Acuity Advisors

There’s still time to set up a retirement plan for 2016

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

Stay up to date! Subscribe to our future blog posts!

The tax-smart way to replace a business vehicle

Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value. This can be costly tax-wise, depending on how you dispose of the vehicle:

Trade-in. If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one — even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits.

Sale. If you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

For example, if you sell a vehicle you’ve used 100% for business and it has an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.

For details on the depreciation limits or more ideas on how to maximize your vehicle-related deductions, contact us.

Stay up to date! Subscribe to our future blog posts!

Reporting contingent liabilities

Deciding whether to disclose pending litigation, a government investigation or another contingent liability is a highly sensitive matter, especially for public companies. Investors and other stakeholders want information about impending risks that may affect your company’s future performance. But you want to avoid alarming investors with losses that are unlikely to occur or disclosing your litigation strategies.

The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) continue to focus on the required disclosures. In fact, the SEC has noted that many companies aren’t providing the required information related to reasonably possible losses. Here’s what you need to know to comply with the financial reporting rules.

GAAP requirements

Under U.S. Generally Accepted Accounting Principles (GAAP), a company is required to classify contingent losses as “remote” (meaning the chances that a loss will occur are slight), “probable” (that is, likely to occur) or “reasonably possible” (falling somewhere between remote and probable). If a contingent loss is remote, no disclosure or accrual is required.

If a contingent loss is probable, the company must record an accrual, provided it can reasonably estimate the amount or a range of amounts. Otherwise, it should disclose the nature of the contingency and explain why the amount can’t be estimated.

If a contingent loss is reasonably possible, the company must disclose it but doesn’t need to record an accrual. The disclosure should include an estimate of the amount (or range of amounts) of the contingent loss or an explanation of why it can’t be estimated.

Remote contingencies

In 2010, the FASB proposed controversial amendments to GAAP that would have required companies to disclose remote contingencies if the potential impact was “severe” — that is, disruptive to the company’s normal functioning. This proposal was met with fierce criticism, and the FASB ultimately abandoned its proposal.

Judgment call

The SEC and FASB continue to explore the possibility of requiring additional contingencies disclosure. In the meantime, your company may still choose to disclose certain remote contingencies that would result in a material loss. Without revealing litigation strategies, such disclosure may help protect your company against shareholder claims in the event a loss occurs.

Stay up to date! Subscribe to our future blog posts!

Depreciation-related breaks offer 2016 tax savings on business real estate

Commercial buildings and improvements generally are depreciated over 39 years, which essentially means you can deduct a portion of the cost every year over the depreciation period. (Land isn’t depreciable.) But enhanced tax breaks that allow deductions to be taken more quickly are available for certain real estate investments:

1. 50% bonus depreciation. This additional first-year depreciation allowance is available for qualified improvement property. The break expired December 31, 2014, but has been extended through 2019. However, it will drop to 40% for 2018 and 30% for 2019. On the plus side, beginning in 2016, the qualified improvement property doesn’t have to be leased.

2. Section 179 expensing. This election to deduct under Sec. 179 (rather than depreciate over a number of years) qualified leasehold-improvement, restaurant and retail-improvement property expired December 31, 2014, but has been made permanent.

Beginning in 2016, the full Sec. 179 expensing limit of $500,000 can be applied to these investments. (Before 2016, only $250,000 of the expensing election limit, which also is available for tangible personal property and certain other assets, could be applied to leasehold-improvement, restaurant and retail-improvement property.)

The expensing limit is subject to a dollar-for-dollar phaseout if your qualified asset purchases for 2016 exceed $2,010,000. In other words, if, say, your qualified asset purchases for the year are $2,110,000, your expensing limit would be reduced by $100,000 (to $400,000).

Both the expensing limit and the purchase limit are now adjusted annually for inflation.

3. Accelerated depreciation. This break allows a shortened recovery period of 15 years for qualified leasehold-improvement, restaurant and retail-improvement property. It expired December 31, 2014, but has been made permanent.

Although these enhanced depreciation-related breaks may offer substantial savings on your 2016 tax bill, it’s possible they won’t prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations — such as if in the future your business could be in a higher tax bracket or tax rates go up — the normal depreciation deductions could be more valuable.

For more information on these breaks or advice on whether you should take advantage of them, please contact us.

Stay up to date! Subscribe to our future blog posts!

It’s sometimes hard to report “hard” assets

How much do you really know about accounting for property, plant and equipment? U.S. Generally Accepted Accounting Principles (GAAP) permits some leeway when deciding whether to capitalize or expense a fixed asset purchase, as well as in choosing depreciation methods and useful lives. Such leeway is part of the reason many business owners are uncertain about how to report these valuable assets on their financial statements.

Capitalize vs. expense

Deciding whether to capitalize or expense a purchase is subjective and often depends on the company’s size and industry. Technically, if an asset is above a materiality threshold (which varies from company to company) and is expected to have ongoing use to the business beyond the current period, it should be capitalized. In other words, you should report it on the balance sheet and gradually depreciate the asset over its expected useful life.

Alternatively, some purchases are expensed in the current period, typically as supplies or repairs and maintenance expense. Immediately expensing those purchases lowers profits over the short term, compared to capitalizing purchases, which expenses the same amount over a longer period of time.

Book value vs. market values

When you capitalize a fixed asset, the amount shown on the balance sheet reflects the original purchase price minus any depreciation expense taken over the asset’s life. If you use accelerated tax depreciation methods for financial reporting purposes — and many smaller businesses do — the balance sheet may significantly understate a fixed asset’s ongoing value to the business. Some fixed assets that are fully depreciated may continue to be used in a business for many years beyond their useful lives.

There are many other reasons the book and market values of fixed assets don’t jibe. For example, land, buildings and leasehold improvements tend to appreciate in value over time. Conversely, other fixed assets may become obsolete or damaged before they’re fully depreciated.

It’s important to identify when market value falls below book value, because GAAP generally requires a write-down. Under the principle of conservatism, fixed assets should be reported at the lower of cost (less accumulated depreciation) or market value.

Need assistance?

Reporting property, plant and equipment is harder than it appears. It requires subjective judgments. Plus, depreciation is an artificial accounting concept that doesn’t always sync with economic reality. We can help you understand how to capitalize, depreciate and write down fixed assets under GAAP.

Stay up to date! Subscribe to our future blog posts!