YEAR-END BUSINESS PLANNING
As with prior years, business tax planning is unsure due to the expiration of many popular but temporary tax breaks that have been of an “extenders” package of legislation. Another factor leading to uncertainty is the far-reaching Affordable Care Act. Additional changes to the tax law in 2015 made by new regulations and other IRS guidance also need to be weighed when evaluating year-end strategies.
Code Sec. 179 Expensing
Code Sec. 179 property includes new or used tangible property that is depreciable under Code Sec. 1245 and is purchased to use in an active trade or business. For 2014 and prior tax years, under enhanced expensing, businesses could write off (“expense”) up to $500,000 in eligible expenditures, and would not reduce this amount unless expenditures exceeded $2 million. Until such time that the enhanced provisions are extended, these limits are $25,000 and $200,000 respectively for 2015 and later years.
Qualifying property has included off-the-shelf computer software and certain real property.
Congress approved 50 percent bonus depreciation through 2014 (and through 2015 as well for certain transportation and other property). Legislation introduced in Congress in 2015 would extend bonus depreciation through 2016 or, alternatively, make bonus depreciation permanent. Since bonus depreciation, if and when it is extended, can be elected on the 2015 return filed in 2016, it is unnecessary for a business to make an immediate decision on its use, although qualifying property must be purchased and put into use in 2015. Bonus depreciation is optional and businesses can choose not to use it. Electing out may be more prudent is the business wants to diffuse its depreciation deduction over future years more evenly.
Research Tax Credit
The research credit is claimed for increases in qualified research expenditures (QREs) and increased payments to others, such as universities, for basic research. The research credit is a popular extender and is currently expected to be renewed.
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Small Business Stock
Code Sec. 1202 provides that noncorporate investors in eligible small business stock can exclude 100 percent of any gain realized on stock acquired after September 27, 2010, and before January 1, 2015, provided the stock is held more than five years. The corporation must conduct a qualified trade or business and cannot have gross assets over $50 million. The exclusion percentage is 50 percent for qualifying stock acquired after December 31, 2014, unless Congress decides to extend the increased exclusion.
Allowable gain from disposing of qualified stock is subject to a limit of $10 million, or 10 times the basis of the stock, if greater.
S Corp Built-In Gains
If a C Corporation converts to an S corporation, and during the recognition period the S corporation sells assets that had built-in gain at the conversion, the built-in gain is subject to a corporate-level tax at the highest marginal rate for corporations. This prevents a C corporation from avoiding a corporate-level tax on appreciated property by converting to an S corporation, which sells the assets and passes the gain through to shareholders. Initially, the recognition period was ten years after the conversion, which was then reduced to seven years, and then reduced to five years through 2014. With a shorter period, the S corporation can sell the asset ore quickly without having to recognize the additional tax. At present, the ten-year recognition period applies for 2015.
Other Business Extenders
A number of other beneficial tax provisions for business would be included in extenders legislation for 2015 and beyond. These include:
- Basis reduction of S corporation stock after donations of property
- Employer wage credit for activated military reservists
- Empowerment zones
- Enhanced deductions for contributions to food industry
- Low-income credits for subsidized new buildings and military housing
- Native American employment credit
- New Markets Tax Credit
- Subpart F provisions
- Treatment of regulated investment companies (RICs)
- Work Opportunity Tax Credit
- R&D Tax Credits
A potentially beneficial provision in final, so-called “repair” regulations is the de minimis safe harbor. The safe harbors enables taxpayers to routinely deduct items whose cost is below the specified threshold.
The de minimis is an annual election, not an accounting method, so it can be made and changed from year to year. The current threshold is set at:
- $5,000 for taxpayers with an applicable financial statement (taxpayers with an AFS should have a written policy in place by the beginning of the year that specifies the amount deductible under the safe harbor)
- $2,500 for taxpayers without an AFS. Recently changed by the IRS
Routine Service Contracts
The IRS has provided a safe-harbor under which accrual-basis taxpayers may treat economic performance as occurring on a ratable basis for ratable service contracts (Rev. Proc. 2015-39). The IRS also gave an indication that other safe harbors may be forthcoming.
This new safe harbor should immediately prove useful in year-end strategies taken by accrual-basis taxpayers that are currently negotiating contracts for regular services that extend into 2016. With a contract done correctly to fit under the definition of ratable service contracts, a full deduction may be taken during the current 2015 tax year for certain 2015 payments, even for services not performed until 2016.
Business Use of Vehicles
Several year-end strategies involving both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees require an awareness of certain dollar caps and rates that change annually. Changes affecting 2015, as well as some 2016 information, include:
Standard Mileage Rate—The standard business mileage allowance rate for 2015 is 57.5 cents-per-mile (up from 56 cents-per-mile for 2014).
