Thursday, November 26, 2015

Don't miss tax opportunities before year end

April 15 is months away, but what you decide to do (or not do) before the Dec. 31 parties are complete will make a huge difference in your results come 2016 tax day! This can be especially true if you are a business owner.
The main focus should be on planning your results. Taking expenses in a down year can make the expenses less valuable than taking them in a high-tax bracket year. Also in planning, consideration of cash flow needs will greatly reduce the risk of a bad surprise at April 15. The goal of planning should be in tax reduction and business cash flow planning.
Several topics should be considered now instead of when talking to your tax professional in 2016.
The list below is not exhaustive but these could have a large affect on tax results.
• Charitable contribution planning including consideration of a donor advised fund
• Asset purchases for business
• Timing of paying expenses and possibly income recognition for tax reduction and cash flow planning
• Harvesting stocks losses for capital gain reduction
• Consideration of year-end employee bonuses
For those with charitable interest, there are many potential approaches to affect 2015 taxes. They can run from short-term considerations like cleaning out a closet and donating to various organizations who appreciate clothing, furniture and other non-cash gifts. Or if you give monthly to a church or other group, you could consider accelerating January gifts into December.
Gifts of appreciated stock or other appreciated assets get a deduction for the fair market value of the gift. Plus you do not pay tax on the gain. This option is much better than selling the stock and then giving the cash to the charity.
If you want to consider a larger gift, but you do not want to give control to the charity all at once, you could select to fund a private foundation or you could contribute to a donor advised fund. The determination of which strategy is best for you is based upon your long-term desires and goals. Utilizing a qualified and experience adviser is critical in making these decisions.
For the business owner, consideration of asset needs for the business is always important. If new assets will be added within the next few months, accelerating the purchase whereby the assets can be “placed in service” by year end could allow large deductions in 2015. Code Section 179 can provide a full deduction of the cost of these assets even if purchased with a note and little or no cash is expended in 2015.
Business owners should also consider whether bonuses will be paid in the next few months. If so, paying or accruing by year end could accelerate deductibility depending on their method of accounting (cash versus accrual).
Also, accelerating payment of or incurring of expenses before Dec. 31 can easily improve results for April 15. If the business is on a tax cash method of accounting, then paying expenses before year end causes those to be deductible in 2015, instead of in 2016. If it is on an accrual method, payment does not cause deductibility, and the incurrence of cost is determinant.
Another planning thought is to consider stock positions held, if you have capital gains to report in 2015. Many times investment advisers can consider held positions that are in a loss position and sell those by the end of the year, while replacing those with economically similar positions whereby avoiding “wash sales” rules, allowing you to reduce capital gains taxes for 2015. This strategy is used by many investment advisers and CPAs annually.

The above strategies and planning tools (along with other approaches) should be considered each year end, with the main goal of maximizing results, planning cash flows and reducing the risk of financial surprises when taxes are filed.