It’s Not Too Late for Year End Tax Planning

Businesses that expect to owe substantial federal taxes in 2015 can still take steps to soften the blow. But many tax breaks hinge on expired tax provisions that Congress might restore before it adjourns for the holidays. Here are some last-minute tax-saving strategies to consider before December 31. 

Deduct rather than depreciate

Manufacturers and distributors rely heavily on equipment, property and other fixed assets. Some of their biggest expenses are depreciation, supplies, and repairs and maintenance. The sooner they can deduct these costs, the lower their current year’s taxes will be.

1. Deduct costs under the repair regs. In general, the IRS’s final regulations for tangible property costs (commonly known as the “repair regs”) require most tangible property costs to be capitalized and depreciated over several years — rather than deducted in the current year — for federal tax purposes. However, the repair regs include provisions that may warrant additional qualifying purchases or improvements before year end to lower taxable income. 

For example, companies can elect to immediately deduct items costing up to $500 that would have otherwise been capitalized. A $5,000 threshold applies to companies with applicable financial statements for the year — generally, companies required to file Form 10-K with the Securities and Exchange Commission and those with audited financial statements. 

A safe-harbor rule also allows businesses to deduct routine maintenance costs. In addition, taxpayers with average annual gross receipts of $10 million or less for the three preceding tax years can deduct improvements to an eligible building property if the total amount paid during the year for repairs, maintenance, improvements and similar items doesn’t exceed the lesser of 1) $10,000 or 2) 2% of the building’s basis before depreciation.

Incidental materials and supplies costs can be deducted in the year they’re paid or incurred. These costs include expenditures of $200 or less for non-inventory items, as well as costs of non-inventory items with useful economic lives of 12 months or less regardless of the size of the expenditure.

2. Make the most of Section 179 limits. For tax years beginning in 2010 through 2014, taxpayers could immediately deduct up to $500,000 for purchases of qualifying new or used assets under Sec. 179. Included in this limit were new and used machinery, office furniture, computer equipment and purchased software. 

As of this writing, the maximum Sec. 179 deduction for tax years beginning in 2015 is only $25,000. Manufacturers and distributors should take advantage of this allowance, but it’s possible that Congress could restore a higher Sec. 179 allowance before year end. If that happens, be prepared to act fast to lower your taxable income for 2015. Remember that assets must be placed in service by no later than the end of your business’s tax year to qualify for the Sec. 179 deduction. 

Finally, there’s no word yet whether Congress will restore the 50% first-year bonus depreciation allowance for 2015. This tax break applies exclusively to qualifying new equipment and purchased software that’s placed in service before year end — so also be prepared to act fast if 50% bonus depreciation is restored.

3. Use Sec. 179 for real property improvements, if available. Real property improvement costs have traditionally been ineligible for immediate deduction under Sec. 179. But the tax law permitted an exception for qualified real property improvements placed in service in tax years beginning in 2010 through 2014. In those years, taxpayers could claim a first-year Sec. 179 deduction of up to $250,000 for 1) interiors of leased nonresidential buildings, 2) restaurant buildings and 3) interiors of retail buildings. 

As of this writing, the $250,000 Sec. 179 allowance for qualified real estate improvements has expired. But taxpayers should be prepared to make property improvements near year end in case Congress restores this tax break for tax years beginning in 2015.

Pay attention to the extenders 

A long list of other federal income tax credits and incentives for businesses — including the research credit — expired at the end of 2014. 

In the meantime, document qualifying expenditures and create wish lists of fixed asset purchases, improvements and other expenditures to take advantage of last-minute tax breaks that may be available for 2015. And check with your tax advisor for the latest information — it’s possible Congress will have acted by the time you’re reading this.

© 2015