[IMGCAP(1)]As 2015 comes to a close, businesses are once again facing uncertainty as Congress has yet to act on a host of important provisions that expired at the end of 2014.
Although these temporary tax provisions have been routinely extended for years, the possibility that Congress could let them remain expired or only extend a select number of them leaves taxpayers and their advisors in limbo as to how to properly plan. Still, there are many actions that can be taken to save tax dollars this year, even amidst the uncertain fate of extender legislation.
For businesses, tax breaks that expired at the end of 2014 include:
• 50 percent bonus first-year depreciation for most new machinery, equipment and software;
• $500,000 annual expensing limitation;
• Research tax credit;
• 15-year write-off for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
Some or all of these expired provisions may be retroactively reinstated, thereby opening up some truly last-minute year-end tax-planning opportunities, but as of yet, there’s no way of knowing if that will take place.
Actions You Can Take Now
Based on current tax rules, the actions below may help businesses save tax dollars if they act before year-end. Not all actions will apply in every business’s particular situation, but companies will likely benefit from many of them.
[IMGCAP(2)]1. Buy machinery and equipment before year end. Under the generally applicable “half-year convention,” businesses will thereby secure a half-year’s worth of depreciation deductions in 2015.
2. Utilize the business property expensing option. Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise get. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
3. Take advantage of the “de minimis safe harbor” election. This election allows businesses 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. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement, or AFS, such as a certified audited financial statement along with an independent CPA’s report. If there is no AFS, the cost of a unit of property can’t exceed $2,500. So, where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015.
4. Consider accelerating income from 2016 to 2015 if your corporation will be in a higher bracket next year. Conversely, a corporation should consider deferring income until 2016 if it will be in a higher bracket this year.
5. Consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
6. Create a small amount of net income for 2015. A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for 2015. This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100 percemt of its much larger 2016 taxable income.
7. Consider whether the 50 percent of W-2 wages limitation applies if your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year. If it does, consider ways to increase 2015 W-2 wages, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.
8. Consider deferring a debt-cancellation event until 2016 to reduce 2015 taxable income.
9. Consider disposing of a passive activity in 2015 to reduce taxable income if doing so will allow you to deduct suspended passive activity losses.
10. If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
As always, year-end tax planning doesn’t occur in a vacuum. It must take into account each business’s particular situation and planning goals with the aim of legally minimizing taxes to the greatest extent possible. While many businesses will come out ahead by following the traditional approach of deferring income and accelerating expenses, all businesses need to consider whether that approach applies to them.
Thomas Long, Catherine Murray, and Jeffrey Pretsfelder work with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters.
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