November 13, 2015
Deferring Income into 2016
Deferring income to the next taxable year is a time-honored year-end planning tool. If you expect your taxable income to be higher in 2015 than in 2016, or if you anticipate being in the same or a higher tax bracket in 2015 than in 2016, you may benefit by deferring income into 2016. Of course, in the case of an individual exposure to the alternative minimum tax could reverse the standard planning. Some ways to defer income include:
Use of Cash Method of Accounting: By adopting the cash method of accounting instead of the accrual method, you can generally put yourself in a better position for accelerating deductions and deferring income. There is still time to implement this planning idea, because an automatic change to the cash method can be made by the due date of the return including extensions. The following three types of businesses can make an automatic change to the cash method: (1) small businesses with average annual gross receipts of $1 million or less (even those with inventories that are a material income producing factor); (2) certain C corporations with average annual gross receipts of $5 million or less in which inventories are not a material income producing factor; and (3) certain taxpayers with average annual gross receipts of $10 million or less. Provided inventories are not a material income producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts.
Installment Sales: Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received. So if you sell property prior to the end of 2015 and will receive payments in future years, you should consider reporting the gain on the property using the installment method to defer payments (and tax) until next year or later.
Delay Billing: If you are on the cash method, delay year-end billing to clients so that payments are not received until 2016.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. Unless you have constructive receipt of dividends before year-end, they will not be taxed to you in 2015. If you have control or influence over when dividends are paid to you, we should discuss this when we meet.
Accelerating Income into 2015
You may benefit from accelerating income into 2015. For example, you may anticipate being in a higher tax bracket in 2016, or perhaps you need additional income in 2015 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2015 could be disadvantageous if you expect to be in the same or lower tax bracket for 2016.
If you report your business income and expenses on a cash basis, issue bills and pursue collection before the end of 2015. Also, see if some of your clients or customers are willing to pay for January 2016 goods or services in advance. Any income received using these steps will shift income from 2016 to 2015.
Qualifying Dividends: Qualified dividends are subject to rates similar to the capital gains rates. Qualified dividend income is subject to a 15% rate for taxpayers below the 39.6% tax bracket. For taxpayers in the 39.6% bracket, the rate is 20%. Note that qualified dividends may be subject to an additional 3.8% net investment income tax. Qualified dividends are typically dividends from domestic and certain foreign corporations. The corporate board may consider the tax impact of declaring a dividend on its shareholders. If you are not in the highest bracket for 2015, but you expect to be in 2016, consideration should be made as to authorizing any dividend payment prior to the end of 2015 to utilize the 15% favorable tax rate vs. the 20% rate at higher income levels.
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