The following information provides a look at important information related to Closely Held Businesses regarding year-end planning.
3.8% Medicare Contribution Tax:
Once again the Medicare surtax will be assessed on taxpayers with Net Investment Income above certain thresholds. The Medicare surtax does not apply to income derived from an active trade or business, or from the sale of property used in an active trade or business. The Medicare surtax is based on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income (MAGI) (AGI with foreign income added back) above a specified threshold.
The MAGI thresholds for 2014 are:
- $250,000 for married taxpayers filing jointly or a surviving spouse;
- $125,000 for married taxpayers filing separately;
- $200,000 for single and head of household taxpayers; and
- $12,150 in 2014 for estates and trusts (indexed for inflation).
- Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business;
- Gross income from a trade or business that is a passive activity;
- Gross income from a trade or business of trading in financial instruments or commodities; and
- Net gain from the disposition of property, other than property held in an active trade or business.
Additional 0.9% Medicare Tax on Earned Income:
The 0.9% will still be in effect for wages and self-employment income received in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) for a total Medicare tax of 2.35% for those individuals.
An employer is required to collect additional Medicare tax on any employee who is in excess of $200,000 for the calendar year, regardless of employee’s filing status or other wages/compensation.
De Minimis Expensing Rule (repairs vs. cap regulations):
Purchases of multiple inexpensive tangible items are not required to be capitalized. The aggregate amount of these items can be expensed. “Inexpensive” varies from client to client and should be defined in a written policy. The amount that can be expensed is subject to certain limitations. Larger companies with Applicable Financial Statements may deduct up to $5,000 per invoice. For smaller companies without Applicable Financial Statements there is a $500 safe harbor.
The IRS has issued final, temporary, and proposed regulations to implement certain restrictions on corporate inversion as set forth by Code Section 7874. These Regulations identify specific stocks that are disregarded when determining whether the issuer is a surrogate foreign corp.
Year-end considerations regarding income and expenses not mentioned above have remained relatively the same; consider accelerating or deferring income into years in which you will receive higher expenses or a lower tax bracket. Additional suggestions are as follows:
- C-Corp – Calculate wages and/or bonuses by zero-ing out income to avoid double taxation.
- S-Corp income is not subject to employment taxes or self-employment income
- S-Corp owners must take reasonable compensation (subject to employment taxes) for services performed for the S-Corp
Withholding & Estimated tax payments
- Consider whether sufficient withholding has been made throughout the year
- If not consider making an estimated tax payment or, if possible, a year-end bonus with extra withholding
Home Office Safe-Harbor Deduction
- Allowed a deduction of $5 per square foot up to 300 square feet
- Deduction is limited to the gross income derived from the business
The following provisions are presented as the current tax law. Negotiations are ongoing regarding an extender bill that would reinstate provisions that are currently expired. Please check back for updates, as we will keep you informed as changes occur. *NOTE* These Provisions have been superseded. Please refer to the article “Extenders Bill” for an update – Click Here
- Bonus Depreciation has expired and is no longer available.
- Section 179 expense: $25,000 deduction limitation with phase-out beginning at $200,000.
- Research Tax Credit has expired and is no longer available
- Small Business Stock: 50% gain exclusion (60% for empowerment zone stock) for stock purchased after December 31, 2013.