Looking back over 2014, many business owners saw a welcome uptick in sales and growth. This growth has important tax consequences and business owners should now take time to review their year-end tax planning for tax-savings opportunities.
Utilizing Expensing and Bonus Depreciation
Uncertainty over the ultimate fate of enhanced Code Sec. 179 expensing and bonus depreciation impacts 2014 year-end planning, particularly as business owners contemplate purchases of equipment and supplies. Because enhanced Code Sec. 179 expenses and bonus depreciation are likely to be extended (and made retroactive to January 1, 2014), businesses may be able to take advantage of these incentives in 2014 and 2015.
For tax years beginning in 2012 and 2013, the Code Sec. 179 dollar limitation was $500,000 (indexed for inflation) and the investment limitation was $2 million (indexed for inflation). These enhanced amounts expired after 2013. Expiration of the enhancements also ended the qualified real property allowance and the computer software deduction. For tax years beginning in 2012 and 2013, taxpayers could elect to treat up to $250,000 of qualified real property as Code Sec. 179 property. Code Sec. 179 expensing was also allowed for off-the-shelf computer software. These enhancements are likely to be extended by Congress but the time frame is uncertain.
Similarly, bonus depreciation has generally expired under current law. Bonus depreciation could be extended for two years (with retroactive application for 2014). If bonus depreciation is extended, a 50% bonus depreciation allowance is the most likely percentage.
Gearing Up for Affordable Care Act Requirements
Few laws have had, and continue to have, such an impact on tax planning as the Affordable Care Act. The health care reform law affects every business in some way. While small employers (generally defined as employers with fewer than 50 full-time employees, including full-time equivalent employees) are exempt from the Affordable Care Act’s employer mandate, small businesses should not overlook other provisions that could generate tax savings. Mid-size and larger businesses do fall under the employer mandate and other requirements; however, mid-size employers are exempt from the employer mandate for 2015.
Health Insurance Reporting
Mid-size (50 – 100 employees) and larger businesses (over 100 employees) are responsible for new information reporting requirements. These Employers must tell the IRS if they offer health insurance or not to employees, among other criteria. The reporting requirements are effective for health insurance coverage offered, or not offered, in 2015. Small employers that are exempt from the employer mandate are also exempt from the new reporting requirements.
Small Business Health Care Tax Credit
Owners of small businesses should not overlook a tax credit under that helps offset the cost of providing health insurance to employees. To be eligible for the tax credit, the small employer must have fewer than 25 full-time equivalent employees (FTE’s). In addition, the annual average wages it pays to its employees for the year must be less than $50,000 per FTE. Finally, the premiums that the employer pays must be for coverage under a qualifying arrangement and insurance generally must be obtained through the ACA’s SHOP Program (subject to some exceptions). If the number of FTE’s exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced until it phases out.
Traditional Tax Planning Techniques
- Since tax rates for 2015 for the various brackets will be the same as those for 2014 (except for inflation adjustments), please consider the following if you anticipate staying in the same bracket: 1) Defer revenue until after December 31st. 2) accelerate expenses by either paying them (cash basis) or accruing them ( accrual basis) prior to December 31st. Please consider applying the opposite strategy if your income will be higher next year.
- Consider setting up a self-employed retirement plan if you are self-employed and haven’t done so yet.
- Review your company’s employee benefit offerings for better or more tax advantageous ways to reward employees.
- Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the corporation.
- Pay any accrued expenses to cash basis related parties before December 31, 2014. An accrual basis business can deduct those expenses in the current year only if paid by the end of the year.
- For an accrual basis taxpayer, pay accrued compensation, including vacation pay and bonuses, to unrelated individuals within two and one-half months after year end in order to deduct the compensation this year. Amounts paid after that become subject to the deferred compensation rules.
- Dispose of obsolete inventory before year-end. You can deduct the inventory you get rid of, but not by merely booking a reserve on your financial statement.
- As a cash basis taxpayer, consider using a credit card to prepay expenses that generate deductions for this year.
- Ensure that loans to or from the company are properly documented and charge an appropriate rate of interest.
These are just some of the year-end steps that can be taken to save taxes. Please contact us to tailor a particular plan that will work best for you. We may be reached at (239) 433-5554 or visit www.markham-norton.com.