As Seen In NJBIZ
It’s that time of year again; when firms are doing their projections for the year ahead to determine which tax saving strategies they might utilize to help reduce or defer their taxes. Unlike this time last year, firms can plan with more certainty due to a number of tax provisions that were made permanent in December 2015. While some planning strategies ought to have been employed prior to December 31st (such as Fixed Asset Purchases, Deferred Revenue, and pre-payment of expenses), others can still be contemplated and executed right now to help business owners achieve greater tax savings.
Cost segregation study
If your firm recently purchased or developed a building or remodeled existing space, consider having a cost segregation (“Cost Seg”) study done. A Cost Seg study identifies the components of the property that can be depreciated faster, increasing current deductions in 2016 and in future years. Typical components that can be depreciated faster include decorative fixtures, security equipment, parking lots, and landscaping.
Research and development credit
A firm favorite. Having a research and development credit study done can help to generate a credit that can be used to offset taxes. A credit is generally better than a deduction as the benefit is dollar for dollar reduction in taxes, whereas a deduction’s benefit is limited to a tax paying entity’s effective tax rate. The large beneficial change for 2016 is that the research and development credit can also be used against alternative minimum tax (“AMT”) broadening its benefit to qualifying firms (generally those with gross receipts less than $50M over the past three years).
Profit-sharing and 401(k) contributions
Firms, including those that file their returns on a cash basis, can deduct 401(k) matching and profit sharing contributions in the 2016 tax year even though the payment needs only to be made by the extended due date of the return. This gives a cash basis firm the ability to take a current year deduction without having to expend the cash until the subsequent year.
Domestic production activities deduction
This federal deduction is intended to provide tax relief for firms that produce goods in the United States rather than producing it overseas. Firms generally qualify for the deduction, but there are limitations. Eligible services include consultation, planning, aesthetic and structural design, and supervision of construction. For 2016, the deduction equals 9% of the net income from eligible activities, with a limit of 50% of certain wages that are attributed to domestic production.
Energy efficiency deduction
This deduction, which must be assigned to a firm by its government clients, provides a deduction of up to $1.80 per square foot for renovations or new construction where a building’s envelope, HVAC and/or lighting components surpass benchmarks for energy efficiency. It is good practice to discuss the assignment of the deduction with your client during.
Using any, or a combination, of the above strategies can help a firm minimize its taxes. Some of the strategies also involve making a business decision (whether or not to make a profit sharing contribution), while by not exploring others (Cost Seg or Research and Development), a firm may be paying more in taxes than it needs to.