These brief tips explain the pros and cons of using a calendar tax year vs. a fiscal tax year, how a donor-advised fund operates, and the tax advantages of using solar power.
Calendar tax year or fiscal tax year?
Many businesses use the calendar year for tax-filing purposes, but in some cases a fiscal year — such as October 1 to September 30 — may be advantageous. For example, if most companies in your industry use a fiscal year, adopting a matching year makes it easier to benchmark your performance against that of your competitors.
Seasonal businesses also stand to benefit. A farming business, for example, might incur most of its expenses in the fall and reap most of its income the following spring. A fiscal year that encompasses both periods produces more accurate matching of income and expenses.
For existing businesses, switching to a fiscal year requires IRS permission. Keep in mind that fiscal year reporting is unavailable to some businesses, including sole proprietorships and certain pass-through entities. If you adopt a fiscal tax year, you must use the same year for financial reporting purposes.
Giving to charity? Consider a donor-advised fund
If charitable giving is an important part of your financial and estate plans, a donor advised fund (DAF) is one of the most tax-efficient vehicles available. Similar in many respects to a private foundation (but at a fraction of the cost), a DAF allows you to take an immediate charitable income tax deduction for your contributions, while retaining the flexibility to identify the charitable recipients down the road. However, keep in mind that, unlike a foundation, a DAF doesn’t give you the final word on how your charitable dollars will be spent. But in most cases, the fund sponsor will follow your recommendations.
Tax break for solar panels
Thinking about installing solar panels in your home to generate electricity or hot water? Not only can such an investment make your home more energy-efficient, but it can also generate significant tax benefits. Qualified solar property is eligible for a 30% tax credit. The credit is nonrefundable, which means it can’t exceed your tax liability for the year. But you can carry forward the excess to the following year. A similar credit is available for businesses (so long as the solar equipment isn’t used to heat a swimming pool).
What if you own residential rental properties? Can you claim a tax credit for installing solar panels in your rental units? There’s a common misconception that you cannot. That’s because Section 25D of the tax code, which authorizes the residential energy credit, states that it’s unavailable for investment property (such as rental property) that’s not also used as your residence. However, Sec. 48 provides a tax break for solar panels as part of the general business credit, which can be used by rental property owners if certain requirements are met.