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Our planning tips for your year-end tax strategies

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drawing tabletGrant Thornton’s Year-End Tax Guide 2017 contains an abundance of useful, timely information to help tax professionals. For each version, private and public companies, we have inserted effective planning tips, which are compiled here. Download our Year-End Tax Guide 2017 and find out more about how these planning tips work, as described in our Public Businesses and Privately Held Businesses versions.

Year-end tax planning strategies for public companiesThe potential for tax reform makes year-end planning even more important for public companies. Your shareholders expect you to understand and respond to the risks and opportunities created by the legislative process, and the possibility of a substantial cut in the corporate rates creates unique planning opportunities. Public companies should look for ways to accelerate deductions into 2017 while rates are high, and defer income into future years when rates might be lower.

The good news is that most businesses have many ways to control the timing of income and expensing. Public companies are often reluctant to pursue tax timing strategies because they typically don’t affect the financial statement, but this year a rate cut could turn a timing change into a permanent benefit. Grant Thornton’s Year-End Tax Guide 2017 for Public Businesses provides planning tips to implement this and other strategies.

Perform an accounting methods review – IRS rules provide many different methods for recognizing certain types of income and expenses. Most public companies employ dozens of separate accounting methods on everything from inventory and rebates to software development and advanced payments. Consider a comprehensive review of all your accounting methods. Identifying a more favorable method can allow you to accelerate a deduction into 2017 while rates are high and defer income into a future year when rates might be lower. The IRS has identified more than 150 accounting method changes that can be made automatically, and there are scores of others you can change after receiving IRS approval.

Accelerate your capital cost recovery – Commercial real estate is depreciated over nearly 40 years, so one of your biggest opportunities for tax savings might be identifying and reclassifying building assets that can be depreciated using shorter lives. A cost segregation study can often identify scores of building components that can be segregated and depreciated more quickly. It is just as important to understand whether any of your capital improvements qualify as repair or maintenance costs that can be immediately deducted instead of depreciated. New IRS rules allow many common expenses that are treated as improvements for book purposes to be deducted as repairs for tax purposes.

Deduct bonuses before the year’s end – The potential for a corporate rate cut next year means that it may be more valuable to take deductions for employee compensation this year instead of next year. You may have many opportunities in your compensation and benefit plans, and one of the best is employee bonuses. The accrual method of accounting used by public companies allows you to take a deduction in 2017 for bonuses paid within the first two and a half months of 2018 if you meet certain conditions. The bonuses must meet the “all-events” test. For bonuses, this typically means that the full bonus pool must be set before year-end.

Consider a reverse audit for sales and use tax refund: Companies that make frequent or large purchases resulting in hefty sales and use taxes should consider a sales and use tax “reverse audit.” Many states offer exceptions for property both for machinery and property bought for further manufacture or resale. You may be eligible for a refund for missed exceptions, misapplied rates and overpayments.

Perform a property tax assessment: Businesses have the right to challenge the valuation a state or local government places on their property in order to assess it. A property tax assessment involves analyzing nearby or similar locations to reveal property value overestimations by state and local authorities that can be successfully challenged to lower taxes.

Year-end tax planning strategies for private companies
Private companies typically have double the year-end planning opportunities because they can leverage tax rules for both business and the owners. The opportunities are even bigger in 2017 because the possibility of a cut in business tax rates creates unique planning opportunities. You should look for ways to accelerate deductions into 2017 while rates are high, and defer income into future years when rates might be lower.

The proposed rate cuts aren’t as big for individuals and pass-through businesses as they are for corporations, but most tax deferral strategies won’t hurt you even if rate cuts don’t come as expected. The good news is that most private businesses have many ways to control the timing of income and expensing. Grant Thornton’s Year-End Tax Guide 2017 for Privately Held Businesses provides planning tips to implement this and other strategies.

Perform an accounting methods review – IRS rules provide many different methods for recognizing certain types of income and expenses. Even the smallest privately held businesses can have separate accounting methods on everything from inventory and rebates to software development and advanced payments. Consider a comprehensive review of all your accounting methods. Identifying a more favorable method can allow you to accelerate a deduction into 2017 while rates are high and defer income into a future year when rates might be lower. The IRS has identified more than 150 accounting method changes that can be made automatically, and there are scores of others you can change after receiving IRS approval.

Accelerate your capital cost recovery – Commercial real estate is depreciated over nearly 40 years, so one of your biggest opportunities for tax savings might be identifying and reclassifying building assets that can be depreciated using shorter lives. A cost segregation study can often identify scores of building components that can be segregated and depreciated more quickly. It is just as important to understand whether any of your capital improvements qualify as repair or maintenance costs that can be immediately deducted instead of depreciated. New IRS rules allow many common expenses that are treated as improvements for book purposes to be deducted as repairs for tax purposes.

Perform a reasonable compensation study – If you own a corporation and work in the business, consider your salary carefully. S corporation owners typically benefit from a low salary because income that isn’t salary is not generally subject to employment tax. On the other hand, owners of a C corporation usually benefit from a higher salary and lower distributions because of the double tax on dividends. The IRS understands the benefits taxpayers can receive by adjusting their salaries and will challenge a salary amount if the IRS deems it unreasonable. You may want to consider using a reasonable compensation analysis to confirm your salary meets IRS standards.

Document your business activities – Privately held business owners may not need to pay 3.8% Medicare tax on business income if they participate in the business enough so that they are not considered a “passive investor.” “Participation,” for this purpose, is defined as almost any work performed in a business as an owner, manager or employee as long as it is not an investor activity. Even so, you must document your activities, and the IRS will not let you make “ballpark” estimates after the fact. Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries.

Consider alternatives to equity pay for key employees – Privately held business owners often struggle to retain key employees without the same ability as public companies to offer equity ownership in the business. Phantom stocks or performance-based cash plans are ways for your employees to share the economic value of an equity interest without the equity itself. A typical phantom stock plan simply credits selected employees with stock units that represent a share of the firm’s stock. Essentially, it is a promise to pay the employee the equivalent of stock value in the future. Performance-based cash payment plans similarly promise employees a future cash bonus if performance goals are met.

See Also:

Contacts
Compensation and Benefits
Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Accounting Methods and Periods
Sharon Kay
Partner, Washington National Tax Office
T +1 202 861 4140

International Taxes
David Sites
Partner, Washington National Tax Office
T +1 202 861 4104

Tax Legislation and Updates
Dustin Stamper
Director, Washington National Tax Office
T +1 202 861 4144