2016 Year End Tax Planning for Businesses

2016 YEAR END TAX PLANNING FOR BUSINESSES

Some points to consider as we come to the end of 2016.

1. RETIREMENT PLANS – a great opportunity to reduce your taxes.

A. 401K plans, Defined contributions, Defined benefit plans.

1. Need to be set up before the end of the year.

2. But you have til the due date of the 2016 return (could be extended to 9/15/17 for corps and partnerships) to fund the 2016 liability.
B. Tax credits for setting up retirement plan 1st year start up 50% of startup cost. At least one person in the plan must be a non highly comp employee.
For example, you pay 2,000 to ADP to start your 401K plan. But max credit is $500.

C. The SEP retirement plan can be established and funded in 2017 by the due date of the tax return including any extension.

2. EQUIPMENT – If you need new equipment, this is a good time to buy.

A. 179 expense personal property

New and used property is eligible

B. Bonus depreciation 50% write off

New property only
3. RECORDS. Good record keeping is critical to making sure you capture all of the deductions allowed.

A. Capture your deductions.

1. Checking account business (separate from personal)

2. Credit Card accounts (don’t mix and match)

3. Out of pocket costs cash purchases ( post office staples)

4. Mileage for auto + parking +tolls + actual costs (insurance repairs gas )

5. Office in the home

6. Equipment (desk, phone, lamp) purchased as personal item now used in business.

4. ACCELERATE EXPENSES AND DEFER INCOME. Defer billing in December with the idea that the delay will cause the receipt of payment until 2017.
5. REVIEW WHETHER FOR 2017 CHANGE FORM OF BUSINESS ENTITY.
6. AUTO RULES – two methods.
A. Standard 54 cents a mile + parking + tolls. If you want to use standard must elect first year. So your 2000 Ford Taurus needs a new transmission and air conditioning – you can switch to actual.
B. Actual

Once you elect Actual you cannot switch back to standard.

Repairs
Gas
Insurance
Car tax
Interest expense

Depreciation

1. New car 50% Bonus Depreciation max 1st year 8,000 (bonus) + = 11,160

2. Used car not eligible No 50% bonus
Standard depreciation 3,560.

3. 179 New and Used car qualifies (used more than 50% in business)

If your car weighs over 6,000 lbs, eligible for a $25,000 write off

If you car weights under 6,000 lbs then 1st year combined = 3,160 limit.
7. HEALTH CARE INSURANCE CREDIT.

The Small Business Health Care Tax Credit helps small businesses pay for health care coverage they offer their employees. You’re eligible for the credit if:

1. You buy the insurance thru SHOP Marketplace.

2. You have fewer than 25 employees who work full-time, or a combination of full-time and part-time, with average wage < 50K.

3. Pay at least 1/2 of premium.

4. The maximum credit is 50 percent of premiums paid for small business employers.
https://www.healthcare.gov/small-businesses/employers/

OID Coupon vs OID bond on a US Strip Treasury

How is a US Strip Treasury OID taxed for Coupon and Bond portions.

I am looking at a Schwab statement that has as description “US Treasury Strip O%26” and in box 8 of the 1099 INT is $3,037. So the idea is that some bright financier has purchase the whole bond and strip it into 2 components. The annual interest portion or the “Coupon” bond and then a second part the “Principal” bond.

For example: Bond pays 2.5% interest for 10 years before being split.

Principal Bond portion of Strip 80,000 (2016 FMV) —– 100,000 (2026 payout) OID is 20,000.

Coupon portion 20,000 (2016 FMV) —– 25,000 (2026 payout) OID is 5,000.
Keep in mind with the Coupon portion you dont actually get 2,500 in cash each year, rather you get 25,000 in cash 10 years from now.

So the Schwab statement says the OID is $3,037 but I have no idea if the client owns the coupon bond portion of the Strip or the principal bond portion of the Strip. And I have concluded it does not matter.

If you look at IRS publication 1212 you get the following info:

“If you strip one or more coupons from a bond and then sell or otherwise dispose of the bond or the stripped coupons, they are treated as separate debt instruments issued with OID. The holder of a stripped bond has the right to receive the principal (redemption price) payment. The holder of a stripped coupon has the right to receive an interest payment on the bond. The rule requiring the holder of a debt instrument issued with OID to include the OID in gross income as it accrues applies to stripped bonds and coupons acquired after July 1, 1982. So the OID rule applies to both stripped bond portion and stripped coupon portion of the bond.”
The IRS goes on in Pub 1212,
“The amount shown in box 8 of the Form 1099-OID you receive for a stripped bond or coupon may not be the proper amount to include in income.” The IRS is confusing in its instructions. You can have US stripped bonds, state and city stripped bonds, and private stripped bonds. If you include in Box 8 then this is for state and city OID. In other words box 8 is for state and city bonds with OID that are tax exempt at the federal level but taxable at the state level if the bond is not a bond from your state ( an out of state bond). However interest on a federal obligation like a US Treasury Bill or Note or US Strip Treasuryies are taxable at the Federal level, but not at the state level. So the US OID has to be entered in Box 3.
I am going to pick up the OID as taxable federal and not taxable state. The question comes to mind why not just buy a treasury bond? Why would I want to recognize interest income and have no cash to show for it?

