If you own a business, it’s likely your biggest investment, so thinking about long-term considerations, such as your exit strategy, is critical as well. And if you’re an executive, you likely have to think about not only the company’s taxes, but also tax considerations related to compensation you receive beyond salary and bonuses, such as stock options. Planning for executive comp involves not only a variety of special rules but also several types of taxes — including ordinary income taxes, capital gains taxes, the NIIT and employment taxes.
Projecting your business’s income for this year and next will allow you to time income and deductions to your advantage. It’s generally — but not always — better to defer tax, so consider:
Deferring income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
Accelerating deductions into the current year. This also will defer tax. If you’re a cash-basis taxpayer, you may want to make an estimated state tax payment before Dec. 31, so you can deduct it this year rather than next. But consider the alternative minimum tax (AMT) consequences first. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
Warning: Don’t let tax considerations get in the way of sound business decisions. For example, the negative impact of these strategies on your cash flow may not be worth the potential tax benefit.
Taking the opposite approach. If it’s likely you’ll be in a higher tax bracket next year, accelerating income and deferring deductible expenses may save you more tax.
For assets with a useful life of more than one year, you generally must depreciate the cost over a period of years. In most cases the Modified Accelerated Cost Recovery System (MACRS) will be preferable to the straight-line method because you’ll get a larger deduction in the early years of an asset’s life.
But if you make more than 40% of the year’s asset purchases in the last quarter, you could be subject to the typically less favorable midquarter convention. When it comes to repairs and maintenance of tangible property, however, different rules may apply. See “What’s new! IRS has issued final regs for tangible property repairs vs. improvements” for more information. Careful planning during the year can help you maximize depreciation deductions in the year of purchase.
Other depreciation-related breaks and strategies also are available:
Section 179 expensing election. This allows you to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets, such as equipment, furniture and off-the-shelf computer software. The expensing limit for 2015 will be $25,000 — and the break will begin to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $200,000 — unless Congress revives the 2014 levels of $500,000 and $2 million, respectively. You can claim the election only to offset net income, not to reduce it below zero to create an NOL.
Warning: The break allowing up to $250,000 of Sec. 179 expensing for qualified leasehold-improvement, restaurant and retail-improvement property won't be available in 2015 unless Congress revives it again. Check back here for the latest information.
50% bonus depreciation. Congress revived this additional first-year depreciation allowance, but generally only for 2014. Check back here to see if Congress revives it again for 2015 or beyond.
Accelerated depreciation. Congress revived only for 2014 this break allowing a shortened recovery period of 15 years — rather than 39 years — for qualified leasehold-improvement, restaurant and retail-improvement property. Check back here to see if Congress revives it again for 2015 or beyond.
Cost segregation study. If you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated much faster and dramatically increase your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots, landscaping and architectural fees allocated to qualifying property. See Case Study "Cost segregation study can accelerate depreciation."
The benefit of a cost segregation study may be limited in certain circumstances — for example, if the business is subject to the AMT or located in a state that doesn’t follow federal depreciation rules.
Begin tackling these and other various challenges head on to avoid tax planning frustrations and discuss relevant issues with a tax advisor at LGT today.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email email@example.com.