Overview
As 2015 approaches, now is the time for businesses to assess their 2014 tax liabilities and take advantage of tax planning opportunities. This article is intended to inform you of important federal tax provisions to be aware of and federal tax planning strategies to consider as your business prepares its 2014 return. However, being that every taxpayer’s situation is unique, we recommend that you consult a qualified tax advisor before implementing any of the strategies discussed in this article.
Uncertainty Surrounding Extenders
Even with the 2014 elections in the rearview mirror, there has been no movement on the tax breaks that lapsed as of December 31, 2013 (the “Extenders”), including the Work Opportunity Tax Credit; 15-year straight-line recovery for qualified leasehold, restaurant, and retail improvements; reduction in recognition period for S corporation built-in gain; credit for research and experimentation; certain credits for renewable energy sources; bonus depreciation; small business expensing (Section 179); election to accelerate Alternative Minimum Tax credits in lieu of bonus depreciation; and special rules for qualified small business stock. There could still be movement on the Extenders between the date of this article and the end of the year, so please consult your advisor to see how your business might be affected.
The Employer Shared Responsibility Rules (“Employer Mandate–Play or Pay”)
Beginning January 1, 2015, most employers with an average of at least 100 full-time and full-time equivalent employees during the preceding year can be subject to a penalty tax for (i) failing to offer health care coverage to 70% of their full-time employees (and their dependents); or (ii) offering minimum essential coverage either that is not affordable or under which the plan’s share of the total allowed cost of benefits is less than 60% of the actuarial value. Employers with 50 to 99 full-time and full-time equivalent employees in 2014 will not be subject to the Employer Mandate–Play or Pay until 2016, but only if they meet certain requirements. Additionally, employers that maintained non-calendar-year plans may have until the first day of their 2015 plan year to comply, but again, only if certain requirements are met.
If you have any questions about or would like to discuss further the Employer Mandate–Play or Pay or other year-end compliance requirements relating to qualified plans or health and welfare plans, please do not hesitate to contact any member of our employee benefits team.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA) is aimed at addressing perceived tax abuses by US persons through the use of foreign accounts. Although the onus is largely on foreign financial institutions, your business might have FATCA duties that it is not aware of. If your company is making payments to foreign payees, it might have a duty to withhold a percentage of the payment. Under FACTA, US withholding agents must withhold 30% of certain US-sourced payments to noncompliant foreign financial institutions and noncompliant nonfinancial foreign entities. Your business should review its business operations and foreign vendors to determine whether withholding requirements are being adhered to. If your business fails to comply with the FACTA withholding requirements, it might be liable for the withholding tax, along with penalties and interest.
Avoiding Accumulated Earnings Tax
If your business operates as a C corporation and is retaining large amounts of earnings and profits without a reasonable business purpose, it might find itself subject to the accumulated earnings tax. The IRS can assess a 20% accumulated earnings tax penalty on corporations that accumulate excessive earnings and profits. C corporations can avoid the 20% penalty by demonstrating that the reserved funds are necessary to maintain the current business as well as the reasonably anticipated future needs of the business. However, if the retention is not reasonable, then you might want to consider having your business make a distribution to avoid the imposition of the penalty.
C to S Corporation Election
Switching from C to S corporation status might be wise if your business meets the S corporation requirements, unless your investors demand a preferred class of equity or there are plans to bring the business public. Unlike C corporations, S corporations are taxed only once on earned income, at the shareholder level. However, for a 10-year period following the conversion, the business might not be able to completely escape double taxation. Any built-in gain that existed at the time of conversion that is recognized in the 10 years following conversion will be subject to double taxation. In addition to the general avoidance of double taxation, S corporation status can provide you with more flexibility if you are contemplating an exit strategy.
Conclusion
As the calendar year comes to a close, there might be tax-saving opportunities available to your business with the proper planning. Keep in mind that this article addresses only federal tax provisions and federal tax planning strategies. There might be additional state tax planning opportunities available to your business. Any strategy needs to be tailored to your business’s specific circumstances and financial objectives, and we do not recommend implementing any of these strategies without first consulting a qualified tax advisor.
If you have any questions about this article or would like additional information, please contact a Hinckley Allen Tax professional.