Depreciation Rates—The IRS released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also modified the 2014 first-year limitations by $8,000 to reflect passage of the Tax Increase Prevention Act of 2014, which retroactively extended bonus depreciation for 2014 late last year. It is uncertain whether expected 2015 extenders legislation will make the same retroactive adjustment for 2015.
Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service for its business, and for each succeeding year.
AFFORDABLE CARE ACT—BUSINESSES
In October 2015, Congress passed the Protecting Affordable Coverage for Employees (PACE) Act, which maintains the present language in the ACA that defines “small employer” as an employer with less than 50 full-time employees on average during the prior calendar year for purposes of the small group health market. The PACE Act, however, gives states the option to apply the original definition of small employer to employers with 51 to 100 employees for purposes of the small group health market. Employers should check state law to be sure which definition applies to their business.
Only small employers can be qualified employers who may offer a cafeteria plan under Code Sec. 125 that permits their employees to enroll in a qualified health plan through the health insurance marketplace. Therefore, the PACE Act may have consequences for any large employers with between 51 and 100 employees that were planning to take advantage of this provision after they became “small employers” subsequent to January 1, 2016.
Health Reimbursement Arrangements
Many small businesses have traditionally offered a health benefit to their employees through a health reimbursement arrangement (HRA). Following passage of the ACA, the IRS released Notice 2013-54, which described these arrangements as employer payment plans. The HRAs therefore are considered to be group health plans subject to the ACA market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Failure to comply with the ACA’s market reforms triggers excise taxes under Code Sec. 4980D.
The IRS published Notice 2015-17 to provide relief from the excise taxes to qualified small employers but the relief expired after June 30, 2015. Bipartisan legislation has been introduced in the House and Senate (Small Business Health Care Relief Act, HR 2911; Sen. 1697) to provide permanent relief to small employers.
Small Business Health Care Tax Credit
Small employers with no more than 25 full-time equivalent employees may qualify for a special tax credit to help offset the cost of health insurance for their employees. The employer must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement.
The small employer tax credit may be carried back or forward. Small businesses that do not owe tax may take advantage of the credit in a prior year or a future year, if eligible.
FILING DEADLINE CHANGES
Due to changes in the tax laws and other events, some deadlines will be changing starting in 2016. As a result, planning at year-end 2015 should factor in some of these deadlines when setting out schedules and strategies at the start of 2016. Notably, under the Surface Transportation Act of 2015 partnerships will be subject to an earlier March 15 deadline and C corporations generally will move to an April 15th deadline starting for 2016 tax year returns. Extensions-to-file are also adjusted.
Emancipation Day, a Washington, D.C. holiday, will shift the filing and payment deadline for 2015 individual returns from April 15, 2016 to April 18, 2016. Taxpayers in two states (Maine and Massachusetts) will have one additional day to file because of Patriots Day, which will be observed on April 18, 2016 in those states.
Delay of Estate Tax Uniform Basis Reporting
The IRS delayed new uniform basis reporting requirements for estate tax property until February 29, 2016. The delay was provided to give the IRS time to issue guidance to executors, beneficiaries, and others on how to comply with the new reporting requirements.
Foreign Bank and Financial Accounts (FBAR)
The due date going forward for filers of FBARs (FinCEN Report 114) will shift from June 30 to April 15, applicable for FBARs for tax years beginning after December 31, 2015. The Surface Transportation Act also provides that any pena lty for failure to timely request or file an extension may be waived for taxpayers required to file Report 114 for the first time. The IRS is also given authority to modify regulations to provide for a maximum extension of six months ending on October 15.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) again postponed the Report of Foreign Bank and Financial Accounts (FBAR – FinCEN Form 1114) filing deadline for certain individuals with signature authority over, but no financial interest in, one or more foreign financial accounts to June 30, 2016.
2015 has been a successful year for Treasury Department efforts to gain international cooperation against unreported offshore accounts. The Foreign Account Tax Compliance Act of 2010 (FATCA) enables the IRS, under the threat of 30 percent withholding, to obtain information from foreign financial institutions on foreign accounts that have U.S. owners. On September 30, 2015, the IRS announced a milestone under FATCA, signaling an initial exchange of financial account information under the authority of intergovernmental agreements (IGAs) negotiated by Treasury with foreign jurisdictions. U.S. taxpayers holding foreign assets, whether individuals or businesses, need to reexamine their compliance as year-end approaches—particularly in light of stepped-up IRS enforcement.
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