Preparing short-term and long-term forecasts is a valuable process that successful business owners do regularly to plan for future growth and profitability. However, these forecasting models are made difficult by ever-changing tax laws and typically do not factor in taxes at all. At the highest federal and state tax rates, a business’ profits could be reduced by 45 percent if proper tax planning is not performed.
For the past few years, Congress has left business and individual taxpayers in limbo with expiring tax laws. This tax uncertainty wreaks havoc on the ability of businesses and individuals to plan for the future and estimate what their tax liability will be. This affects not only the current tax year, but also estimating what that tax liability will be two to five tax years down the road. When President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) on Dec. 18, 2015, some tax-law clarity was provided to millions of taxpayers. Tax practitioners can help their clients save tax dollars now by planning for future events.
The PATH Act made permanent the $500,000 Section 179 expensing limit, thus allowing a business to elect to expense up to $500,000 of qualifying property instead of having to depreciate the cost over a number of years. The $500,000 limit is gradually reduced down to zero once the total qualifying property placed in service during the year exceeds $2 million. The $500,000 and $2 million thresholds are now indexed for inflation.
With this information, business owners can plan and forecast to maximize current tax deductions by ensuring that they do not exceed the $2 million threshold and maximize the $500,000 deduction. In any given forecasted year, if qualifying property expenditures were to exceed $2 million, advisors should be recommending that their clients delay the qualifying property purchase into a future tax year or accelerate the purchase into the current year if the $2 million limit has not been exceeded. There are other limitations that can be forecasted regarding Section 179 expensing, such as the business-income limitation which only allows a Section 179 deduction up to the taxable income from the active conduct of any trade or business.
Another method to save tax dollars is to take advantage of bonus depreciation. It may benefit the business to accelerate capital purchases in order to qualify for higher bonus depreciating rates. The rates phase out each year by 10 percent starting in 2016, and 2017 at 50 percent to 30 percent before expiring on Dec. 31, 2019 for most property.
Successful businesses make it a practice to prepare forecasts by integrating tax planning. The key is to monitor their actual performance towards these goals and then implement tax planning solutions during the year.
Craig M. Anderson, CPA, MT, is a senior tax manager at Siegfried Advisory, LLC, an affiliate of The Siegfried Group, LLP. Jeffrey W. Mitchell Jr., CPA, MT, is the managing director of Siegfried Advisory, LLC. Siegfried Advisory, LLC provides leadership, financial and tax advisory services to entrepreneurial organizations and high net-worth families.