, she notes. A business owner may also benefit from the “Section 179 deduction,” which can let a business expense an asset — or offset its
cost against taxable income in the year of purchase — instead of depreciating it over a number of years according to a formula determined by the IRS.
“As of November 2015, the Section 179 deduction allows you to expense up to $25,000 of tangible personal property, with overall total cap of $200,000,” Dolci says. “But the Section 179 deduction can generally only be taken if an entity is profitable.” Here’s another tip: Business expenses that were charged to a business owner’s personal or business credit card by Dec.31, 2015 can generally be deducted on the 2015 tax return. “This is true even though you may not have paid the bill until 2016,” she adds. “Be sure to scour your credit card statements for any charges that were made
before year end.”
The tax code may even offer some relief if a business loses money. “If your incorporated business is showing a loss, you may want to consider carrying it back to an earlier year when you paid taxes, and use that loss to offset part or all of the taxable income,” Dolci says. “New Jersey, though, does not allow carrybacks, only carryforwards for up to seven years. But on a federal return, a
corporation can generally carry back a loss for up to two, or it can generally be carried forward for up to 20 years.” A sole proprietor, S Corporation, or partnership shareholder may be able to
carry back a loss on a personal tax return and possibly get a refund for the previous period, she adds. “But the calculations are somewhat complex and should be reviewed with the assistance of a tax practitioner.”
Despite efforts to streamline the tax code, tax law is actually getting more complex, according to business owners and CPAs. But maintaining proper documentation and keeping close to your tax advisor can make the whole process a lot less painful. And may end up saving you some hard-earned cash.