In recent years, end of year tax planning for businesses has been further complicated by uncertainty over the future availability of many tax incentives. The 2014 year-end is no different. In 2013, the Senate passed the American Taxpayer Relief Act of 2012, which permanently extended the so-called Bush-era tax cuts. However, other popular provisions were only extended through 2013 and have not been renewed by Congress for 2014. With the recent developments during the November 4th elections and the growing tension between the White House and Congress, there are many concerns for businesses when it comes to year-end planning. Many of those concerns include expired provisions that ended in 2013.
Bonus Depreciation and Code Sec. 179 Expense Deduction
The 2012 Taxpayer Relief Act extended the additional 50 percent bonus depreciation allowance for one year for qualifying property acquired and placed in service before January 1, 2014 (or before January 1, 2015, in the case of property with a longer production period and certain noncommercial aircraft). There was no limit on the total amount of bonus depreciation that may be claimed. Currently bonus depreciation is not applicable for 2014.
For tax years beginning in 2012 and 2013, the 2012 Taxpayer Relief Act increased the Code Sec. 179 dollar limit to $500,000, as long as the total investment in qualifying property did not exceed $2 million for the year. For purposes of Code Sec. 179, qualifying property is depreciable tangible property that is purchased for use in an active trade or business. For 2014, the limit for this deduction is currently set at $25,000, and the total investment limitation is set at $200,000. Used and new Section 1245 property qualifies for the Code Sec. 179 expense allowance without regard to the recovery period.
Currently, any qualified leasehold improvements, qualified retail improvements and qualified restaurant property that were allowed to be depreciated over 15-years are now depreciated over 39-years. This will significantly affect companies who have large amounts invested in leasehold improvements, and more than doubles the recovery period for these improvements.
Both bonus depreciation and the increases in the Code Sec. 179 expense deduction and investment limits were meant to provide temporary incentives for business investment and are currently expired. Unless there is further legislative action, the Code Sec. 179 deduction limit is capped at $25,000, and bonus depreciation is not applicable for 2014.
Research Credit. The 2012 Taxpayer Relief Act extended the research credit to apply to any amounts paid or incurred for qualified research and experimentation before January 1, 2014. Currently, the research credit has yet to be revived.
Work Opportunity Credit. The work opportunity credit for all targeted groups was extended through December 31, 2013. The credit applied with respect to wages paid to persons who begin work for the employer before January 1, 2014. Currently, the work opportunity credit has yet to be renewed.
Small Business Stock
The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock under Code Section 1202 was only extended until December 31, 2013. The stock must be held for more than five years by noncorporate taxpayers. Preferential AMT treatment also applies. The exclusion under Code Section 1202 for 2014 and years beyond is 50 percent.
NEW DEVELOPMENTS FOR 2014
Revised Repair/Capitalization Rules
The IRS issued final regulations in September 2013 on the treatment to acquire, produce or improve tangible property. These rules are generally applicable to tax years beginning on or after January 1, 2014. Included in these regulations are:
- Distinctions between fixed assets versus material and supplies
- What cost must be capitalized on the acquisition of tangible property
- How to define a unit of property
- Whether expenditures related to the property’s operation are deductible repairs or have to be capitalized as improvements
- When to recognize dispositions
- Safe harbor for routine maintenance
Many business operations are not taxed on the entity level as corporations but, instead, pass through taxable profits and losses to their unincorporated owners. Continuing from 2013, these owners face year-end planning challenges in the form of a higher individual tax rate of 39.6% and additional surtaxes on passive income by way of the net investment income surtax of 3.8% and the additional Medicare tax of 0.9% on compensation, both aimed at “higher-income” taxpayers. Deferring some of this income, or harvesting losses to offset some of the income, are traditional year-end planning techniques that take on added value for the 2014 tax year.
Business tax planning involves, not only economic planning for that year, but also making wise tax decisions that will benefit the business for years to come. Tax-saving strategies must take into account short-term and long-term goals so that decisions made for the current tax year also represent sound tax decisions in subsequent years. Often, because business planning opportunities must be viewed in conjunction with personal tax planning, a taxpayer should also consider planning tips affecting their individual return and investment considerations when making business decisions.
Please contact your MarksNelson advisor to discuss the 2014 tax planning strategies that may benefit you.