December 5, 2016
As year-end approaches, consider whether you could benefit from the following "last minute" tax-saving moves, including adjustments to income to preserve favorable estimated tax rules for 2017, deferral of certain advance payments to next year, and fine-tuning bonuses to make the most of the Code Sec. 199 domestic production activities deduction.
Accelerating or deferring income can preserve estimated tax break. Corporations (other than certain "large" corporations,) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year.
Accrual-basis business can take a 2016 deduction for some bonuses not paid till 2017. An accrual-basis business can take a deduction for its current tax year for a bonus not actually paid to its employee until the following tax year if:
(1) the employee doesn't own more than 50% in value of the business,
(2) the bonus is properly accrued on its books for the current tax year, and
(3) the bonus is actually paid within the first 2 ½ months of the following tax year (for a calendar year taxpayer, within the first 2 ½ months of 2017).
It is important for businesses to calculate the tentative deduction and the W-2 deduction cap before year-end. If the deduction cap will limit the otherwise available deduction-for example, in the case of a closely held business whose owners do not draw substantial salaries-the business may want to bonus out additional compensation to maximize the deduction. Bear in mind that in some cases, an accrual-basis business can deduct a bonus that is declared before year-end but not paid until the following year.
Remember to also factor the deduction into other year-end tax planning strategies. For example, when determining whether to defer or accelerate income, a taxpayer must determine the marginal tax rate for each year. Depending on the type of income or deduction that the taxpayer is dealing with when working on such strategies, the Code Sec. 199 deduction may have the effect of decreasing the taxpayer's marginal rate.
For more information on how you can limit your tax liability, contact your tax preparer today.
Original Content edited. © 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.
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