Currently expired business tax breaks include Sec. 168 bonus first-year depreciation; increased limits for Sec. 179 expensing; and the Sec. 41 research and development credit. At this point, it is still unclear when, or if, Congress will act to extend these expired provisions, but there are a number of steps business taxpayers can take to reduce taxes, even without those expired items.
Generally, to reduce 2015 taxes, businesses will want to accelerate deductions into this year and delay income until next year. Here are some suggestions to offer business clients to do that.
Deferring income to 2016
Cash-method businesses that want to defer income should consider delaying the sending of late-in-the-year invoices, so payment is not received until 2016.
Accrual-method businesses should, if possible, hold off on providing goods or services to customers until after Jan. 1.
Accrual-method taxpayers that are paid in advance may be able to take advantage of deferred payment rules under Rev. Procs. 2004-34 and 2011-18 in certain situations. When an accrual-method taxpayer receives payment before the taxpayer delivers the goods or performs the services generating that payment, the taxpayer can defer recognizing that revenue for tax purposes until the next tax year if the payments are reported as deferred revenue on the taxpayer’s financial statements or (if the taxpayer doesn’t generate financial statements) if earned in the later year. Note that, to adopt this treatment, the taxpayer must file Form 3115, Application for Change in Accounting Method.
Accelerating and maximizing deductions
Business taxpayers should be looking to maximize deductions and depreciation. The first step is to identify purchases and money that can be spent on deductible expenses, such as equipment repair, this year instead of waiting until 2016.
Cash-method businesses should consider paying bonuses before year end. Accrual-method taxpayers can also possibly deduct bonus payments made to unrelated employees within 2 1/2 months of year-end. However, for these bonus payments after year-end to be deductible in 2015, the liability to pay the bonus must be fixed and determinable by the end of the year.
Businesses should, as much as possible, try to make as many of their expenses deductible rather than capitalizable and should take advantage of the opportunity under Sec. 179 to currently deduct expenses for purchases of tangible property. This can be beneficial, even though the Sec. 179 limits are lower this year (currently the maximum amount that can be deducted under Sec. 179 is $25,000 and the expensing amount is reduced, dollar for dollar, when the amount of Sec. 179 property placed in service exceeds $200,000).
If a portion of an asset was replaced during the year (e.g. the roof of a building was replaced), a business should consider making a partial disposition election. Under the election, the replacement of the portion of the asset is treated as a partial disposition of the asset, allowing the business to recognize a loss on the disposition of that portion of the asset.
Absent the retroactive increase in the Sec. 179 deduction for the purchase of business property, businesses can still take advantage of some favorable provisions in the repair regulations.
First, businesses should try take advantage of the tangible property regulations’ de minimis safe harbor. Small businesses (without applicable financial statements) can take advantage of the annual election to deduct small purchases of $500 or less per invoice or per purchase. Businesses with applicable financial statements can deduct purchases of up to $5,000 each.
Small business (those with average gross receipts of less than $10 million) can also take advantage of safe harbor for repairs, maintenance, or improvements to eligible buildings (buildings with an unadjusted basis of less than $1 million). Under the safe harbor, expenses for repairs, maintenance, or improvements to an eligible building are currently deductible if their cost does not exceed the lesser of $10,000 or 2% of the building’s unadjusted basis.
For more on taking advantage of the Sec. 179 expensing and the tangible property regulations, see Sellner, “The Interaction Between Sec. 179 and the Repair Regs.” 45 The Tax Adviser 596 (August 2015).
To maximize depreciation, businesses should purchase supplies and equipment in 2015, but the timing of acquisitions is key. The new assets must be placed in service in 2015 to qualify for depreciation in 2015, and businesses should watch out for triggering the mid-quarter convention, which will reduce the amount of the 2015 depreciation deductions for assets purchased late in the year. The mid-quarter convention will apply if more than 40% of the year’s purchases are in the last three months of the year.
Business should also look to harvest losses, checking for the availability of deductions for business bad debts, casualty and theft losses, and losses on the sale of business assets.
S corporation shareholders who anticipate that the S corporation will pass through losses to them this year should ensure that they have sufficient basis to deduct the losses. If they don’t, they should consider making a loan to the S corp. to increase their bases.
Affordable Care Act benefits and burdens for small businesses
A small employer should consider whether it qualifies for the Sec. 45R credit to help pay for its employees’ health insurance premiums. An employer qualifies for a Sec. 45R credit as a “qualified small employer” if it has 25 or fewer FTEs whose average annual wages are less than $50,000. The credit is 50% (35% for not-for-profits) of the amount of the premiums, but there is a steep phaseout as average annual wages increase between $25,000 and $50,000 (with inflation-adjusted cutoffs of $25,800 and $51,600, respectively, for 2015) and/or average FTEs increase between 10 and 25.
Eligible employers can claim this credit only for two consecutive tax years by filing Form 8941, Credit for Small Employer Health Insurance Premiums, in the first tax year in which the employer offers one or more qualified health plans to its employees through an exchange.
Another provision of the health care law that small businesses should be aware of is the Sec. 4980D penalty on certain employer payment plans, which the IRS abated for taxpayers that are not applicable large employers (i.e., employers that did not employ an average of 50 full-time employees during the preceding calendar year) until June 2015. Under Sec. 4980D, employer payment plans generally are considered to fail the market reform requirements of the health care law and are subject to a $100 per day excise tax per employee. The IRS has not yet abated the penalty for the rest of 2015 for non-ALE employers. This penalty can quickly add up to hurt a small employer, so any company not yet in compliance should act fast.
Other business benefits
Businesses with U.S. manufacturing activities can take the Sec. 199 domestic production activities deduction. Under Sec. 199(b)(1), the amount of the domestic production activities deduction allowed for any tax year cannot exceed 50% of the taxpayer’s W-2 wages for the tax year that are allocable to domestic production gross receipts. W-2 wages are defined, for any person for that person’s tax year, as the sum of amounts described in Secs. 6051(a)(3) and (8) (the total wages subject to income tax withholding and deferred compensation) paid by that person for the employment of employees by that person during the calendar year ending during that tax year. Businesses should consider accelerating salaries or bonuses that would be attributable to domestic production gross receipts into the last quarter of 2015 to increase the amount of this deduction.
Credit: The Tax Adviser
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