Oct 27, 2014

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​From healthcare reform and fringe benefits to timely IRS items and uncertain tax positions, here are the hottest year-end tax-planning strategies for businesses.

Healthcare Reform — Tax and Reporting Burdens and Penalties

After considerable controversy and two well-documented delays, employers must be ready in 2015 to provide healthcare insurance to their employees or face significant penalties. The new law applies to organizations employing at least 50 full-time equivalent employees (FTEs). Covered organizations must offer “affordable health coverage” that provides a “minimum level of essential coverage” to their FTEs. Employers with fewer than 50 FTEs are exempt from the requirement to offer coverage.

A plan provides “minimum essential coverage” (MEC) if (1) it’s expected to pay at least 60% of the total allowed cost of benefits incurred under the plan as a whole and (2) it’s “affordable.” A plan is affordable if the cost of self-only coverage for an employee doesn’t exceed 9.5% of the employee’s household income.

If employers don’t offer at least one plan that provides MEC, they may be subject to the Employer Shared Responsibility penalty. Covered employers that don’t offer health insurance coverage will be subject to a $2,000 per-employee fee for each FTE in excess of 30. Covered employers that provide qualifying coverage that’s not deemed “affordable” are subject to a penalty that is the lesser of the penalty for not offering the previously described coverage or a $3,000 penalty for each FTE who receives a tax credit to assist them in acquiring coverage from one of the public healthcare exchanges.

Covered employers will also have new reporting obligations beginning in 2015. They’ll need to prepare and issue new Forms 1094-C and 1095-C, which report a variety of information about their plans and their employees. This information includes whether the employer offers qualifying coverage and which employees and dependents are offered coverage.

Employee Not-so-Fringe Benefits and Retirement

Salaries, fringe benefits, and retirement packages continue to be significant expenses for businesses. Maximizing these compensation-related benefits to employees while minimizing the after-tax cost to businesses continues to be important to bottom lines.

Employee fringe benefits are a cornerstone of compensation plans. To provide a tax-free benefit to employees, the benefits must generally be provided to all eligible employees. The IRS often reviews fringe benefit plans, and if the rules aren’t met, employees may be treated as having additional taxable income.

Self-employed individuals and small business owners often overlook the tax benefits related to employee retirement plans. The Internal Revenue Code provides several tax-advantaged retirement options that use third-party IRAs as investment vehicles. For example, the Savings Incentive Match Plan for Employers (SIMPLE) and the Simplified Employee Pension (SEP) plan provide low-cost retirement plan alternatives. Before selecting a plan, it’s important to review the rules and verify the funding limits for each type of plan.

Another retirement plan that may be available for self-employed business owners is a one-participant 401(k) plan. Commonly known as the Solo 401(k) or Solo-k plan, it covers a business owner with no employees and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan; however, since the business has no other common-law employees, the plan doesn’t need to perform any nondiscrimination testing.

No Uncertainty in Reporting Uncertain Tax Positions

In 2014, C corporations with more than $10 million in assets must disclose on Schedule UTP tax positions that (1) don’t have a “more likely than not” certainty and (2) are disclosed under ASC 740-10 (formerly FIN 48) on their audited financial statements. Larger corporations have had to report these positions since 2010.

Tax Extenders

Annually, Congress must determine if important tax incentives will be extended. This decision is critical to many businesses since incentives such as the research and development credit, the work opportunity credit, the new markets tax credit, and the bonus depreciation deduction are crucial to their tax positions. At the time this article was written, the tax extender bills have been postponed until after the November elections, when the balance of the new Congress will be determined. This uncertainty makes planning difficult because some credits will likely be retroactively reinstated, while others may not.

Fixed Assets — New Capitalization Regulations

Repair Regulations

The IRS issued new capitalization rules in September 2013 that are effective for all businesses for tax years beginning in 2014. The regulations generally address de minimis expensing of small purchases and clarify the proper treatment of expenditures for tangible personal property. The new rules clarify what constitutes a “unit of property” as compared to a “component.” These definitions have significant implications for determining depreciation class lives for purchases.

The regulations also help clarify what expenditures are capital improvements to property and what expenditures are repairs. Expenditures that restore property to its previous operating state are generally deductible repairs. Expenditures that provide a more permanent increment in longevity, utility, or worth of the property will generally be capitalized.

The regulations also provide an elective safe harbor for routine maintenance items that follow a written capitalization policy.

Hot IRS Issues

Accrued Bonus and Commission Deductions

Accrual-basis taxpayers are allowed to deduct accrued bonuses (paid to nonrelated employees) when four conditions are met:

• The all-events test has been passed.
• The liability amount is determinable with reasonable accuracy at the accrual date.
• Economic performance occurs by year end.
• Payment is made within 2 ½ months of year end.

While these four conditions have long been established, now the IRS is more closely reviewing bonus plans for compliance. Bonus plans that require employees be employed on the date the bonus is paid are generally not deductible at year end unless the accrual is required to be reallocated to other employees. Taxpayers that have such plans should consider revising them before year end to deduct their accrued bonuses.

Related Party Loans

Loans between family members or between businesses and their shareholders or members are common. To be treated as bona fide debt, the IRS generally requires, among other things, that a minimum amount of interest be charged. The minimum interest rate levels for these loans are published monthly by the IRS and are referred to as the “applicable federal rates.” Loans that are less than $100,000 are subject to less complex substance and reporting requirements.

Back-Up Withholding

Beginning in 2015, the IRS will begin enforcing the 28% back-up withholding on payments to merchants that fail to give a valid tax ID to the reporting credit and debit card company in connection with their 1099-K filing obligation.

S Corporation Compensation

Deductible executive compensation packages have changed over time with IRS scrutiny of performance-based compensation packages as well as the reasonableness requirement. S corporation owners face increased scrutiny when wages are kept low (to avoid payroll taxes and Medicare surtaxes) while nonwage shareholder distributions are significant. S corporations should prioritize the proper structuring and documentation of their compensation plans for their shareholder-employees to minimize scrutiny.

Buying or Selling a Business — Considerations and Issues

When it comes to negotiating the purchase of a business, buyers and sellers often have adversarial relationships. Tax rules can provide a source of contention that must be negotiated.

Asset vs. stock. When buying a business, buyers generally prefer purchasing assets over an ownership interest. This structure allows them to benefit from higher tax deductions resulting from the step-up in the tax basis of the purchased assets. Sellers, on the other hand, generally prefer to sell stock over assets in order to obtain favorable capital gains treatment. Sellers of businesses organized as C corporations also generally prefer to sell stock in order to limit taxation to a single level.

Allocation of purchase price. An agreement on how the purchase price is allocated is a key component of transactions. The federal tax rate on gains will generally vary from 20% (for capital assets) to 39.6% (for operating assets). Because of this difference, sellers generally prefer an allocation of purchase price so more of their gain can be taxed at capital gains rates. Buyers, on the other hand, prefer that the purchase price be allocated to operating assets, which might result in faster tax deductions but often results in higher tax to the sellers. Since buyers and sellers have different goals, the purchase price should be negotiated carefully. Both parties must report how the purchase price is allocated on a Form 8594 and whether or not they’ve agreed to the purchase-price allocation.

Installment sales. While sellers generally want the purchase price to be paid sooner rather than later, they may be able to delay payment of tax on the sale if they receive payments over time in installments. The installments may be related to an agreed-upon purchase schedule or subject to contingencies like payments based on the future profitability of the company. No deferral is allowed on the portion of the transaction that represents depreciation recapture or gain on ordinary items.