The other thought is that this US Strip Treasury bond is in a child’s name and with the time I spend figuring out the Kiddie tax form on 2 children’s 1040s and my cost and time does it really do the family any benefit investing in these US Strip Treasury obligations. The Kiddie tax on the 1st $1,050 of income is $0, so the savings in not including the US Strip Treasury interest is the parents rate at 25% or $262.50. The child’s rate is used on the interest income from $1,050 to $2,100 so that rate is 10% vs the parent rate leaves a savings of $157.50. On any income earned on the instrument from $2,100 to $3,037 is tax at the parents rate and so no benefit. So the total benefit is $420 and I charged $400 to do the child’s return.

Now IRS form 8814 allows the parent to elect to report the children’s interest and dividends on their tax return and thus avoid having to prepare a separate return and related cost for the child’s tax return preparation. The problem here is that once there is a stock or bond sale of one of the child’s investment a schedule D is required and then the parent cannot elect to use the 8814 form reporting of income and the child has to have a separate tax return prepared on their behalf.

Here is an example from Wikepedia:

Example Original Issue Discount

Bond Issuance Price	$7,462
Bond Redemption Price	$10,000
Original Issue Discount	$2,538

Most loans require interest payments. Loans that require inadequate or no interest payments bear original issue discount. Whether interest is adequate is determined with reference to the applicable federal rate (AFR). Under the Internal Revenue Code, original issue discounts on debt instruments are taxed each year, even though the debt may not be repaid until a later date. The tax system will impute an interest rate on the loan. The rules for calculating the original issue discount utilize a compounding interest formula, with the principal recalculated every six months. Section 1272(a) of the tax code requires that the Original Issue Discount is includible in the lender’s taxable income at the end of each tax year, or part of the tax year if the loan was not owned for the full year.

The daily portion of the discount uses a compounded interest formula with the principal recalculated every six months. The following table illustrates how to calculate the original issue discount for a $7,462 bond with a $10,000 repayment and a three-year maturity date:

Period	Adjusted Issue Price	Yield	Original Issue Discount
1	$7,462	.05	$373
2	$7,835	.05	$392
3	$8,227	.05	$411
4	$8,638	.05	$432
5	$9,070	.05	$454
6	$9,524	.05	$476
Redemption	$10,000

This is a general tax discussion. You need to consult your own tax preparer before taking any action on this discussion above. I hope this has been helpful on OID Coupon vs OID bond on a US Strip Treasury treatment.

A solution to the traffic problem

A solution to the traffic problem.

Here is a solution to the traffic problem. A tax credit of $5,000 for you to move to be within 1 mile of your job, or get a new job within 1 mile of where you live. For example, a Mary lives in Vienna and works in Bethesda for Marriott as an accountant. Bob lives in Silver Spring and works in Falls Church for IBM as an technician. Everyday they head in opposite directly on 495 and cross at the American Legion Bridge.

If Mary loves Virginia and would never think of moving to MD., fine, Mary can get a new job within a mile of her home in Virginia and get the credit. Bob says I love my job with IBM, fine, Bob can find a new residence within a mile of his existing employer IBM and get the 5,000 credit. We have just gotten 2 people off the expressway without having to pour one more foot of concrete.

Think of the amount of billable productive hours that are sitting on the highways, the cost of the autos, the cost of the fuel. This is an idea to alleviate the traffic problem. Keep in mind, right row, if you move for Arlington, where you work, to more than 50 miles to start a new job you get a tax deduction for the move on your 1040. Is $5,000 the right number? Maybe it has to be adjusted to income or geographic location where traffic is the worst.

Renewal energy credit

ENERGY TAX CREDIT FOR RESIDENCES 2016

Thinking about energy credit for your home? Let’s look at the restrictions and limits. All of the improvements for windows, insulation, roofs, doors and skylights are limited to 10% of costs.

There is a further limit to a maximum of $500 for certain improvements. The total credit allowed is cumulative for all years since 2005 through to today in the amount $500 for windows, insulation, roofs, doors, skylights, stoves, furnaces, central air, and water heaters.

So the 1st question you have to ask is how many people have kept track of what they have spent after 2005 – 11 years ago on energy improvements. And certainly the IRS has no way of knowing what you spent in 2006 for insulation, etc.

You may have already taken full advantage of the credits listed for for windows, insulation, roofs, doors, skylights, stoves, furnaces, central air and water heaters. However it is always worth reviewing, especially for new home owners. Congress should reset the time clock. I am sure that with wear and tear on homes in the last 10 years, homeowners should be given an incentive to get up in the attic and put some insulation down, etc. to make their homes more energy efficient.

