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Tax Planning Update for Businesses and Individuals
The Tax Increase Prevention Act of 2014 renewed approximately 50 tax provisions that had expired at the end of 2013. Unfortunately, these provisions generally were only renewed for the 2014 tax year. This means another round of legislative activity sometime in 2015, although most of these “extenders” are a near-certainty for annual renewal.
Section 179 deduction
This first-year depreciation deduction was reinstated at the $500,000 level for tax years beginning in 2014. Generally, this deduction applies to new or used equipment and specialized production facilities, but not to real estate. The deduction phases out if a taxpayer has more than $2 million of eligible asset additions in the year. The Section 179 deduction is burdened with numerous technical restrictions. For example, limitations apply to noncorporate lessors, those acquiring most vehicles, and taxpayers with residential rental property.
50 percent bonus depreciation
This first-year depreciation deduction applies to new (not used) property placed in service during calendar year 2014. It is unlimited in the sense that it is available to any business, regardless of size. For businesses with significant 2014 asset acquisitions that had not anticipated these large first year depreciation deductions, there is only a short time before year end to consider actions that might create income to offset these deductions. Pass-through business owners may wish to convert pre-tax retirement accounts to Roth status; those transactions can often be executed quickly by having the trustee recharacterize the tax status of the account.
Accrual of employee bonuses
Many businesses have informal year-end bonus arrangements, where accrued compensation is set prior to December 31, for payment on or before March 15 of the next year under the so-called 2½-month rule. IRS examiners have been challenging these deductions where there is a reduction due to employee departures before payment. The IRS asserts that an event subsequent to the year-end (the departure of an employee or two) caused an adjustment to the liability, and accordingly, the employer bonus accrual was not properly “fixed and determinable” prior to year-end. Small adjustments can result in postponement of the deduction of the entire accrued bonus. One solution is to adjust the bonus formula to reallocate any departed employee portions to the remaining workforce. If you have a practice of accruing year-end bonuses to employees, the details of the arrangement should be reviewed.
2014 is the first tax year under the new repair and capitalization regulations. CLA tax professionals will be working with our business clients to see that accounting methods related to materials and supplies are in conformity, and that expenditures to improve existing assets are property categorized. There are two areas of opportunity that should receive special attention:
- For 2014 only, a late “partial disposition” deduction may be claimed (For example, a replacement roof was capitalized in some prior year, but the old roof and its removal costs were not deducted).
- Beginning in 2014, an annual safe harbor de minimis election may be made to deduct small asset purchases. The amount of this election varies based on the status of the taxpayer’s financial statement, with some flexibility as to the amount of the election. These topics should be a part of your tax preparation discussions.
The Affordable Care Act and employers
Employers of all size are affected by this law. Beginning in 2015, those with 100 or more employees must provide ACA-level group health coverage. That threshold drops to 50 employees in 2016. But as we recently communicated, all employers, other than those with only one health plan participant, are subject to a substantial penalty in 2014 if they maintain arrangements that reimburse premiums on individual employee policies or use stand-alone Section 105 medical reimbursement plans. If you have questions on these issues, please contact your tax professional.
Related party loans
Closely held business owners frequently have loans to and from their businesses. To be respected for tax purposes, any loan, whether between individuals or businesses, must include adequate interest. The IRS publishes monthly tables of minimum interest rates. For open demand notes (i.e., those without a specified repayment date), the minimum interest rate for 2014 is only 0.28 percent. While this rate is nominal, it is important that interest be paid on all related party loans if the underlying transaction is to withstand IRS scrutiny.
If there is an upturn in interest rates, the IRS minimums adjust quickly. At that point, those with substantial related-party debt should consider converting to term debt at lower rates. For example, for a term loan originating in December 2014, a long-term note (any maturity longer than nine years) can be set as low as 2.74 percent.
Individual and energy incentives
The "extender" legislation also includes individual and energy incentives, which include:
- State and local sales tax deduction option (in lieu of state income tax deduction)
- Higher education tuition and fees deduction
- Teachers’ classroom expense deduction of up to $250
- Exclusion of discharge of qualified principal residence indebtedness
- Mortgage insurance premium deduction
- Tax-free charitable distributions from IRAs for those over 70½
- Contributions of real property for conservation purposes
- Section 25C residential energy property credit
- Deduction for energy-efficient commercial buildings (Section 179D)
- Excise tax credits for certain alternative fuels
- Incentives for biodiesel and renewable diesel
How we can help
These changes are numerous and more will be coming in 2015. We can help you understand how the legislation affects you and your business.