Taxpayers who have been sitting on the sidelines due to the lack of certainty on the expanded Section 179 deduction, bonus depreciation, the R&D credit and other items normally renewed in an extender package need to take action soon, according to Michael Silvio, director of tax services at Hall & Co. CPAs.
“They may have been waiting for legislative action up to now, but if the extenders are passed in December they need to take advantage of it, and if it is not passed before the end of the year, they still need to decide whether to make a move before the end of the year,” he said. “Now is a good time to look at new equipment purchases, because the expanded Section 179 expensing provision is likely to come back in. Also, businesses need to look at credits and incentives.”
The R&D credit will likely be extended as well, according to Silvio. “Even if nothing happens on the federal side, many of the states have an R&D credit,” he noted.
And of course, traditional tax planning moves are in order for those who may be in a higher tax bracket next year. “If you think you will be in a higher bracket next year, you need to be accelerating income into this year and deferring deductions so they are available next year when you’re in a higher bracket,” he said.
If the taxpayer owns an S corporation, they should be looking at whether or not they have been taking estimated tax payments, Silvio said. “If you feel like you haven’t made an estimated payment on time, we suggest taking a bonus on the last paycheck and withholding the amount. It’s deemed to have been paid pro rata throughout the entire year.”
For those who accelerate deductions by paying both halves of their property tax in December, Silvio cautions them to consider the Alternative Minimum Tax. “State taxes and property taxes are not deductible for AMT purposes, so accelerated deductions may put them into AMT territory,” he said. “If they pay both halves in December, so they get a deduction on Schedule A, it’s good for regular tax purposes but it has to be added back and will increase AMT income.”
It’s easy for taxpayers, and their advisors, to overlook the required minimum distribution, Silvio observed. “Be sure that if the taxpayer is 70-½ or over they take the RMD from their retirement account,” he said. “The penalty is 50 percent of the amount required to be distributed. It’s not the responsibility of the custodian; it’s up to the taxpayer.”
Silvio always makes sure to inform clients that they can make gifts up to $14,000 in an annual gift to anyone, to save on gift and estate taxes.
One often-overlooked deduction is the Domestic Production Activities Deduction, Silvio said: “Many don’t realize they qualify for this. For example, if a construction or an architectural or engineering company is involved in the design or development or managing of real estate, they qualify. A lot in that space are missing this deduction.”
A HIERARCHY OF PLANNING
Last-minute tax issues could be things that can be done by the end of the year before it’s too late to do them, or could be things that can still be done up to the time you file the tax return or later, to get a better result for that prior year, according to Matthew Frooman, a member at the Atlanta office of Top 100 Firm Warren Averett.
“For the most part, CPAs know the tools and tricks that are available. What we don’t see is actual implementation,” he said. “It’s amazing to me how many new clients we’re introduced to for whom we see so many opportunities that have not been addressed. In the Internet age, there’s very little that you can’t find and read up on, so it’s either a question of time, or inclination, or the ability to absorb and be creative in your thinking that inhibits the implementation.”
“It helps to have an industry focus,” said Frooman. “That way, there’s a better chance of knowing the tools that apply to a client in that industry.”
“It helps to have a process, a mental or written checklist of how to approach the planning opportunities in that industry,” he said. “So you have a hierarchy of tax planning which starts with a tax-free way to have income. If you can’t figure out a way to have tax-free income, then you go to offsets in terms of deductions from basis or deferral. Then you look at the tax rate itself, the character of the income as to capital gains or ordinary income, and finally you get down to the tax itself. After that, you consider additional offsets in the form of credits.”
“You can approach every engagement with that structure and work through what are the ways of making something tax-free, offsetting income, deferring income, getting a lower tax rate and generating a credit, and then the possibility of buying a credit,” Frooman said. ”Every tax technique should fall into at least one of those categories. For myself, there are too many tools to think through without some sort of structure, so the solution is to prioritize, and decide which tool has the highest impact and is the easiest to apply.”
NEW DUE DATES
End-of-year tax planning provides the opportunity to review the past year and also generate an overall approach going into 2016, according to Jo Anna Fellon, senior tax manager at Top 100 Firm Friedman LLP in East Hanover, N.J.
