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In-Depth: Year-End BUSINESS Tax Planning Focuses on Tangible Property Rules and Tax Extenders Pre TIPA. (Parker Tax Publishing November 2014)

It's that time of year for tax practitioners to reach out to their business clients with last-minute tips for lowering 2014 taxes. The following article on year-end planning for businesses is the second and final installment in Parker's year-end tax planning series. For in-depth discussion of year-end planning for individuals, See Year-End Tax Planning for Individuals in Light of Uncertainty Regarding Tax Extenders.

Practice Aid: See Sample Client Letter: 2014 Year End Tax Planning for Businesses. and Sample Client Letter: 2014 Year End Tax Planning for Individuals

While 2014 saw developments in the courts and the IRS that could impact a client's tax bill, there is still a big question mark as to whether Congress will vote to pass the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 (i.e., the tax extenders bill), which was approved by the Senate Finance Committee earlier this year. Many believe that Congress is waiting until after the November elections to bring the bill to a vote. Even if the legislation is not passed until 2015, the provisions could still be made retroactive to 2014, as has been done in the past.

Perhaps the biggest development for businesses in 2014 that doesn't require guesswork, and which may require certain actions before December 31, is the IRS's overhaul of the tangible property rules. These rules affect any business that owns property and may require some modifications to a client's fixed asset policies to either comply with, or take advantage of, the new rules. The rules also offer opportunities for filing amended returns and reaping tax refunds for clients.

Tangible Property Rules

Safe Harbor Election for Expensing Items

One of the more favorable rules in the tangible property regulations is the $5,000 de minimis safe harbor election for expensing an item rather than capitalizing it. To take advantage of this election, the taxpayer must have had written accounting procedures in place at the beginning of the year and have been following those rules for book and tax accounting purposes. If such procedures were in place at the beginning of 2012 or 2013, the election can be made for those years as well but will require amended returns. If the taxpayer did not have such procedures in place, it's not too late to implement them for 2015, but it must be done by the end of this year.

In addition, the taxpayer must have an applicable financial statement (AFS) to rely on the $5,000 de minimis safe harbor. Without an AFS, the taxpayer may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item as substantiated by the invoice. If the cost exceeds $500 per invoice (or item), then the taxpayer cannot use the de minimis safe harbor. Alternatively, if the taxpayer does not qualify for the $5,000 safe harbor, the taxpayer may still be able to deduct amounts over $500 or even over $5,000, if the taxpayer has a written policy in place, follows it for book purposes, and can prove that it meets materiality thresholds. Various types of statements qualify as an AFS, so if the taxpayer doesn't currently have an AFS, practitioners should evaluate whether one of the available options will work for a client's business.

Finally, the de minimis safe harbor rule also applies to amounts paid for property having a useful life less than a certain period of time.

Partial Disposition Election

Another favorable item in the final tangible property regulations that may save a client some money this year is the partial disposition election. While initially the election could only be made for tax years beginning before January 1, 2014, the IRS extended the time for making the election to any tax year beginning before January 1, 2015. Using this election, the taxpayer can claim a loss on the disposition of a structural component of a building or on the disposition of a component of any other asset without needing to make a general asset account election. The partial disposition rule also minimizes circumstances in which an original part and any subsequent replacements of the same part must be simultaneously capitalized and depreciated. Thus, for example, if the taxpayer replaced an engine in a truck, the old engine would generally continue being depreciated as part of the truck, while the new engine would also be depreciated. Under the partial disposition rule, the taxpayer can now retire the old engine and recognize a loss on that disposition.

Deductions Available for Rehabilitation of Buildings and Other Property The final rules contain a routine maintenance safe harbor that allows the expensing, rather than capitalizing, of costs of performing certain routine maintenance activities for buildings or the structural components, as well as other property. If a taxpayer has done any such maintenance this year or plans to do so next year, it may fall under the "routine" safe harbor and be currently deductible. Practitioners should review any changes to maintenance routines going forward to ensure that such costs, when appropriate, qualify for immediate expensing.

Bonus Depreciation

Although bonus depreciation is not currently available for 2014, there is a good possibility it will return if the tax extenders bill is passed. As previously noted, the drawback is that taxpayers may not know until late 2014 or even early 2015 whether purchases in 2014 will qualify for the bonus depreciation and the amount that will qualify. On the assumption that the bill passes as written, a 50-percent additional first-year depreciation deduction would be effective for qualified property purchased and placed in service before 2016, or before 2017 for certain longer-lived and transportation assets.

