CPA Blog

Year-end tax strategies for accrual-basis taxpayers

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Published: Monday, 12 December 2016 10:37

Written by Phillip Strickler, CPA.CITP

The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill.

Record and recognize

The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:

• Commissions, salaries and wages,
• Payroll taxes,
• Advertising,
• Interest,
• Utilities,
• Insurance, and
• Property taxes.

You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.

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Keeping your family business in the family

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Published: Monday, 12 December 2016 10:31

Written by Phillip Strickler, CPA.CITP

A successful family business can provide long-term financial security for you as its owner, as well as for your loved ones. To improve the chances that your company will continue to benefit your heirs after you’re gone, take steps now to keep it in the family.

Staying in-house

Careful estate planning can ensure that a business continues to benefit family members and that ownership of the business isn’t diluted — at least until the business is ready to accept outside investors.

For example, a well-designed buy-sell agreement can prevent owners from transferring their shares outside the family, while providing the liquidity they need to exit the business. And prenuptial agreements can prevent married owners from losing a portion of their shares in a divorce.

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Roth 401(k) conversions may suit your Millennial employees

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Published: Wednesday, 07 December 2016 10:54

Written by Phillip Strickler, CPA.CITP

Roth 401(k) conversions may suit your Millennial employees

Could your company’s benefits package use a bit of an upgrade? If so, one idea to consider is adding an option for employees to convert their regular 401(k)s to Roth 401(k)s.

Under a Roth 401(k), participants make after-tax contributions to a qualified plan and receive tax-free distributions, provided the funds are in the plan for at least five years from the date of the initial Roth contribution. Thus, while participants pay a tax on the income that was the source of the contribution, the earnings on the contributions are tax-free.

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Can you pay bonuses in 2017 but deduct them this year?

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Published: Wednesday, 07 December 2016 10:47

Written by Phillip Strickler, CPA.CITP

You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available.

For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basistaxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year.

The all-events test

For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:

1. All events have occurred that establish the taxpayer’s liability,
2. The amount of the liability can be determined with reasonable accuracy, and
3. Economic performance has occurred.

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