2015 YEAR END TAX REVIEW
As we come upon the closing of another tax year, it is time once again to reflect upon the past year, plan for year end, and implement planning for tax year 2016. If you have not implemented proper tax strategies throughout the year, it is not too late to institute some last minute planning.
Tax year 2015 did not see much in the way of tax legislation. Given the dysfunction in Congress and the Executive Branch, that is not too surprising. Once again, many provisions of the Internal Revenue Code that expired at the end of tax year 2014 need extender legislation to continue them into tax year 2015. As of the date of writing this article, that tax extender legislation had not been enacted so we are again in a guessing game as to if and when Congress will pass a tax extender bill applicable to tax year 2015. Hopefully, Congress gets on this real soon so individuals and businesses can engage in proper planning.
Typically, when engaging in year-end tax planning, individuals and businesses generally want to defer income and accelerate deductions. Year-end planning is an inexact process. Yet a review of planning options can produce benefits for the individual or business taxpayer by postponing or accelerating items of income and deduction. The tax planner may use the following strategies to assist both individual and business clients.
If your tax planning shows that you will be in the same or a lower tax bracket next year, you probably want to delay the receipt of year-end income until early next year, provided the delay does not jeopardize your prospect of collecting the income. Strategies to defer income include: (1) delay collections; (2) defer compensation; (3) take year-end bonus in the next tax year; (4) maximize retirement plan contributions; or (5) close capital transactions in the next tax year to gain the deferral of time to report the gain. Additionally, if you are close to being subject to the Net Investment Income tax, you may also want to defer the receipt of additional income.
A rule of thumb says you should defer income if at all possible. But in the following situations, it may be better to accelerate income: (1) change in income level or tax bracket; (2) liability for Alternative Minimum Tax (AMT); or (3) itemized deductions exceed taxable income. You can accelerate income by: (1) collecting receivables; (2) take your year-end bonus in current tax year; (3) treat restricted stock as vested; (4) dispose of your incentive stock options; (5) take IRA or retirement plan distributions if over 59 ½; (6) dispose of installment notes; (7) take dividends; and (8) sell capital assets.
If you need to accelerate deductions, the following techniques may be employed to accomplish that goal: (1) doubling up on charitable contributions, paying next year’s with this year’s; (2) realizing losses on investments; (3) taking bad debt deductions; (4) accelerating purchases of business equipment; (5) prepaying state and local income taxes (but be sure to consider AMT issues); and (6) prepaying property taxes.
Business taxpayers can take advantage of the foregoing strategies as well. A major tax planning strategy for businesses is the purchase of equipment to take advantage of bonus depreciation or Section 179 expensing. The 2014 Code Section 179 expensing has not been extended for tax year 2015 but the general consensus is that it will. An additional, but frequently overlooked, tax benefit for businesses is the Code Section 199 domestic activities deduction. Many types of businesses can take advantage of the Section 199 deduction including manufacturing, construction, oil related work, film production, agriculture, and many other activities.
Additionally, another tax benefit to be explored is the de minimis safe harbor threshold amount under the final “repair regs.” 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. The regulations also provide a $500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.
In addition to tax planning, year-end is a good time to review your personal estate planning documents or start your estate planning if you have not done so already. When was the last time you reviewed your Will and/or Trust. Are your beneficiaries correct? Are your major assets titled in your trust? Are your beneficiary designations on life insurance or retirement plans correct? These items should be periodically reviewed.
In closing, realizing benefits from tax planning starts with putting in the time and effort to meet with your certified public accountant or tax attorney to review your particular situation and provide a complete analysis. The government is not looking to save you any taxes. You need to be proactive and watch out for yourself.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com