With the annual chore of filing your personal and business income tax returns for 2016 just around the corner, it’s a good time to take stock of your business practices to make sure you’re on the right side of the line.

SECTION 179

When it comes to federal tax laws, December can often be the month when everything changes. For years, tax experts and business owners have grappled with repeated end-of-year developments — last-minute adjustments to the laws and regulations applying to federal business income taxes.

Not 2016. This has been a presidential election year. That’s pretty much put a halt to any big changes. “History has said, lame-duck Congresses don’t really do very much,” says tax attorney Patricia Hintz, a partner at Quarles & Brady in Milwaukee, Wisconsin.

Furthermore, the two biggest yearly cliffhanger issues where tax policy is concerned were substantially resolved a year ago. The late 2015 tax and spending bill passed by Congress and signed by the president made long-term changes in two different provisions that govern business deductions for equipment purchases under the federal tax code.

The 2015 legislation cemented in place a previous expansion of the code’s Section 179 dating back a decade and a half.

Keeping it simple: Section 179 lets businesses take immediate federal tax deductions on certain kinds of new equipment. Section 179 used to restrict that immediate deduction to equipment costing less than $25,000 per item, with a ceiling of $125,000 on total annual purchases that qualified.

When the economy stalled after the 9/11 attacks, Congress boosted the Section 179 limits temporarily. Suddenly businesses could expense qualifying new equipment costing up to $500,000 apiece — 20 times the original cap. And the total yearly cap for all qualifying equipment purchases soared to $2 million.

Those temporary boosts were extended year after year after year — one year at a time, and always at the eleventh hour.

In the 2015 spending deal, the new, higher limits were made permanent. And because business owners have known this all year, they aren’t faced with a last-minute decision over whether a big purchase will qualify.

BONUS DEPRECIATION

Bonus depreciation was another provision enacted “temporarily” after 9/11. For qualified purchases, a business that for whatever reason can’t use or qualify for the full deduction under Section 179 can take an immediate 50 percent deduction on the cost of new equipment. Like the higher Section 179 limits, bonus depreciation has been given a last-minute extension every year, until last year.

That’s when Congress and the president agreed to extend it through 2017, followed by a slow phase-down. Hintz says the 50 percent bonus depreciation is scheduled to drop to 40 percent in 2018 and 30 percent in 2019. As with the Section 179 change, the longer time frame makes it easier for businesses to plan purchases with an eye toward the tax effects.

Of course, how these provisions, or any other aspect of the tax law, will affect your business will depend on the details of your personal business circumstances that no column can address precisely. So here’s as good a time as any to remind you that if you don’t already have a trusted tax adviser — a certified public accountant at least, and a lawyer qualified in this area as well if at all possible — you need to get a good one pronto.

Not to mention that in every state and in many municipal jurisdictions, a variety of specific laws and regulations abound that go far beyond what we can round up here.

WORTHY OF NOTING

Still, this is a good time to review your practices and carefully inspect your records as you prepare your taxes. Some things to consider:

• If you need to lower your tax burden, are there some bills you can get ahead on by paying them before the end of the calendar year? (You need to be reasonable here — the IRS will frown on things like trying to drive up your expenses by paying your company electric bill for the next three years in one lump sum)
• On the income side, are there some invoices you can hold to send out in the new year, to trim your income and therefore your tax burden for the current year? 

There’s an important caveat to those two suggestions, Hintz notes: They really only work if you keep your books on a cash accounting basis — booking income when you receive payment and expenses when you pay the bill. Most small businesses work this way, but if you don’t know how yours does, check with your adviser.

The alternative is accrual accounting, in which you book income when you do the work, regardless of when you get paid, and you book an expense when you actually order the supply, even if you don’t pay for it until 30 or 60 days out. Small businesses rarely use that method, Hintz points out. But again — find out from your adviser what you do if you don’t already know.

Some other things to look at:

• The end of the year is also a good time to throw money into your personal retirement plan — another tax-saving act. The deadline is soft, however: Depending on the specific federal regulations your retirement plan falls under, you can probably take credit for contributions you make even after the new year begins, so long as you make them before April 15. (Once again — check with your expert to be sure.)
• Review that you’re fully compliant with the Affordable Care Act. If you have fewer than 50 employees, you don’t have any obligation to buy health insurance for your workers. But for your own health coverage, you’re probably governed by the law’s individual mandate, which requires everyone to carry health insurance or face a penalty. That penalty is assessed through your income tax return, so now’s the time to confirm you’re properly covered and won’t have to pay it.
• Make sure you do a good job of segregating personal expenses from business ones. That sounds obvious, but Hintz points out that many small-business owners may casually blur the two categories. That’s especially true if you make some personal purchases from the same supplier you use for your business.

Suppose you carry a running account with the local hardware store so you and your crews can replace hand tools or other materials. Now think about those weekends when you’re working on a project around the house and you stop by the same store for those supplies. Does your purchase get chalked up to the same business account?

If you can confidently say no, that’s great. But Hintz says small-business owners sometimes put everything on one bill, personal and business. “The burden of proof is on you to show you used it for a business purpose,” she says.

Company vehicles that wind up getting used sometimes for personal trips can similarly cause complications at tax time. They’re “a real hot button,” says Hintz.

PREPARE NOW

So between the eggnog, the gift giving and the fellowship with friends and relatives this holiday season, take time to make sure you’re ready for taxes in the new year. It may be one of the best year-end presents you can give your business — and yourself.