2014 Year-end Tax Planning for Businesses

Gumbiner Savett Tax Department writes: Now that the final quarter of 2014 has begun, many businesses and individuals are turning their attention to year end tax planning. This year, however, uncertainty over dozens of expired or expiring tax provisions complicates the planning process, particularly for business owners.

Fifty-seven provisions expired at the end of 2013 and six more are scheduled to expire at the end of 2014. Congress may extend many of these provisions (in some cases retroactively to the beginning of 2014), but that likely won’t happen until after the midterm elections on Nov. 4 — and perhaps not for a month or more after that date. In the meantime, there are many year end tax planning strategies for businesses and individuals that are available now. Others won’t take shape until after Congress acts.

Expired Tax 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 at the end of 2013:

• Enhanced expensing election. Before 2014, Section 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, these limits have dropped to only $25,000 and $200,000, respectively, for 2014.
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• Bonus depreciation. Also expiring at the end of 2013, 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 2014 (with limited exceptions).

Lawmakers are considering bills that would restore enhanced expensing and bonus depreciation retroactively to the beginning of 2014, but probably won’t take any action until late in the year. In the meantime, how should you handle qualified asset purchases?

1. If you need equipment or other assets to run your business, you should acquire it regardless of the availability of tax breaks.
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3. 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.
4. 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 2014 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 Work Opportunity credit, Empowerment Zone incentives, the health care coverage credit and a variety of energy-related tax breaks.

Research Credit Likely to Get Extended

Congress is likely to extend the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit), as it has done repeatedly since the credit was first established in 1981. But regardless of whether the research credit is restored, it pays to investigate whether your business is eligible for the credit for previous tax years.

Even if you lack the documentation to support traditional research credits, you may qualify for the alternative simplified credit (ASC). Until recently, the ASC could be claimed only on a timely filed original tax return. But the IRS issued new regulations in June allowing most eligible businesses to claim missed credits for open tax years by filing an amended return.

Manufacturers’ Deduction Worth Investigating

Many businesses miss out on significant tax savings because they fail to recognize that they’re eligible for the manufacturers’ deduction, also called the “Section 199” or “domestic production activities” deduction. It allows you to deduct up to 9% of your company’s income from “qualified production activities,” limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Many business owners assume that the deduction is available only to manufacturers. But it’s also available for certain construction, engineering, architecture, software development and agricultural activities.

Traditional Strategies are Still Important

As always, consider traditional year end planning strategies, such as deferring income to 2015 and accelerating deductions into 2014. 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 2014 even if they aren’t paid until 2015 (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 2014 and deferring deductions to 2015. This strategy will increase your 2014 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.