The year is almost over, so you have only a few more weeks to shape your 2016 tax situation. 

With tax rates expected to decrease in 2017, it may be more important than ever to take advantage of tax planning in 2016 in order to maximize the benefits of your tax deductions. Tax planning is generally easier to have an impact for business owners and individuals with more complex situations, as the more moving parts you have the more you can engineer your situation.

So what is tax planning?

Rather than waiting until your tax filing to find out what the tax year did to you, you take control and shape your tax situation as optimally as possible. The process generally involves projecting your expected income and a couple of variations of that scenario then coming up with a plan to implement.

Depending on how organized you are, there can be some legwork in the process as you look to figure out where your 2016 income is expected to fall.

A common goal in tax planning is to defer income and accelerate expenses. That strategy can work but is also an endless game once you start it - you’ll continue to do it for all subsequent years. You need to realize there are rules related to this strategy. 

If you are a cash basis taxpayer and you receive cash for the year then that money is income for the year, whether you choose to deposit it or not. On the expense side, for a cash-basis taxpayer, the money actually needs to go out by the end of the year. For accrual basis taxpayers, when you do the work is going to drive revenue recognition, and when you receive a bill is going to generally drive expense recognition. 

Under either basis, you have to be careful that you are not doing a prepayment of expenses, which is considered an asset and not a deduction.

The 2016 tax year doesn’t have as many specific portions of the tax code expiring as normally do in a given year because the tax extender provisions were extended for more than one year.
In other words, we’re normally sitting here at the end of a tax year with uncertainty on what tax provisions will continue into the future. This year, not so much.

A specific item expiring in 2016 pertains to renewable energy, such as wind and geothermal heating and cooling.

Whether you are considering a renewable energy investment or would just like to shape your tax situation to be more optimal, we encourage you to look at tax planning with a tax professional before the year is up. 

My goal today is to inform you of the benefits of tax planning and working to optimize your tax situation.

Adam Shay, CPA (N.C. License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at (910) 256-3456.