This communication explores some of the year-end planning considerations that affect businesses in general. Of course, every business is unique. Our office can review your business and together we can design a year-end tax strategy.
Utilizing expensing and bonus depreciation
Many business owners are familiar with the benefits of Code Sec. 179 expensing and bonus depreciation. For tax years beginning in 2012 and 2013, the Code Sec. 179 dollar limitation was $500,000 (indexed for inflation) and the investment limitation was $2 million (indexed for inflation). Also, for tax years beginning in 2012 and 2013, taxpayers could elect to treat up to $250,000 of qualified real property as Code Sec. 179 property. In addition, Code Sec. 179 expensing was allowed for off-the-shelf computer software.
These enhanced amounts expired after 2013. They could be extended by Congress although the timeframe is uncertain.
Similarly, bonus depreciation has expired under current law. Bonus depreciation applied to qualified property acquired after December 31, 2007 and placed in service before January 1, 2014. Bonus depreciation could be extended for two years (with retroactive application for 2014). If bonus depreciation is extended, a 50 percent bonus depreciation allowance is the most likely percentage.
Uncertainly over the ultimate fate of enhanced Code Sec. 179 expensing and bonus depreciation impacts 2014 year-end planning, particularly as business owners contemplate purchases of equipment and supplies. Businesses considering qualified purchases need to weigh the benefits of making these purchases before year-end or postponing these purchases after 2014. Because enhanced Code Sec. 179 expensing and bonus depreciation are likely to be extended (and made retroactive to January 1, 2014), businesses may be able to take advantage of these incentives in 2014 and 2015.
For passenger automobiles placed in service in 2014 the deduction limitations for the first three years are $3,160, $5,100, and $3,050, respectively, and $1,875 for each succeeding year. For trucks and vans first placed in service in 2014, the depreciation limitations for the first three years are $3,460, $5,500, and $3,350, respectively, and $1,975 for each succeeding year.
Planning with expired business tax breaks
Every two years, many temporary business tax breaks come up for renewal and 2014 is no exception. The extension of many of these incentives in the American Taxpayer Relief Act of 2012 (ATRA) has expired. The research tax credit, special expensing rules for film and television productions, the credit for employer-provided child care facilities and services, and others expired after December 31, 2014. Like enhanced Code Sec. 179 expensing and bonus depreciation, it appears that taxpayers will not know the fate of these incentives until late in 2014 or in early 2015. Congress could, as it has in the past, renew these incentives in a comprehensive bill or it could proceed piecemeal.
Along with the business incentives highlighted above, other business tax breaks also expired after 2013, including:
- Work Opportunity Tax Credit
- Employer wage credit for activated military reservists
- Railroad track maintenance credit
- Recognition period for S corporation built-in gains
- Indian employment credit
- Accelerated depreciation for business property on Indian reservations
- Election to expense mine safety equipment
- Credit for new energy efficient homes
- Enhanced deduction for charitable contributions of food inventory
- Empowerment zone tax benefits
- Credit for electricity produced from renewable resources
- Cellulosic biofuel producer credit
- Energy efficient appliance credit for manufacturers
- Incentives for biodiesel, renewable diesel and alternative fuels
- 15-year straight line recovery for qualified leasehold improvements
- 15-year straight line recovery for qualified restaurant property
- 15-year straight line recovery for qualified retail improvements
The expired tax breaks affect a wide variety of businesses. Businesses may have utilized one or more of the expired tax incentives in past years. Some past strategies may continue to be valuable. Our office can help ascertain the effectiveness of these strategies at year-end 2014.
Gearing up for Affordable Care Act requirements
Few laws have had, and continue to have, such an impact on tax planning as the Affordable Care Act. The health care reform law affects every business in some way. While small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are exempt from the Affordable Care Act’s employer mandate, small business should not overlook other provisions that could generate tax savings. Mid-size and larger businesses do fall under the employer mandate and other requirements; however, mid-size employers are exempt from the employer mandate for 2015. Employers qualify as mid-size if they employ on average at least 50 full-time employees, including full-time equivalents, but fewer than 100 full-time employees, including full-time equivalents. Mid-size employers also must satisfy other requirements to qualify for the transition relief. Under current rules, transition relief is only available for 2015 but it could be extended.
Business owners need to plan for how seasonal and other workers may affect their liability for the employer mandate. Seasonal workers, on-call employees, student workers, and others must be taken into account to determine the number of the employer’s full-time employees. The rules are complex but they cannot be ignored.
Mid-size and larger businesses are responsible for new information reporting requirements under Code Sec. 6056. These employers must tell the IRS if they offer health insurance to employees, among other criteria. The Code Sec. 6056 reporting requirements are effective for health insurance coverage offered, or not offered, in 2015. Small employers that are exempt from the employer mandate are also exempt from Code Sec. 6056 reporting.
Owners of small businesses should not overlook a tax credit that helps offset the cost of providing health insurance to employees. The small employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year; average annual wages of its employees for the year must be less than $50,000 per FTE; and the employer must pay the premiums under a qualifying arrangement. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced until it phases-out.
The Treasury Department is expected to unveil a new retirement savings arrangement before the end of 2014. The new accounts are called myRa. These accounts will be offered through employers that elect to participate. Account holders will be able to build savings for 30 years or until their myRA reaches $15,000, whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs. Small business owners should explore the benefits of offering myRAs to their employees. As more details are released, business owners can weigh the value of these new accounts. At the same time, business owners can explore other retirement savings vehicles, including SIMPLE IRA plans, SEP plans, and payroll deduction IRAs.
Small Business Stock
The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock under Code Section 1202 was extended for stock acquired before January 1, 2014, and then held for more than five years by non-corporate taxpayers. Preferential AMT treatment also applies. The exclusion under Code Section 1202 after 2013 reverts to 50 percent.
Revised Repair/Capitalization Rules
The IRS recently issued long-awaited comprehensive final rules on the treatment of payments to acquire, produce or improve tangible property. Starting January 1, 2014, businesses must use these new rules in determining whether they can deduct their costs as repairs under Code Sec. 162(a) or must capitalize the costs, to be recovered over a period of years under Code Sec. 263(a).
Generally, the final regulations apply to tax years beginning on or after January 1, 2014. However, taxpayers may choose to apply them to tax years beginning on or after January 1, 2012. Taxpayers also have the option to use the 2011 temporary regulations for tax years beginning on or after January 1, 2012 and before January 1, 2014. Because the final regulations went into effect in 2014, taxpayers were advised to revise their written accounting procedures to comply with the expensing limits by the end of 2013 if they wanted to use the de minimis safe harbor, and in many instances, they must also have changed their method of accounting.
Many business operations are not taxed on the entity level as corporations but, instead, pass through taxable profits and losses to their unincorporated owners or to their S corporation shareholders. Starting in 2013, these owners faced new year-end planning challenges in the form of a higher individual tax rate of 39.6 percent and additional surtaxes on passive income by way of the net investment income surtax of 3.8 percent and the Additional Medicare Tax of 0.9 percent on compensation, both aimed at the “higher-income” taxpayers. Deferring some of this income, or harvesting losses to offset some of the income, are traditional year-end planning techniques that take on added value for the 2014 year-end tax year.
Often, because business planning opportunities must be viewed in conjunction with personal tax planning, a taxpayer should also consider planning tips affecting their individual return and investment considerations when making business decisions. Please call our office to discuss the 2014 tax planning strategies that may apply to you.