Sample Client Letter: Year-End 2013 Tax Planning for Businesses
(Parker Tax Publishing: October 25, 2013)
Dear [client name],
As the year draws to a close, it’s important that we review your business’s income for 2013 to project the estimated tax liability for the year and see if there are steps we can take to minimize that liability.
There are a number of tax breaks that are set to expire this year unless Congress works together to extend these tax breaks, which seems unlikely at this time. However, the focus should not be entirely on tax savings, but rather on whether or not an action otherwise makes good financial sense for your business.
In addition, new rules have come out with respect to the acquisition and disposition of business property that are quite favorable to businesses, but may require some revisions to your fixed asset policies. Depending on your current policies, it may be possible to recoup refunds by filing amended returns for prior years.
Section 179 Expensing Deduction
One of the biggest deductions available to all businesses, and one that will be dramatically reduced in 2014, is the Section 179 expensing election. This is the last year for expensing up to $500,000 of Section 179 property. It is also the last year in which the maximum amount that may be expensed is reduced where the taxpayer places into service more than $2 million of Section 179 property.
For tax years beginning after 2013, the maximum amount that may be expensed drops to $25,000, and this amount is reduced where the taxpayer place into service more than $200,000 of Section 179 property. Thus, if you are anticipating any large purchases in the next several months, it may be advantageous to accelerate such purchases into the current year to take advantage of this deduction. (Note: despite the higher overall expensing limit in 2013, a $25,000 limitation applies to purchases of sport utility vehicles (SUVs) and certain other vehicles.)
Another deduction that generally expires at the end of 2013 is the bonus depreciation deduction. Under the bonus depreciation provisions, taxpayers can elect to claim a special additional depreciation allowance to recover part of the cost of certain qualified property placed in service during the tax year. The allowance applies only for the first year the property is placed in service and is an additional deduction taken after any Code Sec. 179 deduction and before calculating regular depreciation for the year. There is no cap on the total bonus depreciation that may be deducted during the year.
Although the bonus depreciation deduction is generally scheduled to disappear after 2013, it will continue through 2014 for certain long-lived property and transportation property.
Shorter Recovery Period for Certain Leasehold Improvements, Restaurant Buildings and Improvements, and Qualified Retail Improvements Ends
Special provisions in the law allow qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property to be depreciated over a 15-year recovery period rather than the normal 39-year recovery period used for nonresidential real property. Those provisions expire at the end of 2013. Thus, if your business is contemplating any such purchases or improvements, placing such buildings or improvements in service in 2013 would significantly increase your depreciation deductions.
Special S Corporation Basis Rules for Charitable Contributions of Property
For 2013, the decrease in an S shareholder’s stock basis by reason of a charitable contribution of property is equal to the shareholder's pro rata share of the adjusted basis of such property. This favorable rule expires for contributions made in tax years beginning after 2013. As a result, for contributions made in tax years beginning after 2013, the amount of the basis reduction is the shareholder's pro rata share of the fair market value of the contributed property.
Expiration of Reduced Recognition Period for S Corporation Built-in Gains
An S corporation may owe the tax if it has net recognized built-in gain during the applicable recognition period. Generally, the applicable recognition period is 10 years. However, for purposes of determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period was reduced from 10 to five years. Thus, no tax is imposed on the net recognized built-in gain of an S corporation if the fifth tax year in the recognition period preceded 2012 or 2013. This favorable rule applies separately with respect to any C corporation asset transferred in a carryover basis transaction to the S corporation.
After 2013, the recognition period returns to 10 years. Thus, to escape gain recognition on property with built-in gain, you will have to hold the property for more than 10 years.
New Rules Apply to Property Purchased by Businesses
The IRS recently issued new rules that affect all businesses that acquire, produce, or improve tangible property. Thus, few businesses are unaffected by these rules. While these new rules apply to tax years beginning after 2013, businesses can adopt them for certain earlier years. Because these rules are quite taxpayer-friendly, retroactive adoption of these rules could result in significant refunds to your business. A new de minimis rule allows items to be expensed without question, up to a certain amount. However, taxpayers must have, at a minimum, a written capitalization policy that they follow for book purposes in order to take advantage of this rule. If this is something your business does not currently have, I can help you establish a policy. However, we need to get such a policy in place before the beginning of your next tax year. The new rules also contain several taxpayer-friendly elections that we need to discuss to see if they would be a good fit with your business.
