Last minute year-end planning

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Gearing Up for Filing Season: Business Tax Planning Tuesday, December 10, 2013; 11 am – noon (EDST) Tuesday, December 10, 2013; 1 pm – 2 pm (EDST)

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Gearing Up for Filing Season: Individual Tax Planning Tuesday, December 3, 2013; 11 am – noon (EDST) Tuesday, December 3, 2013; 1 pm – 2 pm (EDST)

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EXPERT COMMENTATOR: Barbara Weltman

• “Big Ideas for Small Business” • www.barbaraweltman.com

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TO RECEIVE CPE CREDIT:

• This Webinar qualifies for 1 CPE credit • To earn CPE and/or IRS Program credit, you must enter 4 words/phrases within 24 hours of the Webinar

• At conclusion of Webcast, go to: www.smartpros.com/adpwebinars

• Participants may also: Download a copy of the PowerPoint (CPE keywords excluded) Send the presenter a question (if unanswered during the event)

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Introduction

• Taking advantage of expiring tax breaks • Factoring in new tax taxes on successful small business owners • Using last minute year-end planning • Looking ahead to possible law changes

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Expiring rules

• Rules that expire at the end of 2013: – – – – –

Research credit 100% exclusion for small business stock issued in 2013 50% bonus depreciation Generous first-year expense (Sec. 179) deduction 15-year recovery period for qualified leasehold, restaurant, and retail improvements

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Expiring rules

• Other rules that expire in 2013: – Reduction in S corporation built-in gains recognition period – Basis adjustment to stock of S corporations making charitable contributions of appreciated property – Various energy-related breaks – Various employment-related credits – New market credit – Enhanced deductions for certain charitable contributions – Empowerment zone breaks

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Using current tax breaks

• Sec. 179 deduction (“first-year expensing”) – $500,000 limit – Dollar amount phases out for purchases over $2 million; no deduction when purchases are $2.5 million or more – Applies to off-the-shelf software

• Last chance to change/elect/revoke the deduction without IRS consent

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Using current tax breaks

• Bonus depreciation: – 50% for 2013 of the adjusted basis of qualified property – Qualifying property: new tangible property depreciated under MACRS with a recovery period of 20 years or less, certain computer software, qualified leasehold improvement property, and water utility property – Must elect out • Election applies per class

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Using current tax breaks

• Fiscal year taxpayers: – Sec. 179 deduction is based on the tax year the item is placed in service – 50% bonus depreciation is based on the actual acquisition and placed-on-service dates

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Using current tax breaks

• 15-year straight line cost recovery for qualified real

•

property Qualified real property: – Leasehold improvements property – Restaurant property – Retail improvement property

• Election to treat up to $250,000 of the aggregate cost as a Sec. 179 deduction

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Using current tax breaks

• Qualified small business stock – Stock issued by December 31, 2013, entitles the holder to a 100% exclusion if it is held more than 5 years – “Qualified small business stock” definition – Can be issued: • To investors—complete funding arrangement before the end of the year • To employees—compensation for services – Employees may want to make a Sec. 83 election

• Note: Qualified SB stock sold in 2013 has a 50% exclusion

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New tax rules for 2013

• 0.9% additional Medicare tax on earned income (taxable compensation and net earnings from self employment) over applicable threshold: – $200,000 for singles – $250,000 for joint filers – $125,000 for married filing separately

• Individuals complete new Form 8959

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New tax rules for 2013

• 0.9% additional Medicare tax: employer obligations: – Withholding when wages exceed $200,000 (regardless of filing status) • Nonqualified deferred compensation: withhold when earned, not when paid

– No employer matching – Comply with employee requests for additional income tax withholding – W-2 reporting (discussed later)

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New tax rules for 2013

• 3.8% additional Medicare tax on certain unearned income – Called net investment income (NII) tax – Figured on new Form 8960

• Tax is the lesser of: – Net investment income, or – MAGI over the taxpayer’s threshold amount (same as threshold amounts for 0.9% tax)

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New tax rules for 2013

• Determine whether business owner’s distributions from a pass-through entity are treated as investment income – Material participation (see Code Sec. 469)

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New tax rules for 2013

• Simplified option for the home office deduction (Rev. Proc. 2013-13): – $5/sq. ft. up to 300 sq. ft. of space – Must meet basic home office deduction rules – No depreciation (year of simplified option ignored for purposes of future depreciation when the actual method is used)

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New tax rules for 2013

• Limited carryover for FSAs (Notice 2013-71) – Plan can allow a carryover up to $500 (not cumulative) – Can have either carryover or grace period – Carryover does not impact annual contribution

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Last minute year-end planning

• Income tax strategies: deferral or acceleration – Basic strategy for cash basis businesses: defer income when possible • Example: Delay year-end billing for services so that payment is received next year

