Written by Tara C. Theodossis
Tax planning for the year that just ended might not be behind you yet.
Even though we have just begun 2016 it does not mean that tax planning opportunities for 2015 have ended. As you are closing your books or assessing your individual income and deductions, you may find opportunities to still impact 2015 tax outcomes. Below we will explore a few strategies which may be beneficial to you.
Cost Segregation Study and other Fixed Asset Considerations
Owners of real property can significantly increase their cash flow on acquired or constructed property by accelerating tax deductions through Cost Segregation. This is an accounting, tax, and engineering analysis of real property expenditures, the purpose of which is to segregate costs for shorter-lived property for income tax reporting purposes. For example, a newly purchased nonresidential rental building with a depreciable life of 39 years may have fixtures which can be broken out of the total and depreciated over seven years. The acceleration of this tax depreciation creates a tax deferral which provides near-term cash—cash that can be reinvested in operations or other investments. Cost Segregation experts can estimate return on the project investment, and it often exceeds 20 to one. Cost Segregation is beneficial for investments made in 2015 or prior years, and the related studies can be performed after the close of the tax year in which the investment was made. By analyzing project costs and completing engineering estimates from construction blue prints and/or in-person site tours, Cost Segregation engineers are able to generate tax benefits in accordance with published IRS guidance.
A more routine procedure that businesses should perform annually is evaluation of their fixed asset schedule. Make sure your fixed asset schedules are up to date and that asset disposals which occurred during 2015 are appropriately recorded on your books and in your fixed asset software. Asset disposals not only impact your income taxes but also impact county property tax reporting. Disposing of assets no longer in service might reduce your personal property taxes. Just as 2015 asset acquisitions must be reported, disposals need to be reported in the appropriate year.
As of the end of November 2015, the IRS made a significant decision to increase the de minimis safe-harbor amount to $2,500 for businesses without an Applicable Financial Statement (AFS). If a business makes this safe harbor election, they are allowed to deduct the cost to acquire, produce, or improve tangible units of property under that amount. Prior to this recent IRS decision, the de minimis amount for businesses without an AFS was $500. While the IRS has said that this new amount is effective for costs incurred in tax years after 2015, they will not challenge the new $2,500 threshold prior to 2016. Accordingly, businesses may review asset listings for 2015 asset purchases and see how this decision may impact asset classification.
Retirement Plan Contributions
Retirement plan contributions can offer tax benefits to both businesses and individuals, and some of those decisions about how much to contribute may be made after the close of a tax year.
Individual Retirement Account (IRA): Eligible individuals may make 2015 contributions to Roth or Traditional (both deductible and nondeductible) IRAs by April 18, 2016. The maximum contribution is $5,500; those taxpayers age 50 or over at the end of 2015 may contribute an additional $1,000. Since the annual contribution amounts are limited, it may be important to the taxpayer not to miss the opportunity to maximize contributions in any particular year.
Simplified Employee Pension IRA (SEP IRA): A taxpayer with self-employment income in 2015 may be eligible to contribute to a SEP IRA. Not only is the deadline for the 2015 contribution the tax return due date in 2016 (including extensions), but the tax return due date in 2016 (including extensions) is also the date by which the 2015 “plan” can be established. By establishing a plan in 2016, a self-employed individual has the opportunity to decide on a contribution after the close of the tax year once final 2015 income has been determined. The maximum contribution allowed is 20% of net self-employment income after the self-employment tax deduction, up to a maximum contribution of $53,000.
Fiduciary 65 Day Distribution Deduction
Both fiduciaries and taxpayers who are beneficiaries of estates or trusts may be able to strategize now about how to most effectively share their 2015 tax burden. If an appropriate election is made, a fiduciary with a December 31, 2015 year-end may designate some or all of the distributions made in the first 65 days of 2016 as made during the 2015 tax year. This opportunity allows a fiduciary to assess the income of the estate or trust for 2015, while still being able to either make an additional distribution in 2016, or allocate a distribution which has already been made in the first 65 days. Allocating a distribution to 2015 may allow the fiduciary to push some of the taxable income away from the trust or estate and to the beneficiaries. Depending on the tax brackets of both parties in both years, there may be an opportunity to strategize in a way which reduces the overall tax burden. Not only can this election impact traditional income tax as determined by the tax brackets, it may also impact one party’s need to pay the 3.8% net investment income tax. This election amount is limited to the greater of the trust or estate’s accounting income for the tax year or the distributable net income and is generally available to estates and complex trusts as opposed to simple trusts.
If the aforementioned opportunities possibly align with your current situation, consult with your CPA and further explore whether you specifically meet eligibility requirements. Consider January not only a time of gathering data needed for tax preparation, but also a time to strategically consider a year in the past.
Tara C. Theodossis is a Tax Services Partner with Dixon Hughes Goodman, LLP, in Asheville, North Carolina.