2014 Year-End Tax Planning for Businesses

It is that time of year to start thinking about your year-end tax planning. Let’s dive into a few business-related topics that you should consider as you begin planning for your business.

Final Tangible Asset Regulations – Repair Regs
For tax years beginning on or after January 1, 2014, businesses will see the application of the final tangible asset regulations that the IRS released last September. The new regulations distinguish between deductible costs and expenditures, which apply to most businesses that own or lease property, plant and equipment. The regulations have a significant impact on businesses making repairs or improvements to tangible property. While these new regulations are quite complex, they do finally provide guidance to distinguish between repairs and improvements. There may be one-time opportunities for companies to write-off previously disposed of assets or partial assets, so please contact us prior to year-end to discuss if you may qualify.

New Regulations for the Alternative Simplified Credit
The summer brought good news for small and medium-sized businesses that claim the Research Credit, with the Treasury Department and IRS releasing regulations regarding the Alternative Simplified Credit (ASC). They extended the ASC method of calculating the credit, allowing it to be taken on amended returns. Previously, the ASC was only allowed on timely-filed returns. This change could prove significant for many taxpayers.

Expiration of Tax Incentives
As of December 31, 2013, we saw a number of tax credits and other incentives expire for businesses, and as of this date, Congress has not reinstated them. The 50% bonus depreciation deduction expired, which allowed businesses an additional 50% of depreciation in the first year for qualifying property.

Similarly, the Federal Research Credit (also known as the R&D Credit) expired last year, but we are hopeful that it will be extended retroactively for 2014 and future years, if not made permanent. At the time of this writing, the House has passed a bill to permanently extend the R&D Credit; however, without providing a plan to offset the expected cost, the White House has threatened to veto the bill.

Additionally, the Senate Finance committee recommended that the R&D Credit expand to benefit start-up companies and qualified small businesses. The committee recommended that companies still in their first five years of business with less than $5 million in gross receipts be able to offset their federal payroll tax with a credit up to $250,000. Another proposed bill in the Senate provides for increased rate of credit, expansion to new sectors and availability for investors in qualified small research companies.

As the year continues, we will keep you informed on what Congress decides in terms of extending expired credits and possibly making others permanent.

Year-End Tax Planning
While the uncertainty of having tax credits that may or may not be reinstated makes it difficult to plan each year, there are some proven year-end strategies to incorporate to reduce your business’ tax burden.

One annual strategy that applies to many situations is to defer income and accelerate expenses where there is a business purpose (not tax avoidance) for doing so, thus deferring taxation. If your business uses the cash method of accounting, you can employ this strategy by reducing year-end billing for goods or services. If your business operates on the accrual method, you could delay shipping products or delivering services to defer taxable income. However, your company may employ the opposite strategy if it looks like it is going to move into a higher tax bracket next year.

Depending on the structure of a company, the structure makes a significant difference in the income taxation and owner liability. Partnerships, S corporations and Limited Liability Companies provide limited liability and flow through income to their owners. These differences will play a role in determining a strategy, as you should consider the owners’ individual tax situations when making year-end tax planning decisions for the company.

One way that S corporation shareholders/employees can reduce their payroll tax is by ensuring their salary is not higher than reasonable and thereby increasing their corporate distributions of company income. The company income is typically not taxed at the corporate level and is not usually subject to the Medicare tax on net investment income.

For C corporation shareholders/employees, consider paying year-end bonuses or other compensation instead of dividends, since salary is deductible at the corporate level and dividends are not. As with an S corporation, you will need to make sure your salary is at a reasonable level to avoid additional scrutiny.

Looking Ahead
As we move into 2015, there are a couple of topics you may want to keep in mind. One is the Affordable Care Act’s play-or-pay provision slated to take effect on January 1, 2015. There are many elements to this provision, but those businesses that are considered large employers should especially be aware of it, as they could be subject to penalties. For example, if a full-time employee receives a premium tax credit due to their enrollment in a government run Health Insurance Marketplace, a penalty could be imposed on the company.

Corporate inversions are another area that businesses could see some changes in the coming year. There has been a lot talk about it of late, and it would not be surprising if the government implemented policies to reduce the benefits corporations receive by relocating their headquarters outside the U.S.

With many year-end strategies available to businesses, this article only touches upon a few. I encourage you to contact me should you have any questions about topics discussed in this article and other planning strategies available to you.

You can reach me at (805) 963-7811 or jsheffield@bpw.com. As an additional tax planning resource, we are pleased to offer you access to BPW’s Web Tax Guide at https://www.bpw.com/resources-client-tools.aspx.