United States: It's Not Too Early For Year-End Tax Planning

Last Updated: October 7 2015
Article by Joel Herman

Businesses that expect to owe substantial taxes in 2015 can still take steps to soften the blow. However, a number of tax breaks, particularly ones related to depreciation, hinge on legislation that Congress might restore before it adjourns for the holidays. While there is still some uncertainty with respect to depreciation provisions, there are nevertheless still 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. Accelerating the deduction for these costs will lower their current year's taxes.

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 a certain threshold that would have otherwise been capitalized. Thresholds should be defined in a company's capitalization policy. A $5,000 threshold typically applies to companies with applicable financial statements for the year.

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, subject to a company's capitalization policy, include expenditures 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. Consider accelerating purchases of these supplies to take delivery before year end.

2. Make the most of Section 179 limits. For tax years beginning in 2010 through 2014, taxpayers could immediately deduct up to $500,000, with certain limitations, 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 limited to only $25,000, with certain limitations. Manufacturers and distributors should take advantage of this allowance, but it's possible that Congress could restore a higher Sec. 179 allowance before the end of 2015. It did so as the provisions were expiring and the calendar was closing on 2014. If that happens again, 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 as it did at the end of 2014. 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 again, taxpayers should be prepared to make property improvements near year end in case Congress, as it did for 2014, 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. These credits have expired and been extended in previous years, so extension of these credits again remains a possibility.

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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