– Factor in the additional Medicare taxes if applicable

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Last minute year-end planning

• Income tax strategies: deferral or acceleration – Basic strategy for cash basis businesses: accelerate expenses when possible • Pay outstanding payables • Pay bonuses to owners

– Use qualified small business stock – Take 0.9% additional Medicare tax into account

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Last minute year-end planning

• Income tax strategies: deferral or acceleration – Basic strategy for cash basis businesses: accelerate expenses when possible • Buy/place in service equipment before year end to use current bonus depreciation/Sec. 179 rules • Consider vehicle purchases (especially heavy SUVs before year end) • Shelter profits by setting up a qualified retirement plan (e.g., profit-sharing plan) before year end

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Last minute year-end planning

• Dividends – Pay dividends before the end of the year • Note new 20% rate on high-income shareholders

– Check with S corporations that have accumulated E&P from their pre-1987 C corporation days

• Stock redemptions (may be dividends or capital gains) – Execute corporate resolutions

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Last minute year-end planning

• Deduction planning – Review final regulations on repairs (especially the de mimimis rules and safe harbors) – Make charitable contributions • Accrual basis C corporations: declare before year-end

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Last minute year-end planning

• Basis strategies – Owners of pass-through entities should check basis if losses are expected for the year • S corporation shareholders:

– Make loans to the corporation – Re-work loans with guarantees so that shareholders become the borrowers (check with lenders)

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Last minute year-end planning

• Tax credits planning – Hire qualifying workers before year end to use the work opportunity credit • Make sure to file Form 8850 within 28 days of hiring

– Check eligibility for the small employer health insurance credit • Top credit in 2013: 35% of employer-paid premiums • Top credit in 2014: 50% of employer-paid premiums for coverage obtained through SHOPs

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Last minute year-end planning • Payroll tax planning – W-2 reporting • Report employer-sponsored health coverage in box DD (not taxable to employee) – Small employers (250 or fewer forms in the prior year) still exempt

• Report 0.9% additional Medicare tax in box 6

– Form 941 • New line for reporting the 0.9% additional Medicare tax

– FUTA taxes • Check for credit reduction states (www.irs.gov/pub/irsdft/f940sa--dft.pdf)

– Same-sex married employees: see Notice 2013-61

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Last minute year-end planning • Compensation planning for S corporation owneremployees – Set 2014 salary in light of: • $117,000 Social Security wage base • 0.9% additional Medicare tax

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Last minute year-end planning • Consider changes in accounting method – Examples: • Acceleration of certain prepaid expenses • Deferral of income recognition for qualifying advance payments

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Last minute year-end planning

• Get ready for NOL carrybacks – Check businesses impacted by the November tornados in the mid-West or other federally-declared disasters

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Last minute year-end planning

• Tax payments – Corporations: 2013 estimated tax (4th installment) due on December 16 (December 15 is a Sunday) – Business owners: 2013 estimated tax (4th installment) due on January 15, 2014

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Last minute year-end planning

• State taxes – Businesses that sell online should watch for changes in state definitions of nexus (“affiliate” and “click through”) for sales taxes • Note: Federal Marketplace Fairness Act not likely to be passed in 2013

– Some states are moving to “economic” presence for income/franchise taxes

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Looking ahead

• Quality Stores, Inc. to be decided by the U.S. Supreme Court (whether certain severance benefits are exempt from FICA). – File protective refund claims?

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Looking ahead

• Sen. Baucus’ draft proposal for overhaul of cost

•

recovery and accounting rules (www.finance.senate.gov/imo/media/doc/Chairma n's%20Staff%20Discussion%20Draft%20on%20C ost%20Recovery%20and%20Accounting%20Sum mary.pdf) Bipartisan budget committee report due December 13 (may include tax reform proposals)

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Looking ahead • Sec. 179 deduction of $1 million; $2 million phase-out • Overhaul of depreciation (change to 4 pooled asset groups); • • • • • • •

43-year recovery period for realty Change in taxation of foreign income of U.S. corporations Extensions of some expiring provisions Advertising costs (50% expensed; 50% amortized over 5 years) End to LIFO and like-kind exchanges Start-up expenses ($10,000/20-year amortization for excess) Sec. 197 intangible: increase to 20-year amortization period Requiring businesses to verify W-9s for independent contractors – Withholding for unverified contractors from gross payments

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Conclusion • Watch for last-minute business-related tax changes • Keep clients informed

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TO RECEIVE CPE / IRS PROGRAM CREDIT:

• This Webinar qualifies for 1 CPE credit • To earn CPE and/or IRS Program credit, you must enter 4 words/phrases within 24 hours of the Webinar

• At conclusion of Webcast, go to: www.smartpros.com/adpwebinars

• Participants may also: – Download a copy of the PowerPoint (CPE keywords excluded) – Send the presenter a question (if unanswered during the event)