Deferring or Accelerating Income

As we approach the end of the year, C-corporations should think about shifting income and deductions between 2015 and 2016. Usually, C-corporations can benefit from a tax perspective by deferring and accelerating income and deductions. The following briefly discusses some situations in which acceleration and deferral arise.

39% Tax

Corporations with taxable income of between $100,000 and $335,000 are subject to a tax rate of 39%. If taxable income is between $75,000 and $100,000 or between $335,000 and $10 million, the tax rate is 34%. As a result of these various tax rates, it is important to pay attention to expected taxable income for 2015 as well as for 2016.

For example, if a C-corporation expects taxable income to be $90,000 for 2015 and greater than $100,000 in 2016, accelerating $10,000 income from 2016 to 2015 can result in roughly $500 in tax savings. This is because that $10,000 is taxed at 34% and not 39% as it would be if left in 2016.

AMT Exemption

The alternative minimum tax (AMT) causes corporations to pay some tax on their income. However, certain corporations may be exempt from the AMT. In order to qualify for the exemption, the corporation’s average annual gross receipts for all three tax year periods beginning after December 31, 1993 and ending before the current tax year must not exceed $7.5 million. In order to preserve the small corporation AMT exemption in 2016, a corporation may have to defer income from 2015 to 2016 in order to keep annual gross receipts at $7.5 million or less.

Estimated Tax Break

Accelerating or deferring income can also help corporations secure tax deferral if they pay installments based on 100 percent of the tax reported on their return for the preceding year. Using the preceding year’s tax is only available to corporations that file a return for the preceding year that results in a positive tax liability. If the corporation’s return shows zero tax liability, it must pay estimated taxes based on the current year’s tax.

The consequence of this estimated tax method is that a corporation that expects a minimal net operating loss for 2015, but significant net income in 2016, may find it beneficial to accelerate some income from 2016 to 2015. The idea is to create a small amount of net income for 2015 in order to create a positive tax liability. By doing this, the corporation can base its tax installments for 2016 on the small amount of tax on its 2015 return and not on the larger 2016 taxable income. This result can also be accomplished by deferring some of a corporation’s 2015 deductions into 2016.

It is important to note that this method is only available year-round to “small” corporations. Usually, a corporation is considered “large” if it had taxable income of $1 million or more in any one of the three previous tax years. Deferring income or accelerating deductions can be utilized to keep the corporation below the $1 million cap.

Help with Corporate Tax

For more information about the taxation of corporations and ways in which your business can potentially enjoy tax savings, speak with an experienced attorney today. At the Royse Law Firm, we provide help in all aspects of the creation and operation of small businesses. We provide help for individuals in Los Angeles, Palo Alto, and San Francisco.

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Roger Royse

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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