New Rules Apply to Dispositions of Business Property
The IRS also recently issued rules dealing with dispositions of property, which apply to tax years beginning after 2013. Like the rules discussed above, these rules also affect almost all taxpayers and can be retroactively adopted. One benefit of these rules is that taxpayers can now claim a loss upon the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a component (or a portion thereof) of any other asset without identifying the component as an asset before the disposition event. However, to the extent your business is currently using procedures that are inconsistent with these new rules, we will need to make some changes to your fixed asset policy, revise the procedures for property dispositions, and file for a change in accounting method.
Gain or Loss on Dispositions of Partnership and S Corporation Interests Are Subject to the Net Investment Income Tax
A new 3.8 percent tax on net investment income above a threshold amount took effect in 2013. The threshold amount is $200,000 ($250,000 if married filing jointly or $125,000 for married filing separately). Income taken into consideration in calculating net investment income includes most rental income and net gain attributable to the disposition of property other than property held in a trade or business. Thus, this generally covers sales of interests in a partnership or S corporation. If you had such dispositions this year, or expect to, we need to determine the impact it will have on your tax liability to ensure that your tax withholdings and estimated tax payments will cover the resulting additional tax liability.
Potential Increases in Tax Rate and Tax on Dividend Distributions to Business Owners
The tax rates in effect before 2013 for dividend distributions to business owners were generally made permanent by the American Taxpayer Relief Act of 2012, except that, beginning in 2013, a new 20-percent rate applies to amounts that would otherwise be taxed at a 39.6-percent rate (i.e., the highest individual tax rate). Thus, tax rates of 0, 15, and 20 percent apply to dividend income, depending on your tax bracket. Dividend distributions may also be subject to the 3.8 percent net investment income tax if certain thresholds are exceeded.
Work Opportunity Credit
For 2013, a business is eligible for a 40 percent credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees. This credit is not available after 2013.
Generally, this credit is equal to 40 percent of the qualified first-year wages of members of a targeted group of employees who worked 400 or more hours during the year for the employer. The credit is reduced to 25 percent of the qualified first-year wages for employees who worked between 120 and 400 hours for the employer. No credit is available for the qualified first-year wages for employees who worked less than 120 hours.
Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act (PPACA) includes several provisions that may affect you as an employer, including the so-called shared responsibility provisions, also known as the “employer mandate.” Originally, this employer mandate was suppose to take effect on January 1, 2014. However, this has been delayed and the shared responsibility provisions will not take effect until January 1, 2015. Under the employer mandate, a penalty is imposed on certain large employers that do not offer health insurance coverage, offer health insurance coverage that is unaffordable, or offer health insurance coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60 percent. The penalty is assessed for any month in which a full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee.
For these purposes, a large employer is an employer (including a predecessor employer) that employed an average of at least 50 full-time employees during the preceding calendar year. An employer is not treated as employing more than 50 full-time employees if the employer's workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year and the employees that cause the employer's workforce to exceed 50 full-time employees are seasonal workers. A seasonal worker is a worker who performs labor or services on a seasonal basis, including retail workers employed exclusively during the holiday season and workers whose employment is, ordinarily, the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year.
A qualified small employer may be eligible for a credit for contributions to purchase health insurance for its employees. The amount of the credit increases from 35 percent (25 percent for tax-exempt organizations) of eligible premium payments in 2013 to 50 percent (35 percent for tax-exempt organizations) in 2014. The tax credit is subject to a reduction if you have more than 10 full-time employees or if average annual full-time employee wages exceed $25,000.
Finally, employers must report the cost of employer-sponsored group health plan coverage on employee W-2s.
Please call me at your convenience so we can set up an appointment to estimate your business’s tax liability for the year, review policies surrounding the acquisition and disposition of fixed assets, discuss options for reducing your business’s taxes for 2013, and to address any questions you may have.
[Your Name, Your Firm]
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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.