Ask the experts: Preparing for tax season
Q: What do I need to do before the end of the year to prepare for my 2016 taxes?
A. Thinking about ways to minimize your taxes is not something that should happen only at year-end. There are several things to consider now that can pay off when you file next year.
1. First and foremost, meet with your tax preparer before 2016 is over to make sure you're doing everything you can to minimize your taxes. You want to know know what to expect come April 17, 2017.
2. Expensing/depreciating new tangible personal property in the year it was purchased is one tax advantage for small business owners. (Although special limits may apply to vehicles.)
- Thanks to recent legislation—the Section 179 deduction—you can deduct equipment and furniture you buy for your business in the year you buy rather than having to depreciate it over a number of years. This rule has been restored for 2016 with a maximum allowance of $500,000. You cannot deduct more than your taxable income. In other words, this deduction cannot leave you with a loss on your business.
- The bonus depreciation deduction is now 50 percent and is not limited by your taxable income. This can be taken even if it causes a loss on your business tax return.
3. Maximize contributions to both your retirement fund and the charities you support. The IRS rewards taxpayers who do both. Some of the options you can consider for making a tax-deductible retirement contribution include:
- A 401(K) needs to be established before Dec. 31; the maximum contribution for 2016 is $18,000. A Simple 401(K) plan (called this because it is, well, simpler, especially for small businesses) must be established before Oct. 1; the maximum 2016 contribution is $12,500. Both can be funded after year-end.
- IRAs, to which you can contribute up to $5,500 for yourself for 2016. A Roth IRA has the same limit but cannot be deducted on this year's tax return. The advantage of a Roth is that earnings that are distributed after retirement are not taxable.
- SEP (Simplified Employee Pension) caps out with a maximum contribution of $53,000 for 2016, up to 25 percent of your taxable income. Contributions can be made through the date of your extended tax return (as late as Oct. 15 of the following year for a sole proprietor).
4. Do your teenage children need part-time jobs? You can pay them up to $6,300 tax-free and take a deduction for the wages paid. Check out your state’s employment laws for age requirements.
5. When you travel for business, you can write off your expenses, including airfare, hotel, 50 percent of your meals, and $0.54 per mile for any driving you do. This travel has to be business-related to take it as a deduction.
6. If you are self-employed, deduct 100 percent of your health insurance premiums. This does not apply if you have an employer who pays your premiums.
NOTE: This information is meant to be a summary of potential tax planning strategies and opportunities. Do not apply any of this general information without the assistance of your tax preparer! Remember that tax laws often change and contain numerous deadlines, limitations, and exceptions that are not summarized easily.
Scott Kurkian, Professional Photographers of America chief financial officer