Year End Tax Planning 2014
Year-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year). These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence. For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements. The following items are suggested planning tips to take prior to year end.
- Repair Rules – Businesses may be able to take advantage of the “de minimis safe harbor election” to expense the costs of inexpensive assets and materials and supplies. To qualify for the election, the cost of a unit-of-property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. The repair rules became effective January 1, 2014. All businesses should evaluate their exposure to the new rules, make sure that they have proper accounting procedures in place and make proper tax elections when filing their 2014 tax returns.
- Domestic Production Activities Deduction – This deduction allows U.S. producers to deduct a percentage of their income attributable to their production activities. The deduction includes many types of companies to include manufacturing and construction companies. Income from creating a new item or any significant transformation of a product could potentially qualify for this deduction. If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.
- Fixed Asset Purchases (Depreciation) – Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this option for 2014), don’t neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000. Congress is currently working passing a bill which will extend depreciation benefits such as 50% bonus depreciation and the $500,000 Section 179 allowance.
- Research Credit – This credit expired in 2014 but is expected to be renewed by the end of 2014. Businesses should evaluate opportunities to claim the credit, as research is broadly defined to include technological discovery, process experimentation, and other such items not commonly thought to qualify as research.
- Health Care Mandate – Companies with 100 or more full time equivalent employees are subject to the health care mandate starting January 1, 2015. These companies should evaluate potential exposure to penalties for failing to meet the requirements of the employer mandate.
- State Income & Sales Taxes – State governments are continue to aggressively identify and tax Companies who should but choose not to file in a state. We continue to recommend that all businesses continue to evaluate state income and sales tax nexus in the states in which they do business in, even if not physically present in the state.
- Foreign Account Compliance – Individuals with foreign accounts should review the rules to see if they have past or present reporting requirements. Many of these reporting requirements carry significant penalties for failure to disclose required information.
- Investments – Individuals should evaluate capital gains/losses prior to year end and if they have capital gains they should consider realizing losses on stock while substantially preserving their investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
- Tax Bracket Planning & Medicare Surcharges – Individuals with expected income between $200,000-$450,000 should evaluate ways to reduce adjusted gross income, as exceeding certain thresholds will result in higher capital gains taxes and other additional taxes. Medicare surcharges apply when exceeding these income thresholds as well. These surcharges include the 0.9% tax on earned income and the 3.8% tax on unearned income.
- Health Care Mandate – The individual health care mandate is effective for tax year 2014. Those failing to hold coverage as of March 31, 2014 may be subject to a penalty. Certain tax credits are also available to individuals whose employers fail to offer affordable coverage.
- Retirement Plans – Individual Retirement Accounts (including IRA’s and Roth IRA’s) may be contributed to through April 15, 2015 for tax year 2014. Individuals should evaluate if a Roth IRA or Traditional IRA is more advantageous for them. Certain planning techniques may allow for Roth IRA contributions to be made even for individuals who can not contribute to a Roth IRA because of income limitations.
- Medical Accounts –Health Savings Accounts (HSA’s) can be contributed to through April 15, 2015 for tax year 2014 and provide a great way deduct co-payments and other medical expense. Flexible Spending Accounts (FSA) should be utilized so that they do not lose the money that they have contributed to the plan.
For more information please email or call Robert Tighe at 847-695-2700 or Robert.Tighe@tkocpa.com.