2015 Year-End Tax Planning

November 16, 2015
HCVT

With the 2014 tax filing season behind us, now is an excellent time to consider tax planning and wealth preservation strategies in advance of the close of 2015. While we await Congressional action on the passage of the so-called tax extenders, below are some year-end tax planning strategies to consider, along with an update of tax laws, tax rates and legislation that may impact you.

Year-End Tax Planning Strategies

A number of tax planning strategies should be considered with your year-end analysis.  For instance, strategies involving the acceleration of expenses and/or the deferral of income can often provide an immediate cash tax benefit.  Additionally, capital gains planning (including capital loss harvesting) and contributions to tax-deferred accounts, such as retirement savings and flexible spending accounts play a role in a successful year-end tax strategy.  Testing your current tax posture for the Alternative Minimum Tax (“AMT”) liability should also be an integral part of every year-end review.

Other tax planning considerations include:

  • Prepay January 2016 mortgage in December 2015 to maximize 2015 interest deduction.
  • Defer recognition of gain on the sales of business and/or investment property through like-kind exchanges and installment sales.
  • Use the $14,000 per donee annual gift tax exclusion (Spouses together can gift up to $28,000 per donee) by timing gifts, including front-loading gifts for a qualified college tuition program.
  • Cash basis taxpayers can accelerate payment of employee bonuses by year-end to reduce their taxable income.  Accrual basis taxpayers can generally defer the payment of non-owner employee bonuses until the fifteenth day of the third month following the taxable year of the accrual.
  • Evaluate outstanding receivables and notes for collectability and potential full or partial write-off.
  • Analyze “at-risk” and general tax basis in business entities to ensure the proper tax impact from pass-thru income, losses, credits, and distributions.
  • Evaluate the long-term cost-benefit of C-Corp vs. S-Corp vs. LLC structure in light of higher individual income tax rates.
  • Review inventory to identify subnormal goods that may be offered for sale below carrying cost.  Even if not sold by year-end, the difference between the reduced sales price and the carrying cost may be written-off for income tax purposes.
  • Pay expenses by credit card to claim deductions without using immediate cash (and earn reward points).
  • Analyze passive activities to determine if “active” status can be achieved, and evaluate elections to “group” certain activities for purposes of determining net gains and losses from active and passive activities.
  • Evaluate whether tax nexus in new state or local tax jurisdictions has been established.
  • Time charitable contributions, including donations of appreciated securities.
  • Consider the establishment of an IC-DISC to reduce tax on export income.
  • Consider funding a Health Savings Account if you meet the eligibility requirements.
  • Establish a pension or profit sharing retirement plan for your business by year-end, although funding can occur after year-end.
  • Establish a Roth IRA. High net worth taxpayers can benefit from the informally-named “Backdoor Roth IRA” contribution, even if their income exceeds the Roth IRA AGI limitation.

Note that taxpayers in AMT for 2015 may need to modify certain of the aforementioned strategies. 

Expired Federal Tax Provisions

Congressional action is required to extend a number of individual and business tax provisions that expired on December 31, 2014.  Retroactive reinstatement of the expired provisions could take place in December 2015, or early in 2016 when the new Congress meets.

Tax Depreciation: For most taxpayers, the 50% bonus depreciation regime is no longer available for qualified assets placed in service after December 31, 2014.  Furthermore, the recovery period for qualified leasehold, retail and restaurant improvements increased in 2015 from 15 years to 39 years.  Lastly, the Section 179 annual expensing election for qualified business assets decreased in 2015 from $500,000 to $25,000 and is completely phased out for qualified property acquisitions in excess of $225,000. 

Other expired provisions include:

  • Research & Development Tax Credit, Work Opportunity Tax Credit, and New Markets Tax Credit
  • Deduction for sales tax
  • 5-year reduced recognition period for S-Corporation built-in gains
  • 100% gain exclusion for dispositions of Sec. 1202 small business stock
  • Qualified charitable distributions from an IRA
  • Exclusion of discharge of qualified principal residence indebtedness income from gross income
  • Above-the-line deduction for qualified tuition and education expenses
  • Corporate acceleration of AMT credits in lieu of bonus depreciation

Noteworthy Tax Legislation

Tangible Property Regulations: The implementation of the Tangible Property Regulations involving the treatment of costs incurred to improve or acquire tangible property is required for tax years beginning on or after January 1, 2014.  There are a number of items to consider, including the establishment of a written capitalization policy, identification of Units of Property, and an annual review of expenditures to determine costs to capitalize vs. expense.

