While tax prep season doesn’t begin for many people until late January, now is the time to reduce your 2015 tax; waiting until 2016 is really just reacting. There’s no significant increase in marginal rates on the horizon, which makes planning easier. But hold on. The section 179 accelerated write-off for certain assets has again been reset to a maximum of $25,000.

179 Deduction

Section 179 of the Internal Revenue code allows small businesses to deduct in the current tax year the full purchase price of equipment that qualifies for the deduction, even if it’s financed or leased. During the past several years through various last minute tax extender bills, this deduction was raised to a maximum write-off of $500,000. But without another tax extender or law change, this $500,000 drops to $25,000 for 2015. Most business equipment applies to Section 179, including machines, computers, software, furniture and some vehicles.

A Section 179 limit at $500,000 is significant to most small businesses and it would benefit both political parties to extend the law before the end of the year. It could mean a reduction of an additional $475,000 of taxable income for company purchases made during the year.

If this law isn’t extended, all is not lost. You will still be able to depreciate the cost of the equipment over its useful life, usually five to seven years.

Normal Tax Planning

To help you keep your stress level down, you need to know what deductions are available and have the information and documentation available to take advantage of those deductions.

First, you need an accurate profit and loss statement and an accurate balance sheet. All figures should be reconciled to bank statements. Most expenses that are reasonable and necessary to carry on your business are deductible. Some expenses, such as penalties, are not deductible. In addition, business meals and entertainment meetings are only deductible at 50 percent. For these expenses you’ll need a business log that records the expense, who attended these meetings and the business purpose of these meetings. If you come under audit and you don’t have these records, the deductions will be disallowed.

Postponing Income/Accelerating Deductions

In an environment when taxes are not expected to rise, tax planning can be summed up in four words: Postpone income; accelerate deductions.

This strategy can help move the taxpayer into a lower tax bracket in the current year. It also can help the taxpayer avoid crossing the threshold that he or she is subject to the net investment income tax (an additional 3.8 percent on investment income) or subject to losing all or part of certain deductions (i.e., the dependency exemption). Strategies to postpone income include:

• Pushing a large job from this year to next, if there is flexibility;
• Pushing the sale of a gain-generating asset into the next year;
• Structuring the sale of a gain-generating asset as an installment sale;
• Deferring any year-end bonuses;
• Using the like-kind exchange provisions (Section 1031) to defer recognizing gain on dispositions of business or investment property; and
• Delaying the collection of outstanding accounts receivables until the following year for a cash basis taxpayer.

Again this strategy serves to reduce taxable income, so there’s either less income to tax and/or moves the taxpayer into a lower tax bracket. Strategies to accelerate deductions include: 

• Making fourth-quarter state estimated tax payments this year;
• Prepaying property taxes due the following year and prepaying January’s mortgage in December;
• Bunching medical and dental expenses into the current year if it’s expected that those expenses for the current and following year will exceed the 10 percent of adjusted gross income floor limitation applicable to such expenses;
• Moving future charitable donations into the current year; and
• Selling stock losers in your portfolio before year end.

It’s never too early to start thinking about taxes and ways to minimize them. Reconciling your books and producing an accurate set of financials is a great start. Discussing those financials with your CPA will give him or her the proper information to project your liability. If done early enough, he or she will be able to suggest ways to reduce the ultimate liability and/or prepare you for any tax payments you may have to make.