Last Minute 2014 Business Tax Planning

Now that the Senate has passed the Tax Prevention Act of 2014, and with the expected signature of the President, taxpayers have less than two weeks until December 31, 2014, to implement any “last minute” income tax planning strategies.  The Act basically extends for one-year the various tax items that had expired at the end of 2013.  Here is a checklist of several strategies applicable to businesses:

·       50% first-year bonus depreciation has been extended to include qualified property acquired and placed in service by December 31, 2014 (previously expired after 2013 and expiring once more after 2014).  The property’s original use must begin with the taxpayer (new property).

·       The higher Section 179 business expensing limits have been extended to include property (new or used) acquired and placed in service in tax years beginning in 2014 (previously expired for tax years beginning after 2013 and expiring once more for tax years beginning after 2014).  The expensing limit is restored to $500,000; phasing out dollar for dollar as purchases exceed $2,000,000.  Previously these limits would have been $25,000 and $200,000 respectively.

·       Adopt a qualified retirement plan, such as a profit sharing plan, a 401(k) plan, or a defined benefit plan by December 31^st.  Alternatively, a simplified employee pension (SEP) plan can be adopted by the due date of the tax return (with extensions).

·       Estimate the business’ marginal income tax rate for 2014 and 2015 and shift income and deductions as appropriate to allow more income to be taxed at lower tax rates, or to allow more deductions to be claimed at higher tax rates.

·       Cash basis taxpayers should pay and mail all outstanding bills and payroll by December 31^st.

·       Accrual basis corporations should declare and accrue bonuses by December 31^st as long as actual payment occurs no later than March 15, 2015.  Special rules apply to shareholders owning directly or indirectly more than 50% of the corporation’s stock.  Bonuses to such shareholder-employees must be paid by December 31^st to be deductible in 2014.

·       If you own an interest in a partnership or an S corporation, you may need to increase your tax basis in the entity in order to deduct a loss from it for this year.

·       If you do not already have an existing policy, be sure that a written capitalization policy is in place by December 31, 2014 for the 2015 tax year.  This policy permits low-cost asset purchases ($500 or up to $5,000 for audited financial statements) to be expensed in the income statement instead of capitalized on to the balance sheet and depreciated.  Your financial accounting records must also treat these low-cost asset purchases as expenses.  While an annual election in the income tax return must be made each year to claim the deduction, it does not appear that a new capitalization policy must be adopted each year.  Rather, a written capitalization policy simply must be in place before the start of the tax year for which you are making the tax return election.