TAX PLANNING FOR YOUR BUSINESS

• Business Entity Choices – Non-tax considerations generally take precedence in selecting the appropriate structure for your business. However, tax considerations can also play an important role in your decision. Choosing the right business entity at the inception of your business is important, and all aspects should be carefully considered.

Your choices of business entities include: Corporation, Sub-S Corporation, Partnership, and Limited Liability Company; if there are no co-owners, one can choose a Sole Proprietorship.

(2) Exceptions apply

• Business Start-Up Costs – A frequent question is how the start-up costs of a business are handled before actually in business. Typical expenses include legal consultation, travel, surveys, establishment of suppliers, employee training, etc. Current law allows a taxpayer to deduct up to $5,000 of start-up costs in the year the business begins; a partnership or corporation may expense up to $5,000 of organizational costs. Each $5,000 amount must be reduced, but not below zero, by the amount of accumulated start-up expenses and organizational costs in excess of $50,000. If not deductible in the year the business begins, these expenses are deducted ratably over 15 years.

• Purchasing an Ongoing Business – If you are considering purchasing an ongoing business that is not a stock transaction, it is important that you and the seller agree on how the purchase price is allocated among the various elements of the business. The allocation can have significant tax ramifications for both the buyer and seller, and the IRS requires the treatment between the buyer and seller to be consistent. Some elements can be depreciated or written off quicker than others, while some cannot be written off at all. For the seller, the sales prices of some elements receive capital gains treatment, while others generate ordinary income. When negotiating the sale, be sure it includes the agreed allocation.

• Deducting the Cost of Business Assets – Depreciation is a way of recovering the cost of an item purchased for business use over a period of time. Some assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others, accelerated methods that front-load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use.

(3) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions.

(4) The Sec 179 deduction for SUVs is limited to $25,000 and applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less.

Expense Deduction – For 2017, you may also elect to expense up to $510,000   ($255,000 if filing married separate), (down from $500,000 on 2016) of the cost of certain assets (generally those with a depreciable life of seven years or less) the first year the asset is placed in business service (Sec 179 deduction). The deduction is limited to the income from all of the taxpayer’s trades and businesses. There are additional restrictions, called the investment limit, if more than $2,030,000 of assets are placed in service during the tax year.

Excluded from this limitation is any vehicle that:

– is designed for more than nine individuals in seating rearward of the driver’s seat;

– is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or

– has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

Bonus Depreciation –  Bonus depreciation expired after 2013.

• Special Breaks for Incorporated Businesses – If a business is incorporated, there are two special tax provisions that may apply. You may want to qualify the stock as “Small Business Stock.” When stock of this type is sold or exchanged, losses up to $50,000 ($100,000 if married filing jointly) per year may be deducted as an ordinary loss instead of a capital loss, which would be limited to your capital gains plus $3,000 ($1,500 if filing as married separate).

If the business is a C-Corporation and you acquired the stock at original issue, you may also qualify for a 50%, 75% or 100% exclusion of gain for certain small business stock held for more than five years (the applicable exclusion percentage depends on when the stock was acquired). Or, you may choose to roll over the gain from qualified small business stock held for more than six months by buying another small business stock within six months.

• Business Automobiles – When a vehicle is used for business purposes, the taxpayer can deduct the business portion of the operating expenses on the business. If the car is used for both business and personal purposes, you may deduct only the cost of its business use. One can generally determine the expense for the business use of the car in one of two ways: the standard mileage rate method or the actual expense method.

• Standard Mileage Rate Method – The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. For 2016, the standard mileage rate is 54 cents per . In addition, the cost of business-related parking and tolls is deductible. Please call for rates applying to other years.

Caution: If the standard mileage rate is not used in the first year the vehicle is placed in service, it cannot be used in future years. If, in a subsequent year, the taxpayer switches to the actual method, the straight-line method for depreciation must be used. If the car is leased, continue to use the standard mileage rate in future years. The standard mileage rate can be used for up to four vehicles that are being used simultaneously in business.

– Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible.

Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.” The auto depreciation limit for 2016 is $3,160. An additional $400 allowance is added to the above limitations for certain passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs). Please call for rates applying to other years

In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

• Self-Employed Health Insurance Deduction – Self-employed individuals may deduct, as an adjustment to income, 100% of health insurance expenses paid for themselves and their families. Don’t overlook as eligible amounts for this deduction both amounts paid for long-term care insurance premiums, up to the annual age-based limits, and Medicare-B and -D premium payments. In addition, as part of the recently-enacted health care provisions, a child no longer need qualify as your dependent to be included on your self-employed health insurance plan. They need only be your child under the age of 27. This would include children that are self-supporting or married.

• Home-Based Businesses Can Deduct Office-In-Home Expenses – Deducting the costs of a home office gives rise to several issues:

(1) the qualifications that must be met to take that deduction;

(2) expenses that can be deducted; and

(3) the tax implications when the home containing the home office is sold.

– Qualifications for the Deduction – Generally, a home office that is part of a residence is deductible only if used regularly and exclusively as a principal place of business, or as a place to meet or deal with customers or clients in the ordinary course of business. For home-based businesses, the home office qualifies as a principal place of business if the office is used on an exclusive and regular basis for administrative or management activities of any trade or business of the taxpayer, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.

– Home Office Expenses – Home office expenses are divided into two categories: those that are directly related to the office, such as painting the room, installing a phone, etc., and indirect expenses that relate to both the office and personal portions of the home, such as utilities, insurance, real estate taxes, home mortgage interest, repairs benefiting the entire home and depreciation if the home is owned or rent if the home is rented. There is also a simplified method that can be used in lieu of actual expenses and depreciation (or rent payments) that allows a deduction of $5 per square foot up a maximum of 300 square feet.  The expenses for the business use of a home cannot exceed the income from the business requiring the office.

• Acquire Equipment – If you wish to reduce your profits, consider purchasing some additional equipment or machinery needed for the business. This will allow you to take advantage of the depreciation and expensing deductions.

• Establish A Retirement Plan – If you don’t have a retirement plan established, this might be the time to consider one. There are a variety of plans available, including Keogh Defined Contribution and Profit Sharing Plans, which must be established before the end of the year, or a SEP Plan, which can be established after the end of the year.

• Reduce Inventory – The cost of goods is a deduction against business income. However, any inventory remaining at the conclusion of the business year will be used to reduce your cost of goods sold, and thereby increase your profits for the year. You may wish to minimize the inventory before the end of the business year.

• Domestic Production Deduction – For 2016 and 2017, the domestic production deduction for both corporations and individual business owners is 9%. The deduction is 9% of the lesser of the individual taxpayer’s:

(1) Qualified production activities income for the year, or

(2) Adjusted gross income* for the year determined without regard to this deduction (but limited for any year to 50% of the W-2 wages paid by the taxpayer as an employer) during the tax year. So, for example, a sole proprietor who has no employees would not be eligible for this deduction. The main beneficiaries of this deduction are businesses that produce goods, develop software or construct property in the U.S.

*Substitute “taxable income” in lieu of adjusted gross income for other than individuals.

Example – Computing Domestic Production Deduction: Linda actively conducts a business as a sole proprietor manufacturing and selling ceramic dishware, all in the United States. She has two employees. Linda’s qualified production activities income (QPAI) for the year is $55,000, which is the same amount as her net earnings from self-employment. The W-2s she filed for the employees show qualifying wages of $80,000. Linda’s AGI before the domestic production deduction (Sec. 199 of the Tax Code) is $45,000. Her Section 199 deduction will be $4,050. The applicable percentage for 2015 is 9%; the lesser of QPAI or AGI is AGI of $45,000. 9% x $45,000 = $4,050. Since 50% of W-2 wages (50% x $80,000 = $40,000) is greater than $4,050, the deduction is not limited by the W-2 wage element, and the deduction will be $4,050.