As we head into the last month of the calendar year, it is important to take note of the over 50 “temporary” individual and business tax provisions that have expired and may or may not be extended and retroactively reinstated before the end of the year.
Similar to prior years, Congress appears to be waiting until the end of the year before enacting extensions of these “temporary” tax provisions. There have been some instances when Congress has not acted until the beginning of the following calendar year, which complicates tax planning. Nevertheless, taxpayers should be aware of the key expired provisions whether they are extended or not.
The key expired provisions and other hot tax topics are highlighted below, along with suggested year-end tax planning strategies to handle the current uncertainty, where appropriate.
Expensing Deduction (Section 179)
Under current law, for tax years beginning in 2015, the maximum deduction for eligible property placed in service in the year is limited to $25,000, phased out dollar for dollar once total fixed assets purchased exceeds $200,000.
For tax years that began in 2014, the maximum deduction for eligible property placed in service during the year was $500,000 and the phase-out did not start until total fixed assets purchased exceeded $2 million. Similar to prior years, the Section 179 limitation for the 2015 tax year tax may be increased by Congress to the $500,000 threshold in an end of the year “extender” package.
However, despite what Congress does or does not do to adjust the limits for 2015, some businesses may be able to purchase capital assets at year-end and currently deduct the cost under a “de minimis” safe harbor election in the tangible property repair regulations. Click here to read an e-focus that provides further guidance on this topic.
First-Year Depreciation Deduction
Unless Congress extends the provision, property bought and placed in service in 2015 (other than certain specialized property) no longer qualifies for the 50% bonus first year depreciation deduction.
Deduction for Qualified Production Activities Income
Taxpayers can continue to claim a deduction, subject to limits, for 9% of the lesser of:
Taxpayer’s “qualified production activities income” for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. file production, U.S. construction activities and U.S. engineering and architectural services)
Taxpayer’s taxable income for that tax year before taking this deduction into account
This deduction generally has the effect of reducing the taxpayer’s marginal rate and therefore should be taken into account when making decisions regarding income shifting strategies. It is also important to note that the domestic production activities deduction allowed for the tax year cannot exceed 50% of the taxpayer’s W-2 wages for the tax year that is allocable to domestic production gross receipts. That being said, if your deduction is limited by the 50% of W-2 wages, you should considerer increasing salaries or bonuses that are attributable to domestic production gross receipts into the last quarter of 2015 to take full advantage of this deduction
Research and Development (R&D) Tax Credit
Unless Congress acts, businesses are no longer eligible for the R&D tax credit starting in 2015. However, this credit is a popular extender and is expected to be renewed. While Congress has yet to extend the federal credit, many states offer their own version of the credit including Indiana, Ohio and Texas, among others.
Small Business Stock
There are special income tax provisions applicable to “Qualified Small Business Stock” to encourage investment in new ventures, small businesses and specialized small business investment companies. That being said, Code Sec. 1201 grants relief to investors who invest in these qualified small businesses. One such rule is that a non-corporate investor can exclude 100% of any gain realized on stock acquired after September 27, 2010, and before January 1, 2015, as long as the stock is held for more than five years. However, unless the provision is extended, the exclusion reverts back to 50% of any gain realized on qualified small business stock acquired after December 31, 2014.
Recognition Period for S Corporation Built-In Gains
An S corporation may be subject to a “built-in-gains” tax if it was formerly a C corporation, and it sells, within the recognition period, assets that had built-in gain at the conversion. In recent years, the recognition period has been reduced from 10 years after the conversion, to 7 years after the conversion, and then reduced to five years for tax years beginning in 2011 through 2014. The shorter conversion time is beneficial for S corporations as these businesses can sell their assets more quickly without having to recognize the additional built-in gains tax. However, for tax years beginning in 2015, the recognition period is set to revert back to 10 years.
Routine Service Contracts
Accrual basis taxpayers have a new tool to use for certain service contracts in year-end planning. The IRS has provided a safe harbor to treat economic performance as occurring on a ratable basis for certain service contracts. This will allow these taxpayers the opportunity to ratably expense the cost of regular and routine services as the services are provided under the contract. Essentially, taxpayers whom have contracts that fit under the definition of ratable service contracts will be able to take a full deduction in the current 2015 tax year for certain 2015 payments, even though services may not be performed until 2016.
Charitable Contributions from Required IRA Distributions
Through December 31, 2014, individual taxpayers who were at least 70-1/2 years old could contribute to charities directly from their IRAs. These contributions satisfied the 2014 required minimum distribution (RMD) without having to include these amounts in gross income. For some taxpayers, due to the interplay of marginal tax rates and limits on itemized deductions, this planning strategy resulted in less tax than would have occurred by including the RMD in gross income and deducting the contribution as an itemized deduction.
It is not known whether this incentive will be extended for 2015. However, taxpayers may want to consider deferring until year-end their required minimum distributions (RMDs) for 2015 in order to take advantage of this tax break should Congress act to extend it.
Alternative Minimum Tax (AMT)
Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not always save taxes because it may subject the taxpayer to the AMT.
Affordable Care Act
Although the main provisions of the Affordable Care Act have been in place for several years, 2015 is the first tax year that penalties will apply for non-compliance with the employer mandate. Additionally, employers will be required to file annual forms with the IRS in 2016 (for the tax year beginning in 2015) that will determine an employer’s compliance with the Affordable Care Act.
Click here to read our 2015 Fall issue of Horizons that fully details frequently asked questions about the Affordable Care Act and the penalties, reporting requirements, and other issues associated with the Act.
We will continue to keep you informed of the latest developments throughout the remainder of the year. For more information regarding any of the topics in this e-focus, please contact your RubinBrown advisor.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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