Year-end 2013 brings many new planning opportunities along with the traditional year-end tax planning strategies. It also brings challenges—for both individuals and businesses. There is much for taxpayers and their tax advisors to consider in taking action before 2013 ends, including the important changes made by: the American Taxpayer Relief Act of 2012 (ATRA), some of which officially sunset this year; the provisions in the Patient Protection and Affordable Care Act (the Affordable Care Act), scheduled to take effect in 2013, 2014, or later; the U.S. Supreme Court’s decision on same-sex marriage; and the release of significant new IRS rules on many pressing issues, with additional guidance expected when the IRS returns from the federal government shutdown. There is also the prospect of comprehensive tax reform in 2014, which will require some “crystal ball” forecasting of what Congress may or may not do in the coming year.
Business incentives scheduled to officially end with 2013 include bonus depreciation, enhanced Code Sec. 179 expensing, the Work Opportunity Tax Credit, and a handful of other significant tax benefits. Although Congress has routinely renewed these tax extenders in the past, current politics over budget concerns, and the impression that the economy may no longer need extraordinary stimulus measures, may point to the 2013 year-end as being the last occasion for businesses to take advantage of one or more of these special benefits.
New for business owners.
Businesses should also be aware of certain tax rules that are new for 2013. In particular, increased tax rates on higher-income individuals effective for 2013 may impact business strategies directed toward minimizing taxes for business owners with either pass-through or dividend income. Also important for year-end 2013 are tax strategies in connection with new final “repair” regulations.
Code Section 179 expensing
An enhanced Code Sec. 179 expense deduction is available through 2013 to businesses (other than estates, trusts or certain noncorporate lessors) that elect to treat the cost of qualifying property as an expense rather than a capital expenditure. The annual dollar limitation on expensing for 2013 is $500,000. An annual $2 million overall investment limitation applies before the maximum $500,000 deduction must be reduced, dollar-for-dollar, for excess amounts.
For tax years beginning after 2013, that dollar limit is scheduled to plummet under current law to $25,000 unless otherwise extended by Congress. The phase-out ceiling is also scheduled to drop to $200,000.
The Code Sec. 179 deduction is also limited to the taxpayer’s taxable income derived from the active conduct of any trade or business during the tax year, computed without taking into account any Code Sec. 179 deduction, deduction for self-employment taxes, net operating loss carryback or carryover, or deductions suspended under any provision. Any amount disallowed by this limitation may be carried forward and deducted in subsequent tax years, subject to the maximum dollar and investment limitations, or, if lower, the taxable income limitation in effect for the carryover year.
Since the maximum dollar limit for 2014 is scheduled to fall to $25,000 (unless extended by Congress), business should not assume that a carryover will be fully absorbed immediately in 2014. Therefore monitoring 2013 taxable income in 2013 for this purpose is important within an overall Code Sec. 179 strategy.
After 2013 Code Sec 179 expensing is not allowed for off-the-shelf computer software and certain real property, even at the lower $25,000 ceiling. This makes it particularly crucial for certain taxpayers to avail themselves of year-end strategies in 2013.
ATRA generally allows for 50 percent bonus depreciation during 2013. After 2013, bonus depreciation is scheduled to expire (except for certain noncommercial aircraft and longer production period property which may be eligible for 50 percent bonus depreciation through 2014).
Unlike regular depreciation, under which half or quarter year conventions may be required, a taxpayer is entitled to the full, 50-percent bonus depreciation irrespective of when during the year the asset is purchased. However, unlike Sec 179, bonus depreciation is an “all or nothing” decision where the 50% allowance is elected for each class of asset rather than each individual asset.
Luxury car depreciation caps
Along with the sunset of bonus depreciation, the additional $8,000 first-year bonus depreciation cap for passenger automobiles is scheduled to expire after 2013. The scheduled sunsetting of the additional $8,000 first-year depreciation amount may give businesses an additional incentive to purchase (and place into service) a vehicle before year-end 2013.
Special 15-year recovery property
ATRA extended through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property. To qualify for this accelerated recovery period, the qualifying property must be placed in service before January 1, 2014.
Final repair/capitalization regulations
In September 2013, the IRS released much-anticipated final “repair” regulations that explain when taxpayers must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing and replacing tangible property. The final regulations are considered to challenge virtually every business because of their broad application.
Compliance timetable. The final regulations apply to tax years beginning on or after January 1, 2014, but provide taxpayers with the option to apply either the final or temporary regulations to tax years beginning after 2011 and before 2014. The IRS has promised critical “transition guidance” later this year to help taxpayers deal with implementation regarding how to apply the regulations for years prior to 2014 as well as what change-of-accounting procedures should be followed.
De minimis expensing alternative. The final regulations also include a new de minimis expensing rule that allows taxpayers to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property. To take advantage of this $5,000 de minimis rule, however, taxpayers must have written book policies in place at the start of the tax year that specify a per-item dollar amount (up to $5,000) that will be expensed for financial accounting purposes. Calendar-year taxpayers, therefore, should have a policy in place by year-end 2013 to qualify for 2014.
For smaller businesses, the final regulations added a safe harbor for taxpayers without an applicable financial statement. The per-item or invoice threshold amount in that case is $500.
Work Opportunity Tax Credit
Eligibility for the Work Opportunity Tax Credit (WOTC) ends on December 31, 2013. Among other requirements, an employer must hire members of certain targeted groups and have those individuals start work before January 1, 2014.
Advanced certification required. On or before the day the employee begins work, the employer must receive a written certificate from the designated local agency (DLA) indicating that the employee is a member of a specific targeted group. Employers can use Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to obtain the certification.
Additional sunsetting tax breaks
Other provisions in danger of expiring or being significantly cut back after 2013 currently include, among others: the Research Tax Credit, 100 percent gain exclusion for Small Business Stock, Reduced Five-Year Recognition Period for S Built-in Gains, and more.
Affordable Care Act (aka Obamacare)
When Congress passed the Affordable Care Act in 2010, it delayed the effective date of several key provisions until 2014. In July 2013, the Obama administration announced a further delay in the Affordable Care Act’s employer shared responsibility payment provision (also known as the employer mandate) until 2015. The individual shared responsibility provision (known as the individual mandate) has not been delayed and starting in 2014, individuals must carry health insurance or otherwise pay a penalty unless exempt.
Employer reporting. The Affordable Care Act generally requires applicable large employers to file an information return that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the year. Following the White House’s announcement of the delay in employer (and insurer) reporting, the IRS issued transition relief and proposed regulations.
W-2 reporting. The Affordable Care Act requires employers that provide applicable employer-sponsored coverage to report the cost of that coverage on the employee’s Form W-2, Wage Small employers – generally employers filing fewer than 250 Forms W-2 for the previous calendar year – are temporary exempt from reporting. Other entities, such as multi-employer plans, are also eligible for the temporary relief.
Individual mandate. Beginning January 1, 2014, the Affordable Care Act generally requires individuals to carry minimum essential coverage for each month, qualify for an exemption or make a payment when filing his or her return. Certain individuals may be exempt, including individuals whose income is below the minimum threshold for filing a return, members of a health care sharing ministry, individuals unlawfully present in the U.S., and others.
The IRS has encouraged voluntary compliance with the employer information reporting requirements for 2014 and is expected to issue additional guidance before January 1, 2014.