For most people, filing a personal or business income tax return is about as thrilling as going in for a root canal without any painkiller. It can be particularly stressful for small- and medium-sized businesses, since “many are structured as pass-through entities, where income and deductions pass through to the taxpayer's personal return,” said Brent Lipschultz, a tax partner at the New York City office of PricewaterhouseCoopers.
So business owners who tries to do their own tax return without the aid of a CPA or other tax professional may miss out on valuable tips that can reduce the tax bite. Fortunately, some professionals are willing to put a spotlight on the dark corners of the tax code.
“One planning opportunity is an IRA charitable rollover, or qualified charitable distribution,” explained Lipschultz. “This may allow donors 70 1/2 or older, who are required to withdraw a minimum distribution from their IRA, to transfer up to $100,000 of that distribution to a qualified charity and then exclude that amount from their taxable income. Considering all the natural disasters we’ve seen this year, an increasing number of people may want to take advantage of this opportunity to do good while getting a tax break.”
Because a donor is excluding the contribution directly from their gross income, “they can’t take a separate itemized charitable contribution deduction for the donation,” Lipschultz said. “But this direct reduction can really help someone who lives in a state like New Jersey, which calculates state tax on your gross income and also help take advantage of other deductions that may be gained by having lower income.”
Another write-off against income can benefit someone who runs a business from their residence: the home-office deduction.
“A sole proprietor who works at home can generally take a percentage of the costs associated with the home—like utilities, property taxes, mortgage interest or rent—to reduce operating revenue,” he said. “The deduction is generally computed by dividing the area that’s used exclusively for business operations by the square footage of the house or apartment—so if you work in your kitchen or bedroom you cannot claim the deduction.”
Business owners who own their residence may also be able to deduct depreciation expense—again on a business-use percentage—from their business income. “But when you sell the residence, if you elect to exclude your gain on the sale under section 121 of the revenue code you may have to recognize gain on the recaptured depreciation attributable to the portion of the business use of the residence,” Lipschultz said.
Finally, “business owners who contemplate the transfer of interests in family-owned businesses have reason to celebrate as the Treasury Department withdrew regulations that, if adopted, would have increased the cost of transferring interests in family-owned businesses,” he said.
Thinking about getting rid of a car or light truck you use for business? You may want to listen to Marty Abo, the founder and managing member of Abo and Co. LLC, a Mount Laurel-based CPA firm.
“It may be better to sell these vehicles rather than trading them in for a new one,” he said. “Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. So when it’s time to replace the vehicle, it’s not unusual for the tax basis [original cost reduced by depreciation] to be higher than its actual trade-in value.”
But this could present an opportunity.
“If you trade the vehicle in for a new one, any unused depreciation of the old vehicle simply tacks onto the basis of the new one—but this extra basis generally doesn’t generate any additional current depreciation because of annual depreciation limits,” Abo said. “However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can generally be claimed as a deductible loss to the extent of your business use of the vehicle,” he said.
The Credit for Increasing Research Activities, or R&D credit, is a “significant permanent domestic tax credit,” according to Harry Quagliana, a partner at the Parsippany office of Deloitte Tax LLP. Unlike a deduction, which generally reduces taxable income, a tax credit can be more valuable, since it generally reduces tax liability on a dollar-for-dollar basis.
“To be eligible for the R&D credit, a taxpayer’s activities need to satisfy a number of requirements including those in Internal Revenue Code section 174,” Quagliana said. “Under the regulations, even companies who have employees performing R&D activities as an ancillary portion of their activities or outsource it to third-party contractors can often claim the credit,” he said
There may even be a bonus for some New Jersey companies.
“Companies based in NJ in the biotechnology industry that generate R&D credits for activities performed in the state could sell those credits in order to monetize them, even in situations where the companies are generating taxable losses,” Quagliana said.
Businesses that are considering significant capital purchases, like new machinery and equipment, should consider making the buy in 2017 to take advantage of “bonus depreciation,” according to Steve Talkowsky, a tax partner at the Red Bank office of the regional accounting firm WithumSmith+Brown.
“Bonus depreciation allows your business to take an immediate first-year deduction of 50 percent of the purchase price of qualifying business property,” he said. “But bonus depreciation is scheduled to drop to 40 percent in 2018, and 30 percent in 2019 before completely phasing out. So if you were planning to purchase qualified property it may make sense from a cash flow perspective to make these purchases before the end of this year,” Talkowsky advised.
But he does say that “careful attention should be paid to potential tax reform as we approach year-end, as this could change the entire landscape.”