Reduce your 2017 tax bill by buying business assets
Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases.
Section 179 expensing
Sec. 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements.
The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually.
Under the initial version of the House bill, the limit on Sec. 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022.
The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill.
First-year bonus depreciation
For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020.
The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).
The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify.
Year-end planning
If you’ve been thinking about buying business assets, consider doing it before year end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum Sec.179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform. It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation.
© 2017
Tax considerations for switching jobs or unemployment
If you are about to switch jobs or experience some sort of unemployment, there are certain tax implications you may need to consider.
Accrued money
When switching jobs, you may have a sizeable amount of money accrued coming to you from vacation or sick pay. Any form of severance pay you receive is taxable in the year you receive it, in addition to the vacation or sick pay.
Withholding
When you change jobs, you will have to adjust your withholding on Form W-4. Using the worksheet provided will help you determine the right number of withholdings to avoid over or underpaying.
401(k)
If you had a 401 (k) with your previous company, you will have the opportunity to either cash in your 401(k); switch it to the new employee; or pay a penalty if you choose to take the money. If you have more than $5,000 in the account and are fine with the way it is being handled by your former employer, you may elect to leave your savings in the plan where it will continue to grow.
Job search expenses
You may be able to deduct some of the money you expend while looking for another job, but those costs must meet the requirements outlined by the IRS. These expenses can include employment agency fees, the costs associated with sending out your resume, phone and fax expenses, and in some cases, travel.
Relocation
You may be able to deduct some moving expenses that are not covered by your new employer. If your old job is at least 50 miles from the old one, and you will have full-time employment for a 12-month period, you can deduct items like the cost of packing and shipping your personal possessions, insurance and 30 days of storage. Traveling to the new home, and any expenses dealing with the car, which includes gas and oil, parking and tolls.
It is important to note that when receiving unemployment benefits, if taxes are not withheld, you may be facing a large tax bill the following year.
To find out more about tax considerations for switching jobs, or the tax issues surrounding unemployment, contact us by calling 617 651 0531 or by emailing mail@dukhontax.com, or by filling out this contact form:
Get in Touch with Dukhon Tax
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The Honest Taxpayer's Guide to Settling Tax Debt
We pay our federal income taxes through a voluntary pay-as-you-go payroll deduction, or through a system of quarterly estimated payments to report earnings not subject to payroll deductions. The system encourages upfront payments and can add additional tax debt to the taxpayer who underpays.
If you have underpaid your taxes, you'll need to get IRS Form 2210, read the directions, and do the daunting and complicated math. On the other hand, you can just file your return and wait for the IRS to do the work and send you a bill.
IRS tax payment options
The filing deadlines for individuals is April 15th (April 18th for 2016). One well-kept secret, though, is that if the IRS owes you a refund, the filing deadline is moot, because April 15th is the date when all arrears in tax payments are due. Late filing in cases where the taxpayer is owed a refund only results in a delay of said refund.
On the other hand, taxpayers who owe the IRS, have a number of payment options:
- Pay it by check and include the check with the return.
- Pay online directly from a bank account.
- Pay with a credit or debit card.
Choices 2 and 3 can be done online. See the IRS webpage, Payment Options: Pay Online, Installment Plans and More for details and other options available to you.
What if I am late making the payment?
The April 15th deadline (for most taxpayers) starts the clock on interest and other penalties on unpaid tax. The IRS calculates the interest from the due date of payment, based on the federal short-term rate plus three percent--and the interest compounds daily.
Then there are failure-to-pay and failure-to-file penalties, which can amount to a maximum of 25% of the amount owed. IRS Tax Topic 653 has details on late tax payments and the associated penalties.
You can apply for a tax filing extension but…
The big but here is that, although you can file for an extension for completing your tax return, if you owe tax and want to avoid penalties, you must pay the amount due by April 15th. IRS Form 4868 has instructions on obtaining an automatic six-month filing extension.
Installment Agreements with the IRS
Taxpayers financially unable to pay the tax debt immediately can make monthly payments by entering into an installment agreement. Paying the tax debt in full through such an approved agreement can reduce or even eliminate the payment of penalties or interest, but you must file all required tax returns on time.
Read more and download the IRS Installment Agreement forms from the IRS Payment Plans, Installment Agreements webpage.
What happens if I don't pay?
Non-payment of taxes will set in motion a series of written notices from the IRS. Failure to resolve the indebtedness can result in liens, as well as bank account and business asset forfeitures, all of which have the full force of federal law backed up by court orders.
If you need help...
Tax planning is all about mitigating last year's impact on your personal and business finances, as well as starting off on a much better footing for this year and beyond. Contact Dukhon Tax and Accounting by email or give us a call. We specialize in both personal and small business tax accounting.
