Year-end Business Tax Planning
It’s time again to think about year-end tax planning. The bad news is that Congress has yet to act on several tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year). Tax breaks that expired at the end of last year include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Higher-income-earners should be aware of the 3.8% surtax on unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax.
Businesses should consider the following moves by year end:
- Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-years’ worth of depreciation deductions for the first ownership year.
- Make year end expenditures that qualify for the business property expensing option, which is $25,000 for tax years beginning in 2014. An investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
- Businesses may be able to take advantage of the “de minims safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules.
- A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
- A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation alternative minimum tax (AMT) exemption for 2014.
- A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income.
- If a business qualifies for the domestic production activities deduction for its 2014 tax year, it should consider whether the 50%-of-W-2 wages limitation on that deduction applies. If so, the business should consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts.
- To reduce 2014 taxable income, consider deferring a debt-cancellation event until 2015.
- To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow the deduction of suspended passive activity losses.
- A taxpayer who owns an interest in a partnership or S corporation should consider increasing their outside basis in the entity in order to deduct a loss from it.