By Lisa M. Borrelli, CPA, M.T., Senior Wealth Specialist, Bryn Mawr Capital Management, a subsidiary of WSFS Financial Corporation
Owners of closely held businesses face additional challenges when it comes to tax planning and year-end pressures. Most tax planning needs occur before the close of the calendar year, but there are a few options available between January 1 and March 15. (Note, while this article focuses on Calendar year taxpayers, Fiscal year taxpayers may face a different timeline and should separately consult their tax preparer for guidance).
Retirement Contributions: Business owners have the ability to increase their retirement savings by funding retirement accounts up until the tax filing is completed. That means a small business owner filing a Form 1120S may continue to contribute to the company Profit Sharing Plan until March 15 (assuming the returns are not extended and timely filed). An Individual operating as a consultant reporting their income on a Schedule C can continue to fund their SEP IRA through October 15 (assuming the return is appropriately extended and filed on October 15). There are various retirement accounts, each with its own rules of eligibility and filing deadlines, but before finalizing tax returns, ask if there are additional retirement funding opportunities as a great place to start.
Depreciation Methodology: Depreciation should not be new terminology to most business owners. There are different methodologies for taking depreciation of assets placed into business in the current tax year that may increase the currently allowable expenses. Section 179 Deductions for example allows for 100% of the cost to be depreciated in the year an asset is placed into operation. Modified Accelerated Cost Recovery Structure (MACRS) Depreciation results in an accelerated schedule, pulling the deductible expenses to be forward-heavy. For example, when considering the depreciation of a new truck ‑losing 10% of its value upon leaving the lot- from Year 1 to Year 2, the value of the truck at resale (Fair Market Value or FMV) declines at a more rapid pace than it will from Year 4 to Year 5. Ensuring deductible expenses more accurately reflect the decreasing FMV is critical. Bonus Depreciation allows us to further accelerate the currently deductible expenditure to that which resembles something between MACRS and Section 179. Bonus Depreciation underwent a significant change in the 2017 Tax Cuts and Jobs Act and is currently in a phase-out status. Always consult your tax preparer regarding your business needs when considering depreciation methodology.
Tax Credits and Incentives: There are various tax credits and incentives Federally, and at the state level, it’s become a specialized division within tax accounting. While highly complex, there are some tax credits business owners may be eligible for within the day-to-day operations of the company. Research and Development and Energy Efficiency credits are two of the most popular credits available after the close of the year for business owners expanding operations and adapting new energy-efficient technology and infrastructure. For business owners seeking additional tax incentives, a long-term strategic planning meeting can be extremely beneficial in uncovering future and current credits available.
Tax strategy advice is often complex for business owners because no two companies operate identically. Working with a skilled CPA will allow the tax planning conversations to extend beyond year-end and throughout tax deadlines.
About the Author – Lisa M. Borrelli, CPA, M.T.
Lisa Borrelli is a Senior Wealth Specialist at Bryn Mawr Capital Management, a subsidiary of WSFS Financial Corporation. In her role, Lisa works with clients on a variety of planning areas such as income tax and liability exposure, business planning, and trust and estate planning. Lisa received her Masters in Taxation (M.T.) from Villanova University and a B.S. in Accounting from Saint Joseph’s University. Lisa can be reached at [email protected].
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