When it comes to tax planning for your businesses, there are always income projections to consider, deductions to look into and tax credits to research. But each year-end also has a few prominent issues all its own. Here are four for 2014.
• Payroll tax management
Statistics show that payroll taxes and penalties are putting an increasingly heavy burden on small-business owners (and likely the owners of many midsize businesses as well). For example, the “NSBA 2014 Small Business Taxation Survey,” published by the National Small Business Association, found that payroll taxes were the No. 1 financial burden on owners and their businesses. And the administrative challenges of payroll taxes ranked second, behind only income taxes.
So, as you sit down with your managers and tax advisers to discuss year-end tax planning, also discuss the impact of payroll taxes. If you have, for instance, failed to deposit withheld taxes in a timely manner, you may be subject to late-deposit penalties and interest. Factor such penalties and interest into your total tax liability and look for ways to minimize or eliminate them.
Other year-end payroll activities to carry out include checking federal, state and local electronic tax filing requirements for this year, and reviewing accounts payable and general ledger records for unreported taxable items. Whether you handle payroll in-house or use a third-party provider, be sure you are aware of these responsibilities.
• Property and asset repairs
The final IRS regulations for tangible property repairs versus improvements took effect this year. In a nutshell, costs incurred to acquire, produce or improve tangible property must now be depreciated. But you can deduct expenses incurred on incidental repairs and maintenance of such property.
There are a couple of helpful safe harbors to consider. First, you may be able to deduct certain routine activities dedicated to using property and keeping it in efficient operating condition. These are activities that your business reasonably expects to perform multiple times during the property’s “class life,” under the IRS definition.
Second, for buildings that initially cost $1 million or less, qualified small businesses (generally, those with gross receipts of $10 million or less) may elect to deduct the lesser of $10,000 or 2 percent of the adjusted basis of the property for repairs, maintenance, improvements and similar activity each year.
The final regulations cover many other aspects of property repairs and improvements, as well. For example, they increase the dollar threshold for property that is exempt from depreciation from $100 to $200. And they address how to identify “units of property” when distinguishing repairs from improvements in relation to commercial buildings.
• Mergers and acquisitions
It’s been a booming year for mergers and acquisitions activity. In fact, the first half of 2014 was the busiest period of activity since the financial collapse of 2008, according to the July issue of FactSet Flashwire US Monthly (an M&A data tracking publication). Aggregate deal value shot up to $210.3 billion in June from $151.7 billion in May. As of this writing, the rest of the year is generally expected to follow suit.
All of this action means more and more companies are considering the ramifications of an M&A deal in their year-end tax planning. Even if you are only pondering the possibility of buying another company or entering negotiations to be acquired by a larger business, it’s important to have an early heads-up on the potential tax impact.
For starters, business structure plays a huge role in M&A tax planning. With a corporation, for instance, sellers usually prefer a stock sale for the capital gains treatment and to avoid double taxation. Buyers, on the other hand, generally want an asset sale to maximize future depreciation write-offs and avoid potential liabilities.
Another key issue is whether a deal should be set up as a tax-deferred transfer or taxable sale. Looking again at a corporation, ownership can be tax-deferred if it’s exchanged solely for stock or securities of the recipient corporation in a qualifying reorganization. But these types of transactions are strictly regulated.
For cash flow purposes, it’s typically better to postpone tax liability. There are, however, some valid reasons for agreeing to a taxable sale. The parties don’t have to meet the technical requirements of a tax-deferred transfer. Also, the seller doesn’t have to worry about the quality of buyer stock or other business risks of a tax-deferred transfer. The buyer benefits from a stepped-up basis in its acquisition’s assets while keeping the seller out of the picture as a continuing equity owner.
Naturally, the tax effects of a sale or acquisition are just one component of the deal’s viability. And, again, we’ve looked only at some of the aspects of a corporation’s sale here – other entity choices will involve different challenges and degrees of complexity.
• Additional Medicare tax
The additional 0.9 percent Medicare tax on the excess earnings of some highly compensated employees is nothing new. A provision of the Affordable Care Act, the tax took effect in 2013. But the IRS didn’t issue final regulations on the additional Medicare tax until earlier this year, and the agency even issued a follow-up FAQ about it in June.
Essentially, taxpayers with wages over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay the additional 0.9 percent on their excess earnings. Unlike regular Medicare taxes, the additional Medicare tax doesn’t include a corresponding employer portion. But, as an employer, you do need to withhold the additional tax to the extent that an employee’s wages exceed $200,000 in a calendar year. (Various other stipulations and exceptions may apply. Talk with your tax adviser about them.)
Withholding doesn’t have to begin until the first pay period when wages for the year exceed the $200,000 threshold – and that could very well be year-end. So now is a good time to learn more about the additional Medicare tax as well as assess which of your staff members may be subject to it.
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