Valuation Discounts on Intra-Family Transfers:  The release of new Treasury regulations governing valuation discounts to intra-family transfers of closely-held businesses and real estate interests is anticipated prior to the close of 2015.  This estate planning mechanism, utilized to transfer wealth between family members, has received increased scrutiny from the taxing authorities.

Base Erosion and Profit Sharing: In response to the growing global concern over the shift of taxable profits from high tax to low tax jurisdictions, the Organization of Economic Cooperation and Development (“OECD”) issued its final package surrounding the Base Erosion and Profit Sharing (“BEPS”) project in October 2015.  Originally undertaken in July 2012, this project contains a series of 15 recommended measures aimed at reforming the global tax system to better align taxable profits with the jurisdictions where they were generated.  Specific implementation of BEPS measures in the United States are not final, but taxpayers should be prepared to see changes to treaty policy, transfer pricing rules, as well as other international tax provisions in the future.

FATCA Compliance:  The Foreign Account Tax Compliance Act (“FATCA”) legislation was implemented to add transparency and consistency to the reporting requirements of U.S. persons holding investments in offshore accounts and entities.  FATCA withholding tax on certain prima facie Foreign Financial Institutions (“FFIs”), undocumented new account holders, and documented non-participating FFIs began on January 1, 2015.  FATCA reporting for amounts withheld in 2015 will be reported for the first time in 2016.  Impacted taxpayers should understand their FATCA reporting and withholding obligations on certain cross-border payments.  All foreign persons with U.S. investments will likely receive requests for new withholding certificates (Forms W-8BEN, W-8BEN-E, and W-8IMY) that include FATCA filing status so that U.S. withholding agents can properly determine if FATCA withholding tax applies.  Withholding agents will also be seeking withholding certificates from all pre-existing account holders to comply with the July 1, 2016 documentation due date.

Form BE-10:  New in 2015 (for fiscal 2014 data), the Bureau of Economic Analysis requires U.S. persons that maintain a 10% or more direct or indirect voting interest in a foreign enterprise to file an annual benchmark survey to secure economic data on the operations of U.S. parent companies and their foreign affiliates.  Non-compliance can result in penalties for failure to report ranging from $2,500 to $25,000.  The Form BE-10 survey is required every five years. 

California Net Operating Losses (“NOLs”):  Beginning in 2013, the state of California phased in an NOL carryback regime.  Under this regime, taxpayers are allowed a two-year carryback of 100% of the NOL generated in 2015 and beyond.  This can be a significant tax benefit for businesses that have a taxable loss in the 2015 tax year and taxable income in 2013 or 2014 tax years.  Additionally, Assembly Bill 154 signed by Governor Jerry Brown on September 30, 2015, updates the federal tax conformity to January 1, 2015, for taxable years beginning on or after January 1, 2015.  This bill includes a provision that conforms California to the federal provision allowing a corporation expecting an NOL carryback to extend the time for payment of taxes for the immediately preceding tax year, which includes extending the time for payment of a tax deficiency.

California Competes Credit:  California has enacted the California Competes Credit (“CCC”) for businesses that want to move to California or existing businesses that want to grow in California.  The CCC is geared towards businesses that plan on hiring additional full-time employees and make capital investments anywhere in California.  The next application window opens January 4, 2016, and closes January 25, 2016.  An additional application window will run from March 7, 2016, through March 28, 2016.  California awards income tax credits through the Governor’s Office of Business and Economic Development based on the number of full-time jobs and compensation paid to its employees and capital investments in California.