Quarterly Estimated Taxes: What they are, What they are for, and Why you may need to pay them
Estimated taxes are commonly paid by those who are self-employed or have unconventional income, such as income from stocks and bonds. Those who are on salary and receive a check from payroll generally pay their estimated taxes through their company; their income tax is withheld from each check and then filed by the business. Those who do not receive salaried checks must complete these calculations and payments themselves.
Who Needs to Pay Estimated Taxes?
Generally, any individual who will be expected to owe taxes of $1,000 or more when a return is filed will need to pay estimated taxes. For corporations, the threshold is lower; corporations must pay if they will owe taxes of $500 or more on their return. Accounting and tax services can make the process of filing estimated taxes much easier, as they can calculate the amount that is likely to be due and make sure that the payments are sent in on time. If estimated tax payments are late, an individual may incur significant penalties when they file their taxes for the year.
Who Doesn't Need to Pay Estimated Taxes?
Any individual who had no tax liability for the prior year and has been a US resident for that year will not need to pay estimated taxes. Further, those who work in the farming industry have unique qualifications regarding estimated taxes. Anyone who is on payroll and has state and federal withholdings taken out of their paycheck does not need to pay estimated taxes; they essentially already are, but through their employer. Having multiple W-2’s may cause you to owe taxes at the end of the year if your withholdings are not enough to cover your liability.
How Do Estimated Taxes Work?
Estimated taxes are paid on a quarterly basis and are estimated based on the individual's income and tax bracket. If the individual does not pay enough, they may be charged a penalty.
Generally, if the quarterly estimated tax payments have been correct, the individual will not need to pay any additional taxes on the annual tax return. However, the annual tax return still needs to be filed. If the individual's estimated tax payments were more than necessary, the individual will get a tax refund. Usually, it's best to overpay slightly on estimated taxes rather than to underpay.
It is important to note that estimated tax payments are not an additional payment on top of annual tax returns -- they are simply a way of paying taxes in advance to avoid a hefty tax bill at the end of the year, in addition to fines and penalties.
Are you wondering whether you need to pay estimated taxes? Contact Dukhon Tax and Accounting today to find out more about when estimated tax payments are needed and what you need to do to get started immediately. With proper tax planning or even a simple conversation with your CPA, you can avoid the surprise of hefty bill on April 15th. There may not be time to change your situation for 2015, but you can start 2016 off right.
Tax Planning for Business Sales and Purchasing
Whether you're selling or purchasing a business, conscientious tax planning is essential. Whenever a business is transferred, there are tax ramifications for both buyer and seller. These tax ramifications could greatly affect the value of the business sale for both parties -- and it can be even more complicated when partnerships or more complex entities are involved.
The Tax Implications of Selling a Business
When you sell a business, you need to pay taxes on your gains -- the amount of profit that you made off of the sale your business. At its most simplistic, the amount of profit in your business is the amount that you've sold your business for less the amount that you invested into it. But, naturally, the situation can be far more complicated than that. The amount of money you've put into your business is referred to as the tax basis, and it is affected by things such as depreciation, casualty losses, selling expenses, and other factors.
You may be able to sell your business either for a lump sum or a scheduled payment structure, known as an installment sale, both of which will also have tax ramifications -- a lump sum payment will be taxed immediately, whereas scheduled payments will be taxed upon each received payment. Depending on your personal tax situation, scheduled payments may be preferable. But either way, the taxes will need to be paid upon your next tax filing.
There are a few special situations that may apply when selling your business. If your business is being purchased by another business, it may be able to be organized as a tax-free merger. If your business includes long-term capital gains, this will be taxed at a lower rate. Further, assets and stock sales have different tax consequences than an ordinary business sale.
The Tax Implications of Buying a Business
The tax implications for a business buyer tend to be fairly less complex than for a seller -- but there are still some complications that may arise. In general, the purchaser of the business will not be responsible for federal, state, and local taxes that are owed upon the company's sale. This tax liability will be the onus of the seller of the business. However, if the business does owe these taxes, they will likely need to be paid during the escrow process. If they exceed the amount that the seller would make from the sale (and the seller cannot cover the additional funds), the business sale may not continue.
Upon acquiring ownership of the business, the buyer will assume responsibilities regarding taxes for that business. This includes payroll taxes, sales taxes, general excise taxes, and, naturally, income taxes. To ease this transition, the buyer should learn about the company's existing and scheduled tax liabilities, so that they can be paid quickly following the sale.
It's essential to consult with a company who specializes in business accounting and tax services before making the move to either purchase or sell a company. At Dukhon Tax and Accounting, you can get a free tax consultation regarding your purchase or sale. Dukhon Tax and Accounting provides expert income tax prep, tax consultations, and general tax and bookkeeping services for businesses and individuals throughout Allston.
