Year-End Tax Planning Ideas

The year end is approaching us fast and it’s time to consider some of the year-end tax planning ideas.  Here are some of the year-end tax saving moves to consider:

• Even if your business uses an accrual basis method to account for taxable income, expenditures to related-parties are generally deductible in the year of payment rather than when they are occurred. Therefore, we recommend settling the liabilities before the year end to take the related deduction in 2016.

• C-corporations should consider paying out reasonable amount of bonus to employee-shareholders to avoid double taxation. Note that compensation to employee-shareholders must be reasonable in amount and nature to avoid potential challenges from the taxing authorities.  Best practice is to adopt a written bonus plans that meets the industry practice and expectation.

• If your business needs to make capital expenditure, why not putting it in service now and enjoy the 50% bonus depreciation and section 179 deduction now rather than next year?

• Many business owners will be hosting Christmas parties. Learn how to structure the event to deduct 100% of event related expenses including meals.

• Minimize capital gains tax by timing the gain or loss realization. Capital losses are generally deductible to the extent of capital gains.  So if you are looking at big gains for the year, maybe it’s time to trigger losses on built-in loss capital assets you may have been holding on to.  Or if you have excess capital losses, consider selling some built-in gain capital assets.  Timing is everything when it comes to managing capital gains tax.

• Year-end is a perfect time to review employee benefits and compensation. Some of the qualified plans will provide opportunity to defer taxes until retirement for employees and owners.  They are SEP, SIMPlE, 401(k), profit-sharing, and pension plans.  Additionally, the business deduction is readily available for funds contributed to the these plans.

• Review opportunity for various federal and state tax credits, including research and development, small business health care credit, work-opportunity tax credits, etc.

• Individuals should consider prepaying property taxes and making charitable contributions of non-cash goods and/or cash. Also, perform a year-end tax projection and prepay state income taxes, if you are not subject to AMT tax.

• Cash basis taxpayers may be able to defer income recognizing by delaying billing and collection until next year.

• Inventory is generally valued at lower of cost or market value. The end of the year inventory should be reviewed to detect obsolete or damaged items and written down to their probable selling price (net of selling expenses).  Tax deduction for write off is available as long as the items are offered for sale within 30 days after the inventory date.

• Perform a year-end tax projection to submit required estimated tax payment timely to avoid any penalties and interest.

• Individuals should consider maximizing contribution to qualified retirement funds including 401(k) and traditional IRAs to defer income taxes.

Tax Accounting for Stock Compensation

FASB issued ASU 2016-09 simplifying accounting for stock based compensation under ASC 718. The amendments are effective for annual periods beginning after December 15, 2016 for public entities and after December 15, 2017 for all other entities. Early adoption is permitted. Our discussion will be focused on tax accounting aspect as summarized below:

Previously, reporting entities were subject to complex rules in accounting for the differences in tax deductions resulting from the exercise of stock compensations and how they were accounted for in the income statement. The rules under ASC 718 required reporting entities to track APIC pool, determining excess benefit and short-falls, and were required to consider recognition threshold for excess benefits (causing significant difference in book and tax attributes in certain situations). However, the amendments significantly simplify the accounting for share based compensation.

Under the amendments, reporting entities treat the tax effects of exercised or vested award as discrete items in the reporting period in which they occur, and recognize excess tax benefits and short-falls through income statement without regard to the APIC pool and regardless of whether the benefit reduces taxes payable. Accordingly, reporting entities are no longer required to maintain APIC pool.

Reporting entities shall apply the amendments on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period, and disclose the nature of and reason for the change in accounting principle and the cumulative effect of the change on retained earnings or other components of financial statements. Under the modified retrospective transition method, reporting entities will apply the overall amendments on a prospective basis and recognize previously unrecognized excess tax benefits as cumulative adjustment to retained earnings.

Please refer to the ASU 2016-09 for further detail.

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168028584&acceptedDisclaimer=true