Welcome to part 2 of our tax planning tips for small-to-medium sized businesses. In this 2nd part of our 2-part series, we will look at replacing or upgrading your assets with a 1031 Exchange, ways to make your deductions more efficient, and how to impact your tax bracket. Making these 3rd quarter decisions now could be key to some serious savings on your 2016 books and cash flow!
Replace or Upgrade Assets with a 1031 Exchange
If you’re planning to replace or upgrade your current equipment, vehicles, machinery, the land they’re on or buildings they’re garaged and repaired in, look into setting up a 1031 Like-Kind Exchange before you sell. You will need a 1031 Exchange “Qualified Intermediary” (QI) to assist with the transactions, with fees starting at $575 (and some charging $1500 or more). Law requires that a third party, typically the QI, hold the funds during the Exchange period.
- Trade Your Elway for a Manning
The idea is that you are simply exchanging one piece of property for another and that all gain is transferred to the new property. Your replacement or upgrade is then not recognized as a gain or loss by the IRS. Heavy equipment, livestock, airplanes, even that football signed by John Elway. They can all be exchanged for like-items to defer taxes, improve cash flow, and improve your bottom line over time.
- Sell Now, Shop Later
Avoid capital gains and/or normal income tax while you search for your replacement property(ies). You can typically get 180 days to find these replacement(s). If the equipment you are selling will give you at least $5,000 in normal gains (or $10,000 in capital gains), a 1031 Exchange is a money saving option to consider.
- Vail or Steamboat
It is possible to purchase real estate such as a different second home, business, or vacation home with the 1031 Exchange strategy. A set of regulations applies to this situation for two years on each side of the Exchange. Real estate swaps are a popular option for a 1031 Tax Deferred Exchange.
- When an Exchange Won’t Work
A 1031 Exchange can’t be used retroactively. If you’ve already purchased or sold an asset in question (by title, payment or use), it is not eligible. Also, if the sale of your current equipment will result in a significant loss, you’ll want to check with your advisor regarding the favorability of a 1031 Like-Kind Exchange.
Make Those Deductions More Efficient
Don’t wait until 2016 to check in with your CPA or CFO about deductions. Catch your advisor now when their schedule is quieter and they are more likely to take an in-depth look at your available deductions.
- Green Flag for the Home Office
Worried about the Home Office Deduction being a red flag for the IRS, worry no more. The majority of small businesses are home-based these days and your advisor can make sure that you are satisfying all of the requirements listed in IRS Publication 587.
- Pre-Startup Costs
How about this one: did you know you can deduct startup costs of up to $5,000 that were incurred before you even opened your business; and once underway, you can amortize costs of up to $50,000 for real estate, property, equipment, tools, machinery and vehicles?! Spreading these costs out over 180 months (15 years), from the month your business officially opened, can have a huge impact on available cash flow. See IRS Publication 535 for details or consult with your tax professional.
Are you making the best use of carryovers? Carryovers that didn’t apply in prior years may be applicable now. Take a closer look into your contributions to charities, passive activity losses, and capital losses.
Be Proactive with Your Tax Bracket
Now is the time to revisit your tax bracket for 2016 by checking into the tax rates for 2015-2016. Accelerating your 2016 income into 2015 can keep your business from falling into a higher tax bracket next year. The other side of this coin is to possibly defer income until 2016, with the same goal in mind. Tax brackets changed again from 2014 to 2015; make sure you don’t get caught off-guard.
Need a little help navigating Section 1031 Like-Kind Exchange waters? Give us a call.