Rose Report: Issue 26
Year Round Tax Planning for Companies
As the year comes to a close, it’s also the time for companies to wrap up annual tax plans. While it’s typical to start planning taxes in the last quarter, the planning actually goes on year-round when your company estimates its taxes and makes quarterly payments. In the last quarter, it’s a good time to implement your plan and review any the tax-related provisions, paying attention to the tax changes that will affect your business.
When preparing your taxes and reviewing the various tax deductions, it’s important to keep track of all assets, profit and loss, and balance sheet changes to help plan the taxable income for the year. These should be tracked by federal and by state, and to make sure you’re making estimated payments in any new states your business has registered in that year. It’s also important to be aware of which tax deductions have changed when making your tax plan. This year, about 45 business tax-related tax provisions expired after 2013.
One of the more notable changes for 2014 is Section 179, which allows businesses to take 100 percent deduction on the purchase of certain assets. The maximum deduction was reduced from $500,000 down to $25,000 on such purchases as office equipment, computers and furniture.
Another noteworthy change is the five-year waiting period for S Corporations to avoid built-in gains tax. Prior to 2009, the waiting period for an S Corporation (S Corps) that switched over from C Corporation (C Corps) status to avoid built-in gains tax was 10 years. C Corps are entities that pay their own taxes as a company, rather than by passing the taxes down through shareholders and taxed at personal rates, as in S Corps. C Corps are essentially double-taxed at the 35 percent corporate level and another 15 percent dividend tax on the company owners. Once a company converts, it must go through a waiting period before skipping the built-in gains tax resulting from sales of assets previously held by the C Corps. The waiting period was temporarily reduced to seven and then five years, which was extended under the American Taxpayer Relief Act of 2012, but expired at the start of 2014. This waiting period is now 10 years again.
The Research and Experimentation Credit, also known as the R&D Credit, also expired for qualifying expenditures after 2013. Costs incurred in research and development (R&D) may qualify for the credit, although some may no longer. However, this particular credit, introduced in 1981, has been extended 15 times and may very likely be extended again. If extended, the credit may possibly be retroactively taken, as it has 10 times already since its introduction. The definition of R&D by the IRS has evolved to include products, processes, formulas, prototypes, models, patents, certification testing, new technology, environmental testing, software technologies, manufacturing facilities and streamlining internal processes.
The IRS also released a new set of capitalization rules related to purchasing assets and repairs. This includes the new safe harbor allowing taxpayers to expense de minimis amounts for property. Those with an applicable financial statement (AFS) can deduct up to $5,000 of the cost per item or invoice, as long as the statement is filed with the SEC. Those who do not have an AFS can still deduct costs but only up to $500. Maintenance and repairs of these buildings are also recorded and classified differently by the new rules. If you purchased a building or materials a few years ago, you may need to recalculate the assets to see if you over-depreciated them. The difference can be taken over four years.
While tax changes are always occurring each year, it’s a good idea to keep all paperwork, receipts, and records organized and on-hand to take advantage of any tax credits. The difference could be a huge savings for the company and for its shareholders.