The good news is for geothermal, wind, fuel cells, and solar energy units there is not dollar limit, and the credit is 30%.

RESIDENTIAL ENERGY PROPERTY COSTS

A. For an existing home that is your principal residence here are the items that you are entitled to a 10% of the money spent towards a energy credit

For example, if you spent $2,500 for energy efficient windows, that cost is limited to $2,000, and if you spent $450 for insulation and another $200 on your roof. Then the total credit would be $265 ($2,000 + $200 + 450 = 2,650 X 10%)

And limited to the following CUMULATIVE since 2005

OVER ALL CREDIT LIMIT $500

LIMIT for Window credit $200

LIMIT for advanced main air circulating fan credit $50

LIMIT for ALL BOILERS & FURNACES credit is $150

LIMIT for Bio Mass stoves, heat pumps, central air conditioning, and hot water heater credit is $300.

If you think about the cost of a water heater being approx $700, then this is a very good credit, but for a furnace that may cost $7,000 a $150 credit is paltry.
Energy-efficient building property Bio Mass Stoves, Heat Pumps, Central Air Conditioning, and Hot Water Heaters

Biomass Stove (burns plant derived fuel to heat your home or hot water) Although wood and wood pellet stoves are most common, biomass fuels includes renewable forms such as corn or even aquatic plants.

Bio mass stove
Air Source Heat Pumps. This device absorbs heat in one place and releases it as another either to cool or heat the house.

Heat Pump

Central Air and Water heater

Maximum credit for Natural Gas, Propane, Oil, and Hot Water Furnaces or Boilers is $150. If there is an advance main air circulating fan then a credit is limited to $50.
Natural Gas, Propane, Oil Furnace or Hot Water Boilers

Boiler 1

Gas Propane and Oil Furnaces and Fans

Boler 2

QUALIFIED ENERGY EFFICIENCY IMPROVEMENTS – ROOFS, WINDOWS, SKYLIGHTS, AND DOORS. Remember costs are multiplied by 10% to calculate credit.

Insulation

Roof
Roofs
Must meet
Energy Star req.

Window Doors

Windows, Doors & Skylights

Must meet Energy Star requirements

Maximum cost is $2,000 X .10 is $200.

RESIDENTIAL ENERGY CREDITS
B. For principal residence for either new or existing construction the following

Credit is 30% of cost with no limits

Fuel Cells. A machine that creates electricity by the interacting of hydrogen and oxygen.

Fuel cell

There is a limit to the lower of 30% of the cost or the Kilowatt capacity X 1,000. So if you buy a Fuel cell system for 10,000 and it has a Kilowatt capacity of 2. The lower amount will be 2 X 1,000 or $2,000 and not the 3,000 amount ($10,000 X 30%)
C. For both new homes and existing homes qualify – and principal residence and 2nd homes qualify.
30% of cost with no limit on the following:

Geothermal Heat Pumps

Small Wind Turbines (Residential)

Windmill

Solar Panel
Solar Energy Systems (Water or Heating)
The IRS form to claim a credit is form 5695. As typical these credits are subject to almost yearly renewal. So you may want to do energy conservation in 2016 because you don’t know is Congress will renew. The one exception is for Geothermal, Wind, and Solar the 30% credit is through 12/31/19, and then is reduced to 26% for 2020,and then drops to 22% in 2021 the final year.

Using a C Corporation to income average

Using a C Corporation to income average as compared to an S corporation.

A C corporation can be used for income averaging.

Let’s talk about the concept of using a C corporation to income average. The example below give you an idea of the tax savings available. Three things to keep in mind.

1. The C corporation will get the tax back via a refund when the NOL is carried back, but, of course there is a cash flow issue. During the period the IRS has the tax money pending the NOL carryback, there is a cost of money. In our example below, the federal corporate taxes on $160,000 is $45,650. So this money would be unavailable to the Taxpayer for a year. At 10% interest the cost of funds would be $4,565. So there is still an overall savings.

2. The example below is just for 2 years. Keep in mind that the NOL can be carried back 2 years. So you could have a loss in Year 3, and carry back the NOL to Years 1 and 2. This would allow for even more income averaging.

3. Also the pension benefit allowed would be greater with the C corp example. Let’s say the S corp had a SEP retirement plan that allows for 25% of salary. So you might assume you could make a $75,000 contribution ($300,000 X .25%). But the limit per year in 2016 is $53,000 ($59,000 if 50 years of age or over). So, the SEP contribution is limited. Not so with the C corporation example below because the salary is spread over two years. You get to contribute money and enjoy the tax savings on the additional contribution. The additional SEP contribution would be $22,000 ($75,000 – $53,000), and you get a tax deduction on the $22,000 at 39% or $8,580.

4. So in our example, there is a $16,091 tax benefit less the cost of money of $4,565, plus the tax savings on the ability to make an additional SEP contribution of $8,580 for a total savings of $20,106.

See the example of the benefits of using a C corporation to income average.

Income_Averaging_C_Corp