Tax Rates & Tax Profile

Tax Rates: The top federal marginal income tax rate of 39.6% (pre-Net Investment Income Tax) is imposed on single filers with Adjusted Gross Income (“AGI”) over $413,200, as well as for married filing joint (“MFJ”) filers with AGI over $464,850. The table below sets forth the 2015 federal individual income tax rates and brackets:

Tax Rate

Single

Married Filing Jointly

Married Filing Separately

Head of Household

10%

$0 to $9,225

$0 to $18,450

$0 to $9,225

$0 to $13,150

15%

$9,226 - $37,450

$18,451 - $74,900

$9,226 - $37,450

$13,151 - $50,200

25%

$37,451 - $90,750

$74,901 - $151,200

$37,451 - $75,600

$50,201 - $129,600

28%

$90,751 - $189,300

$151,201 - $230,450

$75,601 - $115,225

$129,601 - $209,850

33%

$189,301 - $411,500

$230,451 - $411,500

$115,226 - $205,750

$209,851 - $411,500

35%

$411,501 - $413,200

$411,501 - $464,850

$205,751 - $232,425

$411,501 - $439,000

39.6%

Over $413,200

Over $464,850

Over $232,425

Over $439,000

Capital Gains/Qualified Dividend Tax Rates: For taxpayers subject to the 39.6% tax rate referenced above, the tax rate for long-term capital gains and qualified dividends remains unchanged at 20% (short-term capital gains are subject to ordinary income rates). Most investment income (e.g., interest, dividends, rents, royalties and income from passive activities) for higher income taxpayers is also subject to the 3.8% Net Investment Income Tax (“NII Tax”).  Taxpayers that are active in a flow-through business may avoid the 3.8% NII Tax on capital gains on the sale of their business.

Limitations on Personal Exemptions and Itemized Deductions: The 2015 personal exemption and itemized deduction phase-outs impact single filers with AGI in excess of $258,250 and MFJ filers with AGI in excess of $309,900.  High-income taxpayers should pay particular attention to these limitations as itemized deductions can be reduced by up to 80%.  Personal exemptions are subject to reduction as well. 

Payroll Taxes: The social security tax rate is 6.2% on an employee’s first $118,500 of earned income in 2015 ($118,500 in 2016 as well).  Additionally, single filers with wages or self-employment income over $200,000, as well as MFJ filers with wages or self-employment income over $250,000, are subject to an additional 0.9% Medicare Tax. 

Alternative Minimum Tax: The AMT tax rate is 26% or 28% on alternative minimum taxable income in excess of the exemption amounts.  In 2015, the exemption threshold for single filers is $53,600 and is $83,400 for MFJ filers.

Retirement Plan Contributions: For 2015, taxpayers can contribute up to $18,000 to their individual 401(k), 403(b) or 457(b) plans ($24,000 for taxpayers age 50 or older, although 457(b) participants should check with their plan administrator to confirm that catch-up contributions are allowed), while individual taxpayers with a sufficient amount of earned income can contribute up to $5,500 to their IRA or Roth IRA accounts ($6,500 for taxpayers age 50 or older).  The limitations largely remain unchanged for 2016.  Significantly larger contributions can be made to pension and profit-sharing plans established by year-end.

Estate Tax and Gift Tax Limitations: For 2015, the estate and gift tax exemption amount increased from $5.34 million to $5.43 million ($5.45 million in 2016). The maximum tax rate for gifts in excess of the annual exclusion and the lifetime credit remains at 40%. 

Future Tax Considerations

While the primary focus of this letter covers the 2015 and 2016 tax landscape, there have been some significant pronouncements and law changes to consider for 2017 and beyond.  Although beyond the scope of this letter, we wanted to provide you with some information on the future tax landscape.

Tax Return Date Changes: On July 31, 2015, President Obama signed Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, modifying the tax return due dates of partnerships, corporations and certain fiduciary returns beginning with the 2017 filing season (i.e., 2016 tax returns).

TEFRA Partnership IRS Audits: On November 2, 2015, President Obama signed into law H.R. 1314, the Bipartisan Budget Agreement of 2015.  Effective generally for returns filed for partnership tax years beginning after Dec. 31, 2017, the new law eliminates the Tax Equity and Fiscal Responsibility Act of '82 (“TEFRA”) unified partnership audit rules and the electing large partnership rules and replaces them with streamlined partnership audit procedures.

We hope this information is helpful as you begin to plan for year-end 2015. 

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