2015 Year-End Tax Planning for Businesses – 12 Keys Before Closing The Year

John (Rusty) Davis, CPA

IRC 179 Expensing Deduction for Asset Purchases

Unless Congress changes the rules, for qualified property placed in service in tax years beginning in 2015, the maximum amount that may be expensed under the limitation is $25,000, and the beginning-of-phase-out amount is $200,000 In earlier years, the dollar limit was $500,000 and the beginning-of-phase-out amount was $2 million. However, despite what Congress does (or doesn’t do) to adjust the IRC 179  limits for 2015, some businesses may be able to buy much-needed machinery and equipment at year-end and currently deduct the cost under a “de minimis” safe harbor election in the capitalization regs

First-year “Bonus” Depreciation Deduction

Unless Congress extends IRC 168 property bought and placed in service in 2015 (other than certain specialized property) no longer qualifies for the 50% bonus first-year depreciation deduction. However, because of the half-year convention that generally applies in the computation of cost recovery deductions for property (other than real property) first placed in service during the current tax year, year-end purchases of depreciable property can achieve tax savings even if bonus depreciation is not extended. Under the half-year convention, a business asset placed in service at any time during the tax year—even in the final days—is generally treated as having been placed in service in the middle of that year..

Document Your Business Activities

You may not need to pay a 3.8 percent Medicare tax on your business income if you participate in the business enough so that you are not considered a “passive investor.” Participation is almost any work performed in a business as an owner, manager or employee as long as it is not an investor activity. Even so, you must document your activities, and the IRS will not let you make ballpark estimates after the fact. Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries.

Prepare Your Information Reporting

You should start gathering information early this year to make sure you can complete your mandatory reporting on time. Congress has enacted new legislation that more than doubles most penalties for late or incorrect information returns. This includes the Form W-2 employers must provide to all employees and the Form 1099 a business must provide to any contractor it pays at least $600 for services. These returns are due to recipients by February 1, 2016 and the IRS by February 28, 2016.

Remember Your State and Local Tax Obligations

Don’t forget that state and local governments impose their own filing and payment responsibilities with various income, sales and property taxes. Recently, states have become more aggressive in taxing corporations that are not physically present in their states, but have significant sales to customers in those states. While there may be exceptions for limited business activities in particular states, it is wise to check on your activities of your salespeople that often travel to different states to ensure you are filing

Net Operating Losses and Debt Cancellation Income. 

A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. Also, a debtor who anticipates having the debt cancelled or debt reduced should consider steps to defer the resulting taxable income until 2016,

When C Corporations Should Defer or Accelerate Income

C corporations, like individuals, must also decide when and how to shift income and deductions between 2015 and 2016. C corporations will, as a general rule, benefit from the deferral of income and the acceleration of deductions in the same way as individuals. However, acceleration of income may be advisable in some cases. Take, for example, a corporation subject to the 39% “bubble.” Corporate taxable income between $100,000 and $335,000 is taxed at the rate of 39% to phase out the benefits of the 15% and 25% brackets that cover a corporation’s first $75,000 of taxable income.

Taxable income between $75,000 and $100,000, and between $335,000 and $10 million, is taxed at 34%. Taxable income over $10 million is taxed at 35%, except that there is also a 38% “bubble” that applies to corporate taxable income between $15 million and $18,333,333 to eliminate the benefit of the 34% rate.

Assume a C corporation expects taxable income of about $90,000 for 2015 but expects its income to go well over $100,000 in 2016. Accelerating $10,000 in income from 2016 to 2015 will save about $500 in taxes, since the $10,000 will be taxed at only 34% instead of 39% ($10,000 times 5% equals $500). This represents a return of 14.7% on the $3,400 used to make the early tax payment ($500 divided by $3,400).

Similar considerations apply to situations where the acceleration of income from 2016 into 2015 will prevent the corporation from moving into other higher tax brackets next year, say from the 15% bracket into the 25% bracket, or from the 35% bracket into the 38% “bubble” that applies to corporate taxable income between $15 million and $18,333,333.

How S Corporation Status Affects Tax Planning.

In deciding whether to accelerate income into 2015 or defer it to 2016, keep in mind that the income and operating losses of an S corporation are picked up on the personal returns of the corporation’s shareholders for the shareholder’s tax year that includes the last day of the corporation’s tax year. This means that a shareholder of an S corporation must attempt to mesh the income or loss picture of the corporation with his personal income or loss picture for effective year-end tax planning. Consideration must also be given to the passive activity loss limitation rules. To the extent that a shareholder doesn’t materially participate in the corporation’s business, he generally will be able to make no current tax use of the losses from the S corporation except to the extent of any passive activity income he may have from other sources.

Also remember that different kinds of income and loss passed through to an S corporation shareholder will retain the same character in his hands. If the corporation has a passive activity loss and also has portfolio income from investments, the shareholder can’t offset his shares of the income and loss.

Taking S Corporation Losses With an Increase in Basis

A shareholder can deduct a pro rata share of S corporation losses only to the extent of the total of your basis in (a) the S corporation stock, and (b) debt owed to you by the S corporation. This determination is made as of the end of the S corporation tax year in which the loss occurs. Any loss or deduction that can’t be used on account of this limitation can be carried forward indefinitely. If a shareholder wants to claim a 2015 S corporation loss on your 2015 individual return, but the loss exceeds the basis for his S corporation stock and debt, you can still claim the loss in full by lending the S corporation more money or by making a capital contribution by the end of the S corporation’s tax year (in the case of a calendar year corporation, by Dec. 31, 2015).

Income Shifting by Cash Basis Taxpayers

A cash basis taxpayer can postpone income to the next year as long as it isn’t actually or constructively received this year. Income is constructively received if there is no substantial restriction on the time or manner of payment.

Income the taxpayer earns by rendering services isn’t taxed until the client, patient etc., pays. If the taxpayer holds off billing until next year—or until so late in the year that no payment can be received in 2015—he won’t have taxable income this year.

Domestic Production Activities Deduction Planning

If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2015 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 2015, even if the business has a fiscal year.

Revised Due Dates for 2016 Partnership and C Corporation Returns

Enacted in 2015 by the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015″, new due dates were established for 2016 tax return filings for pass-through entities due in 2017.

Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by Mar. 15 of the following year.

The partnership return is due on the 15th day of the fourth month after the end of the partnership’s tax year. Thus, partnerships using a calendar year must file their returns by Apr. 15 of the following year. Since the due date of the partnership return is the same date as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.

Under the new law, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after Dec. 31, 2015:

Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by Mar. 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same.

By having most partnership returns due one month before individual returns are due, taxpayers and practitioners will generally not have to extend, or scurry around at the last minute to file, the returns of individuals who are partners in partnerships.

C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by Apr. 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month.

Taxpayers who can’t file a tax form on time can ask the IRS for an extension to file the form. Effective for tax returns for tax years beginning after Dec. 31, 2015, the new law directs the IRS to modify its regulations to provide for a longer extension to file a number of forms, including the following:

Form 1065 (U.S. Return of Partnership Income) will have a maximum extension of six-months (currently, a 5-month extension applies). The extension will end on Sept. 15 for calendar year taxpayers.

Form 1041 (U.S. Income Tax Return for Estates and Trusts) will have a maximum extension of five and a half months (currently, a 5-month extension applies). The extension will end on Sept. 30 for calendar year taxpayers.

The Form 5500 series (Annual Return/Report of Employee Benefit Plan) will have a maximum automatic extension of three and a half months (under currently law, a 2½ month period applies). The extension will end on Nov. 15 for calendar year filers.