CLOSING OUT 2014 WITH YEAR END TAX PLANNING
It is hard to believe 2014 is coming to a close. With another tax year ending, it is time again to discuss tax planning. Although proper tax planning begins at the beginning of the tax year, it is not too late to do some last minute planning.
The problem today is that Congress is not working together and there are various tax provisions that have expired and we still do not know for certain if legislation extenders will be passed before the year-end or enacted early next year and made retroactive. The main problem, as many businesspersons know, is whether bonus depreciation and the higher limit Section 179 expensing deduction will be extended. These two tax provisions can have serious economic consequences to a business, whether that business is trying to sell equipment or your business needs to purchase new equipment. Although Congress can operate without a budget, in the real world businesses need to budget and make economic decisions that will affect the lives of the owners and their employees.
A report was recently issued by Congressional staffers that a tax extender bill was likely during the lame duck session as the two bills in the House and Senate were not that far apart and there were not any hard lines being drawn in the sand on any particular issue. Reportedly, the differences between the two bills are “easily resolvable.” There is a reported desire to complete the tax extender package before year end. Hopefully Congress does not try to tie the tax extender legislation to other legislation to try and stop President Obama from going it alone on immigration reform as that would throw a serious twist into the debate. My prediction is that Republicans will make this threat but give in and both chambers of Congress will pass a simple bill just dealing with tax extending legislation. However, that is just my prediction.
Normally, when implementing year-end tax strategies, individuals and businesses generally want to defer income and accelerate deductions. Year-end planning is an inexact process. Yet a systematic analysis of planning options can produce benefits for the individual or business taxpayer by postponing or accelerating items of income and deduction. The tax planner may use the following strategies to assist both individual and business clients.
If your tax planning shows that you will be in the same or a lower tax bracket next year, you probably want to delay the receipt of year-end income until early next year, provided the delay does not jeopardize your prospect of collecting the income. Here are a few techniques you may be able to use to achieve that goal: (1) delay collections; (2) defer compensation; (3) take year-end bonus in the next tax year; (4) transfer funds to annuities instead of interest bearing accounts; (5) maximize retirement plan contributions; or (6) close capital transactions in the next tax year to gain the deferral of time to report the gain.
A rule of thumb says you should defer income if at all possible. But in the following situations, it may be better to accelerate income: (1) change in income level or tax bracket; (2) liability for Alternative Minimum Tax (AMT); or (3) itemized deductions exceed taxable income.
The following are strategies for accelerating your income: (1) collect receivables; (2) take your year-end bonus in current tax year; (3) treat restricted stock as vested; (4) dispose of your incentive stock options; (5) take IRA or retirement plan distributions if over 59 ½; (6) dispose of installment notes; (7) take dividends; and (8) sell capital assets.
If you need to accelerate deductions, the following techniques may be employed to accomplish that goal: (1) doubling up on charitable contributions, paying next year’s with this year’s; (2) realizing losses on investments; (3) taking bad debt deductions; (4) accelerating purchases of business equipment; (5) prepaying state and local income taxes (but be sure to consider AMT issues); and (6) prepaying property taxes.
Various year-end planning strategies for losses other than losses from securities transactions should also be considered. Specifically, there may be planning opportunities with regard to partnership losses, S Corporation losses, and net operating losses for individuals and corporations.
A partner can deduct his share of partnership losses only to the extent of basis in the partnership interest. Thus, if toward year end you have losses that will be denied as a deduction because of the basis limitation, you can make a capital contribution to the partnership to increase basis and thereby deduct the loss. An S shareholder’s losses are also limited to the sum of stock basis and basis in debt owed him by the company. If you foresee non-deductibility of a loss because of the basis limitation, you may be able to secure the deduction by making a capital contribution.
Inevitably, in late November and early December, I am often asked are there any investments out there that can generate a tax deduction to shelter some income. For the time being, Congress is still allowing a generous deduction for intangible drilling costs associated with investments in oil and gas properties. Although these investments can produce a tax deduction, they are still investments in oil and gas properties and can carry risks as to your principal investment. If you would like more information on these types of investments, talk with your financial planner or give me a call.
In these uncertain times, stay tuned to the news and what Congress does in the next couple of weeks. Consult with your certified public accountant and tax attorney to properly advise and implement your year-end tax planning.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or firstname.lastname@example.org