2015 Year-End Tax Planning for Businesses

With the end of 2015 in sight, businesses have already started to gear up for next year, and with that, comes year-end tax planning. We will discuss what business tax strategies are available and what changes to keep in mind for 2016 and beyond. But first, let’s take a look at two new laws that have had the biggest impact on 2015.

The Affordable Care Act
2015 is the year that large employers run the danger of the Affordable Care Act’s (ACA) play-or-pay penalty. Businesses that are considered large employers will run the risk of a penalty if they have at least one full-time employee who receives a premium tax credit due to being enrolled in a government Health Insurance Marketplace. Under the ACA, if a business has at least 50 full-time equivalent employees it is typically considered a large employer (100 for 2015). To avoid this penalty, an employer must offer minimum essential coverage to its full-time employees, and it has to be affordable. This provision has many components, and the IRS has issued some additional guidance and possible exemptions, but due to the complexity, it is best to evaluate this on per business basis.

Tangible Property Regulations
The tangible property regulations actually took effect for tax years beginning on or after January 1, 2014, but for many taxpayers, the impact lasted well into the filing season in 2015. For most of our clients filing business tax returns for 2014, we recommend including Form 3115, Application for Change in Accounting Method, to conform to the new rules.

Although there are additional burdens of filing and complying with the new regulations, some taxpayer-friendly provisions surfaced as well. Most notably, the de minimis safe harbor threshold allows taxpayers to deduct the cost of certain items under dollar amount thresholds (up to $5,000). This can be especially helpful if used in connection with Section 179 that provides an immediate write-off for equipment that would normally be depreciated. The costs deducted under the de minimis safe harbor don’t count against the Section 179 deduction or investment limits. For 2014, the limits under Section 179 were $500,000 for the deduction with a phase-out investment limit starting at $2,000,000. Absent any action by Congress, these limits will drop to $25,000 and $200,000 for 2015, which will make it that much more important to implement the de minimis safe harbor.

Tax Extenders: Will They or Won’t They?
For both individuals and businesses, it is becoming standard practice for us to wait and see what Congress will do with the tax credits that were extended and expired during the previous tax season. This year looks like it will be no different. There were many tax credits extended on December 19, 2014 as part of the Tax Increase Prevention Act of 2014 (TIPA); however, they were only extended through December 31, 2014. For businesses, some of the expired credits include the Federal Research Credit (R&D Credit), higher Section 179 deduction limits and the 50% bonus depreciation.

There was a bill that passed the House on May 20, 2015 to both simplify and make permanent the R&D Credit, but it has not yet made its way through the Senate as of this writing. Additionally, the President has threatened to veto it if there is not a plan in place to offset the cost. So it might be more likely to see this as part of an extender package once again. The same is true for the deduction for state and local sales taxes; a bill passed the House that would permanently extend this deduction, but again, the White House has threatened to veto the bill, stating that this would add to the long-term deficits.

It’s worth noting that unlike recent years, the Senate Finance Committee has already approved the Tax Increase Prevention Act of 2015 extending many of these tax incentives. This approval happened in July, but it is not likely to be reviewed by the House Ways and Means Committee until later in the year.

What about tax reform? In January, the Senate Finance Committee formed working groups to lead this effort, but after 6 months, the groups released reports that merely contained various approaches that had been discussed in prior years. No group produced any proposals, and enthusiasm has since dissipated.

If we still don’t know the laws that will be in effect for 2015, what can we do to plan appropriately for 2015?

Deferring and Accelerating Income and Deductions
A year-end planning article just wouldn’t feel complete without the mention of deferring or accelerating income and deductions from one year to another. If you are able to estimate your businesses income for this year and the next, one strategy that can be considered during year-end planning is to defer income into the next year and thereby defer the tax on the income.

For businesses that use the cash method of accounting, you can apply this method by reducing year-end billing for goods or services. On the other side, there are times when prepayment of costs can accelerate tax deductions.

If the business works on the accrual method, then this strategy can be applied by delaying the shipment of products or delivery of services to defer income. If it looks like the business will be bumped into a higher tax bracket next year, however, the business will want to consider accelerating income and deferring expenses.

Closely Held Corporations and Owner Compensation
Owner compensation in a closely held corporation is always a hot topic as well, and year-end offers an opportunity to review it. With the top individual tax rate being 39.6%, and the top corporate rate at about 35%, it is important to consider both the owner’s tax situation and the business’s situation when developing a strategy for year-end planning.

A strategy for S corporation shareholders/employees is to keep their salary at a lower amount and increase corporate distributions of company income, thereby reducing the business’s payroll taxes. Typically, distributions are not taxed at the corporate level and are not usually subject to the Medicare tax on net investment income. However, you will need to make sure your salary is still at a reasonable amount to avoid unwanted scrutiny.

A consideration for C corporation’s shareholders/employees is to pay out year-end bonuses instead of dividends, since salary will be deductible at the corporate level and dividends are not. Similar to an S corporation you will want to make sure salaries are at a reasonable amount.

Looking Ahead
For taxable years beginning after December 31, 2015, legislation was recently signed to change the due dates of both partnership returns and C corporation returns. As part of H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, the following changes have been made:

• Partnership returns will be due on March 15 instead of April 15.
• C corporation returns with a calendar year-end will be due on April 15 instead of March 15.
• Due dates for most fiscal year-end C corporations will also be extended one month, with an odd exception for June 30 year-end C corporations.
• June 30 year-end C corporations will have to wait until tax years beginning after December 31, 2025.

Again, the first three bullets will go into effect for taxable years beginning after December 31, 2015.

There are many year-end planning strategies for businesses to consider, and this article touches on just a few. Please feel free to contact me at (805) 963-7811 or jsheffield@bpw.com if you would like to get a jump on your year-end tax planning or have any questions pertaining to this article. Also, as an additional resource, please take a look at BPW’s Web Tax Guide at https://www.bpw.com/resources/client-tools/.