Year-End Tax Planning for Businesses
Author: Brittany Cummings
The end of 2017 has provided for a very active tax legislation environment. While we await the final results of potential tax reform, here are a few tax planning strategies to consider:
- Defer Income & Accelerate Deductions: The continued tax planning goal is to defer income into next year—where proposals for a flat 20 percent corporate tax rate loom—and accelerate deductions into 2017. If the current tax proposals are adopted, business deductions will generate a greater tax benefit in 2017 than if taken in a future year where rates are expected to decrease. A cash-basis taxpayer can accomplish this shift by accelerating business expense payments into 2017 while an accrual taxpayer can shift deductions into an earlier tax period by accelerating when the expenses are incurred.
- Capital Asset Acquisitions: Businesses should consider capital asset purchases for possible bonus depreciation and Section 179 deductions. Note that the end-of-year acquisition of more than 40 percent of a business’s total capital assets for the year could result in mid-quarter convention treatment, which may decrease potential tax benefits. Bonus depreciation is scheduled to phase out beginning in 2018, with the deduction decreasing from 50 percent to 40 percent. However, current tax proposals suggest the possibility of immediate expensing for qualified asset acquisitions made after September 27, 2017. Taxpayers should consult their tax advisor to assist in any asset acquisition analysis.
- Domestic Production Activities Deduction (DPAD): Qualifying entities should take full advantage of this deduction for the 2017 tax year as both the House and Senate have proposed to repeal the DPAD depending on the timing of the lower business tax rates’ implementation.
- Research & Development (R&D) Tax Credit: Businesses should continue to annually assess if techniques, processes, software and/or products were developed or enhanced that may qualify for research credits. The R&D credit was made permanent in 2015; however, both the House and Senate tax proposals would require certain research and experimentation expenses, including software development costs, to be capitalized and amortized over a five-year period. This provision would be effective for tax years beginning after December 31, 2025, for the Senate bill and December 31, 2022, for the House bill.
Other Planning Mentions
In June 2017 the IRS and Treasury Department released proposed partnership audit rules affecting partnership entities beginning January 1, 2018. See Kristi Fireline’s previous BKD Thoughtware® article for an overview of these new rules. Partners should discuss the effect of these changes with their tax advisor and/or legal counsel and consider planning ahead for potential exams.
New revenue recognition rules will be in effect for many businesses in the coming years. Taxpayers whose revenue recognition may change should consider, and discuss with their tax advisor, if accounting method changes should be filed with the IRS to allow for more parallel book and taxable income reporting. See our October 2017 BKD Thoughtware article to learn more about the tax implications of the new revenue rules.
Business tax planning remains consistent with the prior year—defer income and accelerate expenses. Tax planning in an uncertain tax environment can be challenging but made easier with parallel planning for 2017 and 2018 filing and year-end planning meetings with your trusted BKD advisor. Be sure to keep up with the BKD Tax Reform Resource Center and the BKD Simply Tax podcast as we provide updated tax reform information.