“As we get closer to year end, we should be more concerned about where we are in closing out 2015,” she said. “From an individual perspective, why not assess current gains and losses for the year? The market adjusts daily, and individuals should do the same,” she said. Because of the complexity of the Tax Code, Fellon recommends getting the financial advisor and the client in the same room with the CPA to talk. “Looking into 2016, practitioners need to be aware of the filing deadline changes that will take effect for the 2016 period,” she advised.
For tax years beginning after Dec. 31, 2015, the due dates for partnership tax returns will change from April 15 for calendar-year partnerships to March 15, and the fifteenth day of the third month after the end of the fiscal year for fiscal-year partnerships. The due date for C corporations will be April 15, or the fifteenth day of the fourth month after the close of their year. S corporation return due dates continue to be March 15, or the third month following the close of the taxable year.
For this year’s filing season, the due date for individuals is April 18, 2016 (due to Emancipation Day falling on Friday, April 15), while taxpayers in Maine and Massachusetts will have until April 19, 2016 (due to Patriot’s Day falling on April 18).
The tax extenders have historically been passed, so we have to plan for the fact that they will be passed, advised Gary Fox, managing partner of tax services at Top 100 Firm Crowe Horwath.
“But there’s no guarantee,” he cautioned, “So you have to go into year-end pretty flexible in case they are not passed. You really have to look at estimates based on whether the extenders are passed versus not passed. Since last year’s extenders were not passed until January of this year, there was a lot of uncertainty because so much of year-end planning is based on what happens to the extenders.”
The other big issue, according to Fox, is the Affordable Care Act. “There are a lot of reporting requirements and some pretty significant penalties,” he said.
Individuals who do not have health coverage will pay the higher of 2 percent of their yearly household income, up from 1 percent in 2014. Applicable large employers with 100 or more full-time employees in 2014 are subject to the employer shared responsibility provisions in 2015 and will owe an employer shared responsibility payment if they do not offer minimal essential coverage to at least 70 percent of their full-time employees and their dependents and at least one full-time employee receives the premium tax credit for purchasing coverage through the exchange.
“We continue to find people who are surprised by the Alternative Minimum Tax, so a lot of planning goes into the break-even point for individuals between the AMT and the regular tax,” said Fox. “They’re two separate tax systems. A lot of times, planning works for the regular tax but not for the AMT, so our planning encompasses both.”
HOPING FOR BETTER
Next filing season can’t be as bad as the previous one, according to Rick Wojciechowski of Top 100 Firm The Bonadio Group: “Provided the extenders get passed earlier than they did for 2014, it should be better. Plus, the tangible property regs are better understood now. But we do have layering of the ACA, which affects business clients. CPAs need to communicate the rules to their clients.”
“Many CPAs focus on the big projects first and save the smaller returns until later,” Wojciechowski observed. Instead of postponing the smaller projects until the end of the busy season, he recommends that tax pros take work that would normally fall in the worst time — February 15 to April 15 — and complete it by January 28. “If you set a date for yourself to complete the tax returns for family and friends, you’re more likely to actually complete them on time,” he said. “In addition, completing these returns first will help you refine your process. If any mistakes are made, your family is inclined to be more forgiving than a client.”
“Usually you can look to cash basis entities that have no reason not to be ready,” he said. “Try to get them done early so they won’t clog up the pipeline at a later date.”
As we went to press, the extenders had not yet been acted on by Congress. However, this past July, the Senate Finance Committee renewed more than 50 recently expired provisions, noted Matt Becker, regional managing partner for tax services at Top 10 Firm BDO USA. “While the broader tax environment may be uncertain, this year’s tax extenders package contains no surprises,” he explained. “It includes the extension of the Work Opportunity Tax Credit, the look-through treatment of payments between related [controlled foreign corporations], and bonus depreciation. To accererate bonus depreciation deductions, businesses should consider cost-segregation studies to identify qualified personal property.”
“The federal R&D credit has yet to be authorized for 2015,” he observed. “While the future of the federal R&D tax credit for 2015 is still to be determined, the credit can be claimed for prior open tax years,” he said. “Most states also offer businessess their own version of the R&D tax credit. For taxpayers with insufficient liability, a growing number of states are offering methods of monetization for these types of tax credits — for example, refundable or salable credits.”
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