Friday, June 10, 2016

June’s the time to start your Business tax planning

 June is a great time for mid-year tax planning. It may sounds strange to be talking about taxes as we begin the summer months. But time flies and the end of the calendar year will be here before you know it. Creating a tax reduction strategy is much easier when you have time to put your plan into action.
At the end of 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH) was passed preventing a tax increase that would have affected middle income taxpayers and families, especially those with small businesses. The PATH Act made many popular tax benefits permanent, including the ability to make charitable contributions directly from an IRA, the American Opportunity Tax Credit, and the teachers’ classroom expense deduction. Other popular tax benefits, such as the Work Opportunity Tax Credit, were extended for multiple years, a much better result than the year by year piecemeal approach that was becoming too common.
The legislation included in the PATH Act is extensive and, in some cases, complex in nature. In order for you to take advantage of potential tax saving opportunities, we’ve highlighted a few of the major provisions you should consider during your mid-year tax planning efforts.
Time to convert to a C-corp?
Business owners should evaluate whether it is in their best interest to convert to a C corporation since the maximum tax rate is currently 35 percent and may drop further if Congress decides to act on other corporate reform proposals. For individuals, the maximum income tax rate is 39.6 percent. In addition, the marginal tax rate for higher income families could be subject to an additional 3.8 percent tax on certain types of investment income including interest, dividends, capital gains, rental income, etc. Business income from pass through entities cause many business owners to pay tax at higher marginal rates since the company’s income is taxed on their personal returns.
The PATH Act made permanent the ability to exclude 100-percent of the gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers. This could provide a tremendous tax savings when ultimately exiting your business.
However, the above should not be the only considerations in determining whether a business should convert to a C corporation or remain a pass through entity. There are many tax benefits to operating as a pass through (such as the avoidance of double taxation) so be sure to consult with a knowledgeable professional regarding your specific circumstances.
Assess your equipment needs
If your business needs new equipment (or other depreciable property), consider making the acquisition in the next six months to take advantage of enhanced deductions made available by the PATH Act. You may be eligible to immediately “expense” the full cost of equipment, machinery, furniture, vehicles and other qualifying assets. The PATH Act made permanent the previous limits of $500,000 and $2 million, indexed for inflation in future years.
In addition, the PATH Act reinstated the ability to claim bonus depreciation on fixed asset purchases. However, this provision was not made permanent but instead will expire after 2019. This deduction will be phased out through 2019, with a 50 percent deduction being allowed for 2015-2017; a 40 percent deduction for 2018; and a 30 percent deduction for 2019.
Can you claim the R&D credit?
One of the biggest tax breaks included in the PATH Act is the revival, and permanent extension, of the tax credit for increased research expenditures. The Research and Development Credit (R&D Credit) is valuable, but because its complexity is often misunderstood, the benefits of claiming this credit is often overlooked. However If your business conducts research in connection with developing new or improved products, technologies or processes, you may qualify for the R&D Credit. The credit is available to businesses in a wide range of industries, including manufacturing, technology, health care, construction, agriculture, etc.
In addition, because many businesses that are involved in R&D activities are not yet profitable, the PATH Act allows for the R&D credit to be claimed against payroll tax liabilities. This change to the way the R&D tax credit can be claimed will provide an immediate cash boost to those innovative businesses that need it most.