The end of 2016 is upon us and “tis the season” to appreciate the year, the many blessings in our lives and to wrap up the year with an eye toward an even better 2017.
As we make that final push to end our business year well, our budgets for the coming year get a final touch, holiday parties are held and the energy is positive and hopeful.
We also spend time with our trusted business advisor to determine just how much Uncle Sam will want from our prosperity. Yet he comes bearing gifts for those who know how to find and utilize them to reduce their taxes and make their 2016 an even better year.
Here are four tax incentives that you should be looking closely at and perhaps taking advantage of in order to maximize your after-tax profit, Christmas bonuses and year-end party.
Cost Segregation / Energy-efficient tax deduction (Section 179D)
Construct or buy a building this year? Not an inexpensive effort yet one that can generate some significant tax savings. The tax law allows companies to evaluate this new (or purchased) building at an engineering level, parsing out the various assets into their useful lives and depreciating them at various rates to maximize depreciation.
How does this help?
By segregating the costs out into their useful lives rather than simply depreciating the entire structure over the required period of 39.5 years (or 27.5 years for residential property), depreciation is increased substantially in the first 5-7 years. This lowers taxable income resulting in lower overall taxes paid and more cash available to invest back into the business. If an increase in cash flow for your business means an increased investment in activities that will help with your growth, this can be a nice way to start the Holiday season.
You can learn more at Cost Segregation on our web site.
Energy Efficient Commercial Buildings Deduction (Section 179D)
Saving energy isn’t simply something everyone should be doing, it’s something that Uncle Sam is willing to help you complete. Through 2016 (the provision has been extended several times in the past but is set to expire at the end of 2016), building that can demonstrate a reduction in energy and power costs by 50% or more (when compared to a reference building which meets certain ASHRA standards) can generate an additional tax deduction of up to $1.80 psf.
This can apply to a recently purchased, built or currently owned building that is renovated with new energy saving equipment. Typically, this analysis is completed in connection with a cost segregation study and is like that little extra present in your stocking on Christmas morning.
If you do, then you should be looking closely at the IC DISC. This US incentive is available to companies that export goods manufactured in the United States.
In its simplest form, the IC DISC provides a deduction based upon export sales or profits that can result in significant tax savings. The analysis a comparison of 4% of export sales or 50% of net income derived from export sales.
The larger of the two amounts is then paid to a wholly-owned US subsidiary creating a deduction for the US manufacturing company (thus lowering the parent company’s taxes). The subsidiary pays no tax on the revenue from the parent and then dividends the proceeds back to the parent company. The dividends are then taxed at dividend rates rather than ordinary income rates generating a permanent tax savings on the amount of the dividends.
Sounds a little confusing? It gets better. The analysis of export profits can be completed a number of different ways depending on the product mix and industry.
This incentive requires the help of an expert but can generate a very nice holiday bonus. Want to see how your incentive could turn out? Try our IC DISC Calculator for free and find out if this incentive is worth more research.
Domestic Production Activities Deduction (DPAD)
There was a time when MPG meant Miles Per Gallon (ok so it still does). Today, MPGE means a lot more when it comes to tax savings.
The Domestic Production Activities Deduction or DPAD is a deduction available to US companies that M-Manufacture, P-Produce, G-Grow, or E-Extract (or install, develop, improve or create) qualified production property (or QPP). Sound like something you might do? It could be.
This incentive is designed to help US companies be more competitive globally by providing a deduction amounting to 9% of Qualified Production Activities Income (QPAI-yes, this incentive is all about the acronyms).
Calculating the DPAD can be relatively easy if the company’s revenues are less than $5 million. If the average revenues are above $5 million for the last 3 years, the calculations start to get more complicated (Hint: See help from an expert in the DPAD).
Because this is a deduction, it reduces taxable income and positively affects your regular and alternative minimum tax calculations.
You can learn more at Domestic Production Activities Deduction at our web site.
R&D Tax Credits
Gifts from Congress rarely come in the form of taxes. This year, however, we are fortunate to have the research tax credit available to offset alternative minimum tax.
Wait. What happened?
The PATH Act changed the research tax credit by making it a permanent credit AND adding a provision for small businesses (with revenues of less than $50 million) allowing the research credits generated to be used against alternative minimum tax (beginning in 2016). This is a VBD for small business owners who are routinely either paying AMT or are almost paying AMT rendering the research tax credit almost useless. With this change comes tax reductions and perhaps a few more presents under the tree for the family.
Go back. What is the R&D Tax Credit?
Simply, the R&D tax credit is available to US companies that develop or improve on products, processes, software, techniques, formulas or inventions. While there is a lot more depth to qualifying projects and calculating the credit, anyone that is profitable AND meets the definition above should be looking closely at this incentive.
Who can you call for help?
(Shameless self-promotion coming) Acena Consulting has been helping US companies understand, calculate and document the R&D tax credit for more than 10 years. Our process is efficient, results defensible and audit track record outstanding. We not only offer a free consultation and analysis of your activities, but one-hour webinars on the R&D Credit. I hope you will reach out when you have a question or want to work with experts in the field. You can register for our webinars below.
At Acena Consulting, we recognize that you, the small business owner, have a lot more on your plate than worrying about tax incentives. Our role is to bring strong tax technical knowledge, ability to build efficient processes, answer the questions you may not know to ask. We take this concern off your list so you can focus on your core business.
Want to learn more about the magic of our approach?