As the end of the year approaches, it is clear that tax planning will be no less complicated than in recent years. Several tax breaks that had expired were extended through the end of 2014, but there is no crystal ball for what Congress will do this year. Fortunately, although there are some year-end tax planning strategies that can’t be implemented until after tax legislation is signed into law, there are still many that can be implemented now.
Prepare for possible revival of expired business breaks
Year-end tax planning for businesses often focuses on acquiring equipment, machinery, vehicles or other qualifying assets to take advantage of enhanced depreciation tax breaks. Unfortunately, the following breaks were among those that expired on December 31, 2014:
Enhanced Section 179 expensing election. Before 2015, Sec. 179 permitted businesses to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction was phased out, on a dollar-for-dollar basis, to the extent qualified asset purchases for the year exceeded $2 million. Because Congress failed to extend the enhanced election beyond 2014, these limits have dropped to only $25,000 and $200,000, respectively.
50% bonus depreciation. Also expiring at the end of 2014, this provision allowed businesses to claim an additional first-year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, as well as for off-the-shelf software. Currently, it’s unavailable for 2015 (with limited exceptions).
Lawmakers may restore enhanced expensing and bonus depreciation retroactively to the beginning of 2015, but they probably won’t take any action until late in the year. In the meantime, how should you handle qualified asset purchases?
- If you need equipment or other assets to run your business, acquire it regardless of the availability of tax breaks.
- For less urgent asset needs, consider spending up to $25,000 — the amount you’ll be able to expense regardless of whether Congress extends the expired breaks.
- For additional planned asset purchases, consider taking a wait-and-see approach and be prepared to act quickly if and when “tax extenders” legislation is signed into law.
Keep in mind that, to take advantage of depreciation tax breaks on your 2015 tax return, you’ll need to place assets in service by the end of the year. Paying for them this year isn’t enough.
Other expired tax provisions to keep an eye on include the research credit, the Work Opportunity credit, Empowerment Zone incentives and a variety of energy-related tax breaks.
Follow traditional year-end strategies for businesses
As always, consider traditional year-end planning strategies, such as deferring income to 2016 and accelerating deductible expenses into 2015. If your business uses the cash method of accounting, you may be able to defer income by delaying invoices until late in the year or accelerate deductions by paying certain expenses in advance.
If your business uses the accrual method of accounting, you may be able to defer the tax on certain advance payments you receive this year. You may also be able to deduct year-end bonuses accrued in 2015 even if they aren’t paid until 2016 (provided they’re paid within 2½ months after the end of the tax year).
But deferring income and accelerating deductions isn’t the best strategy in all circumstances. If you expect your business’s marginal tax rate to be higher next year, you may be better off accelerating income into 2015 and deferring deductions to 2016. This strategy will increase your 2015 tax bill, but it can reduce your overall tax liability for the two-year period.
Finally, consider switching your tax accounting method from accrual to cash or vice versa if your business is eligible and doing so will lower your tax bill.
Be mindful of the ACA’s information reporting deadlines
Something else to think about on the tax front as we approach year end is the upcoming deadline for the Affordable Care Act’s information reporting provisions for applicable large employers (ALEs). ALEs — generally those with at least 50 full-time employees or the equivalent — must report to the IRS information about what health care coverage, if any, they offered to full-time employees.
The reporting deadline is February 28 (March 31, if filed electronically) of the year following the calendar year to which the reporting relates. Smaller employers that are self-insured or part of a “controlled group” ALE will also have reporting obligations.
With the deadline approaching, now is the time for affected employers to begin assembling the necessary information. The compliance obligation will likely require a joint effort by the payroll, HR and benefits departments to collect the relevant data.
The IRS has developed new forms for this type of information reporting: Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.” (A non-ALE self-insured employer should file Forms 1094-B and 1095-B.)
Don’t let uncertainty paralyze your planning efforts
Uncertainty over expired tax breaks has been an issue with year-end tax planning for the past few years. Nevertheless, most steps to reduce your 2015 tax bill must be taken before year end. We can guide you through the uncertainty by helping you to implement the strategies available today and to be in a position to act quickly when tax legislation is signed into law.