End the year with smart tax decisions

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As with any year, if you have planned business expenses that can be moved into December from early 2016, those deductions will reduce your 2015 taxable income. This is pretty straightforward except when it comes to large purchases, such as a truck or trailer.

Potentially big changes loomed at year-end regarding depreciation, says Mike Calahan, manager of tax services for Denver-based ATBS, the nation’s largest owner-operator financial services provider. Expensing limits for depreciation under IRS Section 179 were decreased for 2015 to $25,000.

Home office equipment must be used regularly and exclusively for your business in order to quality for a tax deduction.Home office equipment must be used regularly and exclusively for your business in order to quality for a tax deduction.

Congress has been working on a bill to increase that to $2 million, and to make it permanent. If a congressional decision is made in December or January to increase the limit, it might well be backdated to cover 2015 taxes, Calahan says.

However, the allowable expense amount cannot exceed income for the year. “If I bought a trailer for $25,000 and my net income for the business before depreciation was $25,000, I could expense the amount to zero net income,” Calahan says. Any expenses beyond $25,000 would not affect expensing equipment under Section 179.

A similar situation exists for bonus depreciation, which used to be taken after the Section 179 spending cap is reached. It allowed the taxpayer “to take 50 percent of the cost of a new asset in the first year,” Calahan says. “That, right now, is not in effect unless Congress passes it and backdates it.” Such a bill likely would restore it on a permanent basis.

Depreciation has treated heavy-duty trucks as three-year assets. However, the depreciation affected four tax years since the first and fourth years were partial years.

Other year-end tax points:

FRIVOLOUS DEDUCTIONS. “My biggest advice is to buy only equipment you need,” Calahan says. Because the tax break is relatively small, it’s a waste of money to buy equipment that isn’t seriously needed.

He says most ATBS clients are in the 15 percent or 25 percent federal tax brackets. State income taxes average close to 5 percent. So typical tax savings on a business expense would total 20 percent or 30 percent of the amount.

Partner Insights
Information to advance your business from industry suppliers

Overdrive’s Partners in Business manual, produced with ATBS, offers more information on deductions, such as home office qualifications, and a large list of acceptable deductions.

IRA LIMITS. The maximum contribution to an Individual Retirement Account is unchanged for 2015, $5,500. For taxpayers over 50, the limit is $6,500. You can reduce taxable income by saving it in an IRA, though tax will be due when it’s withdrawn.

OBAMACARE. Many owner-operators without health insurance made no change in 2014. “Last year it was cheaper to pay the penalty in most cases,” Calahan says. For most taxpayers, failure to be insured during 2016 will carry a penalty of more than $1,000 when taxes are paid in early 2017, due to provisions in the Affordable Care Act. This calculator will help give you an idea of how hard you’ll have to bite that bullet to remain uninsured.

ACA open enrollment runs through Jan. 31, but for new coverage to take effect Jan. 1, enrollment must be complete by Dec. 15. You’ll find more information in our most recent Obamacare report from Senior Editor Todd Dills.

PER DIEM INCREASE. One of the most noticeable things affecting owner-operator income tax for 2015 is the per diem change that took effect Oct. 1, Calahan says.

“The rate for per diem went from $59 per day to $63 per day,” he says. Of that, 80 percent ($50.40) can be claimed as a business deduction. To figure the amount your taxable income is reduced, multiply $50.40 times the number of days away from home.

The change is guaranteed through the end of the current federal fiscal year, Sept. 30, 2016, and it’s doubtful it will be changed then, Calahan says.