Year-End Tax Planning for 2015
This guide is generally oriented towards the time-honored approach of deferring income and accelerating deductions to minimize 2015 taxes. For individuals, deferring income also may help minimize or avoid AGI-based phaseouts of various tax breaks.
Year-end tax planning for 2015 must take account of the many important "temporary" tax provisions that have expired and may not be retroactively reinstated and extended before year-end (if they are extended at all). They include: the election to claim sales and use taxes as an itemized deduction instead of state income taxes; charitable distributions from IRAs for those age 70-1/2 and older; bonus first-year depreciation deductions for qualifying new purchases; and generous expensing limits under Code Sec. 179.
Effective year-end tax planning also must take into account each taxpayer's particular situation and planning goals, with the aim of minimizing taxes. For example, higher income individuals must consider the effect of the 39.6% top tax bracket, the 20% tax rate on long-term capital gains and qualified dividends for taxpayers taxed at a rate of 39.6% on ordinary income, the phaseout of itemized deductions and personal exemptions when income is over specified thresholds, and the 3.8% surtax (Medicare contribution tax) on net investment income for taxpayers whose income exceeds specified thresholds (which are lower than the thresholds at which the phase-out of itemized deductions and personal exemptions begins,).
Concerns for High Earning Individuals
Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
The surtax is 3.8% of the lesser of: (1) net investment income (NII) or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than net investment income and other individuals will need to consider ways to minimize both NII and other types of MAGI.
The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year-end to cover the tax.
While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, should consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up his business's billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2015 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.
Inflation adjustments to rate brackets, exemption amounts, etc.
For both 2015 and 2016, some individuals will benefit from inflation adjustments in the thresholds for applying the income tax rates, higher standard deduction amounts, and higher personal exemption amounts.
Capital gains
Long-term capital gains are taxed at a rate of (a) 20% if they would be taxed at a rate of 39.6% if they were treated as ordinary income, (b) 15% if they would be taxed at above 15% but below 39.6% if they were treated as ordinary income, and (c) 0% if they would be taxed at a rate of 10% or 15% if they were treated as ordinary income. And, the 3.8% surtax on net investment income may apply.
Low-taxed dividend income
Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. Converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income. However, the 3.8% surtax on net investment income may apply.
Traditional IRA and Roth IRA year-end moves
One can convert traditional IRAs to Roth IRAs. And, one can then recharacterize such a conversion and can even, possibly, reconvert the recharacterized transaction.
Expensing deduction
Unless Congress changes the rules, for qualified property placed in service in tax years beginning in 2015, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $25,000, and the beginning-of-phaseout amount is $200,000 (Code Sec. 179(b)) . In earlier years, the dollar limit was $500,000 and the beginning-of-phaseout amount was $2 million. However, despite what Congress does (or doesn't do) to adjust the Code Sec. 179 limits for 2015, some businesses may be able to buy much-needed machinery and equipment at year-end and currently deduct the cost under a "de minimis" safe harbor election in the capitalization regs.
First-year depreciation deduction
Unless Congress extends Code Sec. 168(k), property bought and placed in service in 2015 (other than certain specialized property) no longer qualifies for the 50% bonus first-year depreciation deduction. However, because of the half-year convention that generally applies in the computation of cost recovery deductions for property (other than real property) first placed in service during the current tax year, year-end purchases of depreciable property can achieve tax savings even if bonus depreciation is not extended. Under the half-year convention, a business asset placed in service at any time during the tax year-even in the final days-is generally treated as having been placed in service in the middle of that year.
Deduction for qualified production activities income
Taxpayers can claim a deduction, subject to limits, for 9% of the lesser of (1) the taxpayer's "qualified production activities income" for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or (2) the taxpayer's taxable income for that tax year (before taking this deduction into account). This deduction generally has the effect of a reduction in the taxpayer's marginal rate and, thus, should be taken into account when making decisions regarding income shifting strategies.
Changes in individual's tax status may call for acceleration of income
Changes in an individual's tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered.
Alternative minimum tax (AMT)
Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not save taxes if the taxpayer is subject to the AMT.
Time value of money
Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.
Estimated tax
Rules for estimated taxes can be affected when taxable income is shifted from one tax year to another.
Obstacles to deferring taxable income
The Code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain taxpayers use the accrual method, and limitations on the deduction of investment interest.
Charitable contributions
The timing of charitable contributions can have an important impact on year-end tax planning. Note that in earlier years (but not 2015, unless Congress extends this tax break), individual taxpayers who are at least 70-1/2 years old could contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduced their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. Some taxpayers, who would take advantage of this tax break for this year, if it were extended, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2015.
Net operating losses and debt cancellation income
A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. Also, a debtor who anticipates having the debt cancelled or debt reduced should consider steps to defer the resulting taxable income until 2016.