Section 179 Deduction

The Section 179 deduction is also in limbo until the fate of the tax extenders bill is known. Currently, for taxable years beginning in 2014 and thereafter, businesses may immediately expense up to $25,000 of Section 179 property annually, with a dollar for dollar phase-out of the maximum deductible amount for purchases in excess of $200,000. If the EXPIRE bill becomes law, it would increase the maximum amount and phase-out threshold in 2014 and 2015 to the levels in effect in 2010 through 2013 ($500,000 and $2 million respectively). The law would also extend the definition of Section 179 property to include computer software and qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Research Tax Credit

Perhaps one of the most popular provisions in the tax extenders bill on both sides of the aisle is the extension of the tax research credit through 2015. It is almost a given that if any provision gets extended, this one will. Additionally, the EXPIRE bill would allow qualifying startup businesses to claim unused credits against their payroll tax after applying the credit to income tax liability. And it is worth noting that in 2014, two taxpayer-favorable court cases (Trinity Industries, Inc. v. U.S., 2014 PTC 326 (5th Cir. 2014); Suder v. Comm'r, T.C. Memo. 2014-201) rejected IRS attempts to rein in taxpayers' ability to take full advantage of this credit. If a taxpayer has taken research tax credits in the past couple of years, it may be worthwhile to review the calculation of those credits in light of these cases to see if additional expenses can be claimed based on the court holdings.

S Corporations

Earlier this year, the IRS loosened the rules relating to S corporation shareholder debt. Under the new rules, it is easier for such debt to give the shareholder basis against which the shareholder can deduct losses from the S corporation. The rules generally eliminated the "actual economic outlay" doctrine replacing it with a clearer "bona fide debt" requirement, and made the changes retroactive. Thus, if a shareholder previously could not deduct losses because the actual economic outlay doctrine wasn't met, amended returns may be in order.

Real Estate Developers

For real estate developers, two court cases this year (Shea Homes, Inc. v. Comm'r, 142 T.C. No. 3 (2014); Howard Hughes Company, LLC v. Comm'r, 142 T.C. No. 20 (2014)) drew a distinction between the type of contracts that will qualify as home construction contracts eligible for the completed contract method and those that will not. As a result of these decisions, it is worth taking a second look at client's construction contracts to see if they meet the requirements for using the completed contract method.

Affordable Care Act ("Obamacare")

The Affordable Care Act includes several provisions that may affect business clients, including the shared responsibility provision, also known as the "employer mandate." Under the employer mandate, which is effective January 1, 2015, 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.

It is important to note that this provision only applies to an employer who employed an average of at least 50 full-time employees on business days in the preceding calendar year. Additionally, subject to certain requirements, no employer shared responsibility payments will apply during 2015 for employers with fewer than 100 full-time employees.

The penalty is assessed for any month in which a full-time employee is certified to the employer as having purchased health insurance through an Exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee.

OBSERVATION: It is worth noting that several courts have ruled that insurance purchased on a federal Exchange does not qualify for the subsidies that trigger the tax on the employer. This has the possibility of negating the penalty tax on employers. The issue may end up before the Supreme Court, which would determine the ultimate outcome.

Small Employer Credit

With respect to health insurance, certain small employers may be eligible for a credit for contributions to purchase health insurance for employees. The amount of the credit increased in 2014 to 50 percent (35 percent for tax-exempt organizations) of premiums paid. The tax credit is subject to a reduction for employers with more than 10 full-time employees or if average annual full-time employee wages exceed $25,000.

Mass Transit Benefits

For taxpayers that subsidize their employee's commuting expenses, there is a tax extender provision that would increase, for 2014 and 2015, the monthly exclusion from income for employer-provided transit and vanpool benefits from $130 to $250, so that it would be the same as the exclusion for employer-provided parking benefits. Also, the definition of qualified bicycle commuting reimbursement would be modified to include expenses associated with the use of a bike sharing program for two years. The benefits that are excludible from income would not be includible in the employee's wages on Form W-2 and would be deductible by employers as fringe benefits. (Staff Editor Parker Tax Publishing)

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.

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