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Year end Tax Planning for Businesses
Last minute" year-end 2014 tax-saving moves for corporations
As year-end approaches, it would be worthwhile for practitioners to
consider whether corporate clients could benefit from the following
"last minute" tax-saving moves, including adjustments to income to
preserve favorable estimated tax rules for 2015, deferral of certain
advance payments to next year, and fine-tuning bonuses to make the most
of the Code Sec. 199 domestic production activities deduction.
Accelerating or deferring income can preserve estimated tax break.
Corporations (other than certain "large" corporations, see below) can
avoid being penalized for underpaying estimated taxes if they pay
installments based on 100% of the tax shown on the return for the
preceding year. Otherwise, they must pay estimated taxes based on 100%
of the current year's tax. However, the 100%-of-last-year's-tax safe
harbor isn't available unless the corporation filed a return for the
preceding year that showed a liability for tax. A return showing a zero
tax liability doesn't satisfy this requirement. Only a return that shows
a positive tax liability for the preceding year makes the safe harbor
available.
RIA recommendation: A corporation (other than a
"large" corporation) that anticipates a small net operating loss (NOL)
for 2014 (and substantial net income in 2015) may find it worthwhile to
accelerate just enough of its 2015 income (or to defer just enough of
its 2014 deductions) to create a small amount of net income for 2014.
This will permit the corporation to base its 2015 estimated tax
installments on the relatively small amount of income shown on its 2014
return, rather than having to pay estimated taxes based on 100% of its
much larger 2015 taxable income. Also, by accelerating income from 2015
to 2014, the income may be taxed at a lower rate in 2014, e.g., at 15%
instead of at 25% or 34%. However, where a 2014 NOL would result in a
carryback that would eliminate tax in an earlier year, the value of the
carryback should be compared to the cost of having to pay only a small
amount of estimated tax for 2015.
Accrual basis business can take a 2014 deduction for some bonuses not paid till 2015.
An accrual basis corporation can take a deduction for its current tax
year for a bonus not actually paid to its employee until the following
tax year if (1) the employee doesn't own more than 50% in value of the
corporation's stock, (2) the bonus is properly accrued on its books
before the end of the current tax year, and (3) the bonus is actually
paid within the first 2 1/2 months of the following tax year (for a
calendar year taxpayer, within the first 2 1/2 months of 2015).
For employees on the cash basis, the bonus won't be taxable income
until the following year. The 2014 deduction won't be allowed, however,
if the bonus is paid by a personal service corporation to an
employee-owner, or by an S corporation to an employee-shareholder, or by
a C corporation to a direct or indirect majority owner.
Accrual-basis taxpayers can defer inclusion of certain advance payments.
Accrual-basis taxpayers generally may defer including in gross income
advance payments for goods until the tax year in which they are properly
accruable for tax purposes if the income inclusion for tax purposes
isn't later than it is under the taxpayer's accounting method for
financial reporting purposes.
An advance payment is also eligible for deferral—but only until the year following its receipt—if:
1. Including the payment in income for the year of receipt is a permissible method of accounting for tax purposes;
2. The taxpayer recognizes all or part of it in its financial statement for a later year; and
3. The payment is for (a) services, (b) goods (other than goods for
which the deferral method discussed above is used), (c) the use of
intellectual property (including by lease or license), (d) the occupancy
or use of property ancillary to the provision of services, (e) the
sale, lease, or license of computer software, (f) guaranty or warranty
contracts ancillary to the preceding items, (g) subscriptions in
tangible or intangible format, (h) organization membership, and (i) any
combination of the preceding items.
Friday, February 12, 2016
