YEAR-END BUSINESS PLANNING
As in past years, business tax planning is uncertain because of the expiration of many popular but temporary tax breaks that have been part of an “extenders” package of legislation. Also added to the mix is the far-reaching Affordable Care Act (ACA). Other changes to the tax laws in 2015 made by new regulations and other IRS guidance should also be considered in assessing year-end strategies.
Code Sec. 179 Expensing
Code Sec 179 property includes new or used tangible property that is depreciable under Code Sec. 1245 and that is purchased to use in an active trade or business. Under enhanced expensing, for 2014 and prior years, businesses could write off (“expense”) up to $500,000 in qualifying expenditures, and would not reduce this amount unless expenditures exceed $2 million. Until the enhanced provisions are extended, these limits, respectively, are $25,000 and $200,000 for 2015 and later years.
Qualifying property has included off-the-shelf computer software and certain real property.
Congress provided for 50-percent bonus depreciation through 2014 (through 2015 for certain transportation and other property). Legislation introduced in Congress in 2015 would extend bonus depreciation through 2016 or, alternatively, make bonus depreciation permanent.
Because bonus depreciation, if and when extended, can be elected on the 2015 return filed in 2016, it is not necessary for a business to make an immediate decision on its use, although qualifying property must nevertheless be purchased and placed in service in 2015. Bonus depreciation is optional and businesses can elect not to use it. Electing out may be appropriate if the business wants to spread its depreciation deductions over future years more evenly.
Research Tax Credit
The research credit is claimed for increases in qualified research expenditures (QREs) and for increased payments to others, such as universities, for basic research. The research credit is a popular extender and is expected to be renewed.
Small Business Stock
Code Sec. 1202 provides that noncorporate investors in qualified small business stock can exclude 100 percent of any gain realized on stock acquired after September 27, 2010, and before January 1, 2015, provided the stock is held more than five years. The corporation must conduct a qualified trade or business and must not have gross assets over $50 million. The exclusion percentage is 50 percent for qualifying stock acquired after December 31, 2014, unless Congress decides to extend the increased exclusion.
Eligible gain from disposing of qualified stock is subject to a limit of $10 million, or 10 times the basis of the stock, if greater.
S Corp Built-in Gains
If a C corporation converts to an S corporation, and the S corporation sells, during the recognition period, assets that had built-in gain at the conversion, a corporate level tax at the highest marginal rate for corporations applies to the built-in gain. This prevents a C corporation from avoiding a corporate-level tax on appreciated property by converting to an S corporation, which sells the assets and passes the gain through to shareholders. The recognition period was 10 years after the conversion, reduced to seven years, and then reduced to five years through 2014. With a shorter period, the S corporation can sell the asset more quickly without having to recognize the additional tax.
Currently, the 10-year recognition period applies for 2015.
Other Business Extenders
Other beneficial tax provisions for business would be included in extenders legislation for 2015 and beyond. These include:
- ▪ New Markets Tax Credit;
- ▪ Work Opportunity Tax Credit;
- ▪ Employer wage credit for activated military reservists;
- ▪ Subpart F provisions;
- ▪ Enhanced deduction for contributions of food inventory;
- ▪ Empowerment zones;
- ▪ Indian employment credit;
- ▪ Low-income credits for subsidized new buildings and military housing;
- ▪ Treatment of regulated investment companies (RICs); and
- ▪ Basis reduction of S corporation stock after donations of property.
A potentially beneficial provision in final, so-called “repair” regulations is the de minimis safe harbor. The safe harbor enables taxpayers to routinely deduct items whose cost is below the specified threshold.
The de minimis safe harbor is an annual election, not an accounting method, so it can be made and changed from year to year. The current threshold is set at:
- ▪ $5,000 for taxpayers with an applicable financial statement (taxpayers with an AFS should have a written policy in place by the beginning of the year that specifies the amount deductible under the safe harbor).
- ▪ $500 for taxpayers without an AFS.
Efforts being made in Congress to raise the $500 threshold for small businesses have met with resistance so far this year.
Routine Service Contracts
The IRS has provided a safe harbor under which accrual-basis taxpayers may treat economic performance as occurring on a ratable basis for ratable service contracts (Rev. Proc. 2015-39). The IRS also indicated that additional safe harbors may be developed.
This new safe harbor should prove useful immediately in year-end strategies taken by accrual-basis taxpayers that are currently negotiating contracts for regular services that extend into 2016. Done correctly to fit under the definition of ratable service contracts, a full deduction in the current 2015 tax year may be taken for certain 2015 payments, even for services not performed until 2016.
Business Use of Vehicles
Several year-end strategies involving both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees involve an awareness of certain rates and dollar caps that change annually. Changes affecting 2015, as well as some 2016 information, include:
Standard Mileage Rate. The standard business mileage allowance rate for 2015 is 57.5 cents-per-mile (up from 56 cents-per-mile for 2014).
Depreciation Limits. The IRS released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also modified the 2014 first-year limitations by $8,000 to reflect passage of the Tax Increase Prevention Act of 2014, which retroactively extended bonus depreciation for 2014 late last year. It is uncertain whether anticipated 2015 extenders legislation will make the same retroactive adjustment for 2015.
Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year.