Colorado Real Estate Journal - December 3, 2014
With the end of 2014 just around the corner, it is that time of year to consider yearend tax planning strategies. Four general areas financial executives should be reviewing include: 1) timing year-end income and expenses; 2) credits, deductions, and incentives that may change in 2014 or 2015; 3) the impacts to businesses from health care legislation; and 4) approaching changes to revenue recognition. Income and expense deferral and acceleration. Depending on expected tax bracket in the upcoming year, there are many income and expense timing techniques businesses should consider as year-end approaches. The traditional strategy is to defer income into next year and accelerate deductible expenditures into this year if you expect to be at nearly the same or a lower tax bracket next year. Alternatively, if you expect your business to grow significantly, resulting in a higher tax bracket in 2015, you should take the opposite approach. At the most basic level, companies should consider methods to accelerate or postpone economic performance. This can be achieved through income strategies (i.e., accelerating/postponing economic performance, entering/selling installment contacts, and accelerating/ delaying billable services) or expense strategies (i.e., altering payment schedules for state estimated tax installments, paying contractor bills, and bonus distribution). Other important strategies may include holding or selling appreciated assets, structuring or avoiding like-kind exchange treatment, or altering business structure between pass-through and C Corporation. Year-impacted Credits, deductions and incentives. As of the time this article was written, legislation to extend many popular, temporary tax extenders was being considered by the lame duck congress. Legislation could be passed impacting many tax strategies in late 2014 or early 2015. Regardless, the following issues are important for real estate and construction companies to consider:
(1) Repair Regulations. The adopted final regulations for treating costs associated with tangible property may create tax planning opportunities. For acquisitions of tangible property, a safe harbor applies to items costing $5,000 or less. However, businesses must have a written policy in place at the beginning of the year that specifies a dollar amount for the book treatment. (2) Bonus Depreciation, Section 179 and Section 179D. Bonus depreciation expired at the end of 2013 and at the date of this article it is not known whether Congress will extend bonus depreciation for 2014 and beyond. There have been indications that Congress is leaning toward extending bonus depreciation along with an increased section 179 deduction limits and Section 179D for energy-efficient commercial buildings as part of a lame duck Congress taxextender package. We likely won’t know the outcome of this until late December or even early January. (3) Cost Segregation. Companies may elect to accelerate cash flow benefits of depreciation deductions via a thorough review of depreciable building components. In particular, it is important to do a cost segregation study for buildings purchased or inherited within the past five years. (4) 1031 Tax Straddling. With the end of 2014 approaching, some investors may be leery of selling properties if they are unsure whether to initiate a 1031 exchange because they may be unable to close on a replacement property to complete it. However, with “tax straddling,” taxpayers may still receive a one-year tax deferral thanks to installment sale rules that could defer the gain on the open 1031 exchange to 2015 if you were unable to close on you replacement property. (5) Small Employer Health Insurance Expense Credit. Eligible employers with 10 or fewer employees (and full-time equivalents) are allowed a 50% credit for certain contributions made to purchase health insurance for their employees. The credit begins to phase out for employers with 25 or more employees. Affordable Care Act impacts. As of Jan. 1, 2015, the PPACA’s “employer mandate” (employer shared responsibility requirements) takes effect for select applicable large employers (ALEs), depending on size. ALE determination is based on number of employees, including full-time equivalents, during any consecutive six month period in 2014. • Employers with fewer than 50 employees, including fulltime equivalent employees, continue to remain exempt from any mandate. • Employers with 50 to 100 employees are exempt from the employer mandate until 2016. • Employers with 100 or more employees are subject to the mandate starting in 2015, with some select relaxed standards. (For example, if any of these employers maintain noncalendar year health plans as of Dec. 27, 2012, they may wait to achieve compliance until the first day of the 2015 plan.) Revenue Recognition changes. Following impactful feedback from the real estate and construction industry, the Financial Accounting and Standards Board released Accounting Standards Updates 2014-09 Revenue from Contracts with Customers. All existing industry-based revenue recognition guidance will be replaced by this new standard and becomes effective in 2017 and 2018 for public and nonpublic entities, respectively. The new guidance requires management use a larger degree of judgment when it comes to revenue recognition and related costs. It also significantly increases revenue disclosures. Strategic businesses should begin analyzing if this change will impact their reporting and formulate a plan for a smooth transition. This analysis should include assessing revenue contracts and accounting policies, data systems, processes, and controls to support implementation, and timing changes in relation to sales agreements, long-term compensation agreements, and compliance related to debt covenants, among others. Conclusion. With these four areas as a focus, real estate and construction companies will be able to identify important timing-dependent strategies, ensure compliance with the IRS, and achieve confidence in their strategic approach entering the new year.