Year End Tax Planning Strategies for Individuals and Businesses

Written on November 30, 2016

As we get to the end of another year, it’s time to take a quick look at tax changes and how they might affect you and your business. Thanks to the PATH Act that was passed late in 2015, we are fortunate not to have too many tax credits and deductions expiring at the end of 2016. However, with the election of a new president, we expect many laws to change in the future. Until we know where tax policy will go in 2017, and beyond, we will primarily focus on what we do know will happen as we wrap up 2016. We are also following the Trump tax proposals and other tax proposals for the future. A few “attention grabbers” in the post-election tax policy proposal area are included below.

One of the big changes to think about is gifts of ownership in a family partnership. The IRS issued new regulations in August that will limit the availability to use minority and lack of marketability discounts when valuing gifts of family partnership interests. To read more about this change, please click here. Contact your Warren Averett advisor immediately if you are interested in gifting before the end of the year.

If you have a business, there are many items to keep in mind as we get close to the end of the year. These include:

  • Section 179 Expense: Until further notice, 179 expense is permanently set at a limit of $500,000 and an overall investment limit of $2,000,000.
  • Bonus Depreciation: 50 percent Bonus Depreciation has been extended through the 2016 tax year. This allows an immediate deduction of 50 percent of eligible assets. Bonus Depreciation will start phasing out over the next couple of years. The bonus allowance will be 50 percent in 2017 and will start decreasing to 40 percent in 2018 and 30 percent in 2019.
  • Work Opportunity Credit: The WOTC has been extended to employers who hire employees from specific groups who have faced major barriers to employment. The credit definition has been expanded to employers who hire “qualified long-term unemployment recipients.”
  • Restaurant “Refresh” Safe Harbor: The IRS issued a safe harbor provision that allows a taxpayer operating a restaurant business to deduct 75 percent of “refresh” costs and capitalize 25 percent. Taxpayers may also revoke this election whenever they choose. To take advantage of this safe harbor, the taxpayer must have audited financial statements.
  • Research Credit: The PATH Act made this credit permanent and adds greater incentives for small businesses.
  • Research Credit Regulations: New regulations are coming out that allow an exception for internal use software to qualify for the research credit. In order to qualify, the software must meet a “high threshold of innovation test.” This test includes the following characteristics: “innovative, involves significant economic risk, and is not commercially available for use by the taxpayer.”
  • Partnership Audit Rules:  The new partnership audit rules put into place by the Bipartisan Budget Act of 2015 have been delayed and will come into effect on returns beginning tax year 2017. These rules are important because it changes how the IRS will assess tax if a partnership is audited. Instead of the IRS assessing the tax on individuals, the IRS will, in many cases, assess the tax on the partnership. In addition, partnerships will need a designated partnership representative to handle tax matters. The partnership representative replaces the current Tax Matters Partner.

For individuals, there are really no significant changes this year. The nonbusiness energy credit that allows a credit for energy efficient home improvements expires at the end of the year. It is important to review your tax situation to see if there will be a significant change in your income between 2016 and 2017. If so, this affords tax planning opportunities for the best timing for deductions and planning (to the extent possible income acceleration/deferral and the best time to recognize capital gains and losses). If you are impacted by the alternative minimum tax (AMT), then the normal planning rules tend to be reversed and you look at income acceleration and deduction deferral.

We want to remind Alabama residents of the Alabama Opportunity Tax Credit. You can get a tax credit for qualifying contributions to scholarship granting organizations (SGO). The maximum credit is $50,000 or 50 percent of your Alabama tax. These credits are still available for 2016. You must reserve your credit with the Alabama Department of Revenue. A complete list of approved SGOs is available here.

Donald Trump’s election is expected to bring changes to the tax laws. Click here to view some key campaign proposals that we are following.

If you have any questions about how these year end planning strategies affect you and your business, please contact your Warren Averett advisor

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