With the November elections behind us, the Republican Party is in line to take control of the Senate, giving them the majority vote in both chambers of Congress for the first time since 2006.
What does the change of guard mean for tax reform? It’s hard to say.
The lame duck Congress is currently working towards finalizing a spending bill, and the president and both parties tout tax code overhaul as a top priority in the new year. Meanwhile, businesses eagerly await action on an “extenders” package, which could include popular benefits such as bonus depreciation and the research and development credit. The extenders package would likely have an immediate impact on the 2015 filing season, but could muddy the waters for any long-term, major tax overhaul initiatives. It is no surprise that even with the end of the year quickly approaching, details are hazy, at best, for what these short- or long-term changes might look like.
Don’t Forget to Work the Core
With all of the chatter surrounding Congress’ plans, it can be easy to forget the core planning items that should be considered at the end of each year. For businesses beginning year-end tax planning, keep the following items top of mind, giving particular consideration to bonus plan limitations, the Alternative Minimum Tax (AMT), and permanent benefits:
- Enter into/sell installment contracts
- Hold/sell appreciated assets
- Accumulate/declare special dividend
- Delay/accelerate debt forgiveness
- Delay/accelerate billable services
- Pay bills in 2014/postpone Payment until 2015 for cash basis taxpayers
- Consider AMT – especially in flow-through scenarios
- Review accounting method changes due before year-end
- Document active/passive shareholder involvement via detailed hours log
- Consider bonus depreciation
Bonus Plan Limitations
Bonus Depreciation
With the exception of the non-commercial aircraft industry, bonus depreciation expired at the end of 2013. If new legislation includes a retroactive bonus depreciation provision after a business’ tax return is prepared, taxpayers could include a statement with their return electing out of the accelerated depreciation methodology, rather than updating the calculation and the tax return. This may be a good option if you want to remove the uncertainty surrounding the legislative action, if taxable income is already anticipated to be negative and the benefits of a net operating loss will not be realized until the distant future, or if there will be a greater advantage from smoothing out the depreciation deductions over time.
Alternatively, if the return is filed before the legislation is finalized, the return could simply be amended to include the additional expensing.
Bonus Plans
If your client plans on accruing for bonus payments in 2014 and making those payments in early 2015, year-end is the perfect time to review the bonus plan and related documentation. Depending on the structure of the agreement, the 2014 accrual may or may not be deductible in 2015. It is important to consider the “fixed” and “determinable” rules and if they have been met and properly documented.
Alternative Minimum Tax
In addition to the aforementioned planning items, year-end tax planning without considering AMT would likely not be a sound approach. Without factoring in AMT, an appealing plan could be spoiled by complications late in the game. Often, AMT implications will not come to light until the return is prepared – long after your client has signed off on the plan. This is often missed in a flow-through income scenario where AMT is not considered until it’s time to consider the 1040.
Don’t Forget about Permanent Benefits
Section 199
For taxpayers and tax preparers anticipating positive taxable income for 2014, the section 199 deduction is a great benefit to introduce to your clients. Generally, the incentive is available to US manufacturers and allows for a nine percent deduction of the lesser of taxable income or “qualified production activities income.” Unlike temporary benefits (such as bonus depreciation), the 199 deduction will never reverse and generates real cash savings. Even if part of the manufactured good is produced outside of the US, the benefit might still be applicable if the component has parts made in the US.
IC-DISC
If you are already taking advantage of the section 199 deduction, the interest- charge domestic international sales corporation (IC-DISC) is another permanent benefit that may be available. Companies with profitable export sales can generally increase their after-tax cash flow by up to twenty percent by converting what would be ordinary income – taxable at a maximum rate of 39.6% – to capital gain income taxable at a maximum rate of 20%. The IC-DISC does not apply retroactively and, as such, would not benefit in tax year 2014. However, year-end is a perfect time to put this plan into place so that that export sales beginning in 2015 can benefit.
Even though tax overhaul has continued to work its way into the political discourse, there are still planning opportunities that can be put in place now. With proper foresight and awareness, you can avoid traps down the road, while still creating lasting value.
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Tags: Tax Planning
