Businesses seeking to maximize tax benefits through 2014/2015 year-end business tax planning may want to consider three general strategies: (1) Use of traditional timing techniques for income and deductions; (2) Special consideration of significant tax incentives that expired at the end of 2013 but extended through 2014; and (3) Reaction to certain recent tax developments from IRS and the courts that may present either new opportunities or pitfalls.
Bonus depreciation has been officially extended through 2014 (except for certain noncommercial aircraft and longer production period property which may be eligible for 50 percent bonus depreciation through 2015).
STRATEGY: Decision on making the bonus-depreciation election is not required until a return is filed. Further, bonus depreciation is not mandatory. Certain taxpayers should consider electing out of bonus depreciation to spread depreciation deductions more evenly over future years.
Research Tax Credit:
The research tax credit also officially extended through 2014, but it may be revived by Congress in 2015 again. The research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The credit applies to the excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years.
Small Business Stock:
A full 100-percent gain exclusion applies to qualified small business stock that is acquired after September 27, 2010, and before January 1, 2015, and held for more than five years. Under current law, the percentage that is excluded is 50-percent (60-percent for empowerment zone stock) for qualifying stock acquired after December 31, 2014.
STRATEGY: Even with the reduced exclusion, the provision is a worthwhile strategy. Taxpayers should consider making investments before year-end 2014 so that the required five-year holding period begins to run. Also to keep in mind is that being even a single day short of the five-year period – measured from the acquisition date – eliminates any benefit, with no proration allowed. Certain exchanges of similar stock before the five year period, however, are permitted.
Code Sec. 199 Deduction:
The Code Sec. 199 deduction allows taxpayers to deduct an amount equal to the lesser of a phased-in percentage of taxable income (adjusted gross income for individuals) or qualified production activities income. The deduction is calculated as a percentage (generally nine percent under current law, subject to some exceptions) of qualified production activities income.
PLANNING: The Code Sec. 199 deduction is often viewed as being underutilized. Taxpayers should not let the complexity of the calculations deter potential savings under the deduction.
Business incentives that have officially expired after 2013, but extended through 2014 by Congress, include, in addition to bonus depreciation and the enhanced Code Sec. 179 expensing, the Work Opportunity Tax Credit (WOTC), Indian employment credit, special expensing rules for film and television productions, and many other temporary provisions.
Affordable Care Act:
Effective January 1, 2015, the PPACA’s employer shared responsibility requirements (“employer mandate”) take effect for applicable large employers. However, there is a carve-out for mid-size employers for 2015. Some relaxed standards for larger employers also are available in 2015.
PLANNING: Employers with fewer than 50 full-time employees (including full-time equivalent employees) are completely exempt from the employer mandate for any year. Employers with at least 50 but fewer than 100 full-time employees (including full-time equivalent employees) are exempt from the employer mandate until 2016; and employers with 100 or more full-time employees (including full-time equivalent employees) are subject to the employer mandate starting in 2015, with certain relaxed standards.
Final regulations for treating costs related to tangible property (the so-called “repair regulations”) may open significant tax planning opportunities. For acquisitions of tangible property, a de minimis safe harbor allows taxpayers to deduct certain items. The safe harbor applies to items that cost $5,000 or less (per item or invoice) and that are deducted on the company’s applicable financial statement (AFS) in accordance with a written accounting procedure.
STRATEGY: Under the $5,000 de minimis safe harbor in the final regulations, taxpayers must have a written policy in place at the beginning of the year that specifies a dollar amount for following book treatment. The de minimis safe harbor is an annual election and not an accounting method, so it can be made and changed every year. Calendar-year taxpayers need to have a written policy in place by yearend 2014 to qualify for 2015. The annual election is made by filing a statement with the taxpayer’s income tax return.
PLANNING: The de minimis limit is $500 per item or invoice for companies without an AFS. A written policy, while not required here, is nevertheless recommended.
Questions? Contact our New York office for more information. We are happy to help.
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Any accounting, business, or tax advice contained in this page is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.