Saved By AMT
Last year, Christian was working with a client who was in the top ordinary bracket at the time. But he was planning to sell a business in 2014 and Christian’s forecast showed that he’d be in AMT this year.
Accordingly, Christian sought to minimize 2013 taxable income, leaning on such techniques as cost segregation and other liberalized tax depreciation and expensing strategies, even though the accelerated depreciation would be recaptured (included in income) in 2014 upon sale of the business. Why bother pursuing additional deductions that you’ll just have to add back one year later?
“Because in 2013 we took the deductions at 39.6%, but we’ll recapture them this year at 28%,” Christian says. The client will save tens of millions as a result. Christian cautions that advice such as this rests on detailed projections that account for all of the tax code’s moving parts.
Troll For Business Deductions
A shopping spree at the office-equipment store no longer produces major tax savings, you should warn business owners. A mere $25,000 is the largest write-off clients can get for their 2014 equipment buys under the Section 179 expensing election, and the deduction begins to phase out when purchases exceed $200,000. These figures are a fraction of their previous size.
Moreover, bonus depreciation—a handsome deduction for 50% of the cost of new property—ended last year. Of the dozens of expired tax-code provisions Washington could potentially resurrect for 2014, these depreciation goodies may have the best prayer. Nevertheless, Christian has other plans for skinnying-down clients’ business income this year.
A potential deduction for “subnormal” inventory is something he’s already begun discussing with a high-end apparel manufacturer. When styles change, old product can be hard to move. But under Code Section 471, clients can get a deduction for offering to sell inventory below tax cost within 30 days of year’s end, either before or after.
“You can write it down to the price that you offered even if the offer isn’t accepted. For example, if the unit cost on some shirts is $35 and you offer them for $20 to a longtime distributor or retailer, you can generally deduct the $15 difference even if the shirts don’t get sold,” Christian told his client.
Bad debts are also in his sights. “Maybe a customer owes our client $30,000 and it’s 120 days past due. If the client has documented efforts to collect it, looked at the customer’s balance sheet and knows he’s not going to get paid, you can generally write it off on the books and take a deduction in the year you determined it’s uncollectible,” Christian says.
There’s no need to get greedy. The rules for claiming partially worthless bad debts are more liberal than those for writing off an entire debt. “You could just write off $20,000 this year and the balance next year. That’s often easier than arguing with the IRS that none of it would ever be collected. Collectibility should be carefully evaluated near year-end and doubtful collections written off,” Christian says.
Nexus
On the state-tax front, advisors can help by telling business owners they need to let the accountant know when they start doing business in another state. That way the accountant can determine whether nexus has been established—that is, connection to a state that warrants paying business income tax to it and/or collecting sales tax from customers there.
In year-end planning meetings, “we ask clients where they’re doing business and what they’re doing there, such as whether they’re sending people into states to repair equipment that they sold. Those kinds of things trigger nexus, which triggers filing requirements,” says CPA Mike Robbins, tax principal at Rehmann, a financial services, accounting and consulting firm in the Midwest and Florida.
Finally, a note regarding an intriguing case clients might’ve heard about. In Miller v. Commissioner, the U.S. Tax Court allowed a home-office deduction to a Big Apple taxpayer who failed to use the office space exclusively for business as the law requires. Passing through it to access her studio apartment’s sleeping quarters, along with some occasional personal clerical use, was ruled de minimis and insufficient to deny the deduction.
But don’t get too excited. The decision came in a Tax Court summary opinion (2014-74), which other taxpayers may not rely on as precedent.