2015 YEAR-END TAX PLANNING GUIDE

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1 Q In This Issue 1 Overview 2 Extenders 3 Inflation Adjusted Items & Net Investment Income Tax 4 Individual Income Tax Planning 7 Business Income Tax Planning 9 State Income Tax Planning 11 Contact Us I am pleased to share my thoughts regarding my association with SC&H. They have provided tax preparation and advisory services to my organization for over ten years. I find the professionals at SC&H to be very knowledgeable of the issues facing many organizations. I highly recommend this firm. CFO of Fortune 500 Organization Overview The good news is that we may get a tax bill passed before the end of 2015 that will renew over 50 taxpayer-friendly provisions that expired in This past July, the Senate Committee on Finance approved a measure to renew these provisions by an overwhelming margin of Expectations are high that the House and Senate will approve the bill by mid-december. Otherwise, 2015 has been quiet in regards to federal tax legislation. We are now into the second year of the new tangible property regulations. On a positive note, our experience was that these regulations offered taxpayers, particularly those that owned real property, the ability to accelerate deductions into 2014 that they might otherwise have recognized over a longer period. Thus, taxpayers that have not reviewed their fixed asset schedules and capitalization policies should do so to ensure they are taking advantage of the opportunities presented. The net investment income tax ( NIIT ) is now in its third year. The NIIT, which is a 3.8% tax on passive income, generally applies to individuals with modified adjusted gross income in excess of $200,000 with a filing status of single or head of household. For taxpayers filing jointly, the NIIT applies if modified adjusted gross income exceeds $250,000. In addition to the NIIT, the additional 0.9% Medicare tax applies to individuals receiving wages in excess of $200,000. For taxpayers filing jointly, the threshold is $250,000 and is based on the spouses combined wages. Penalties for not having health insurance continue to increase. The 2015 penalty is the greater of $325 per adult and $ per child (not to exceed $975) or 2% of household income less the amount of your tax-filing threshold. For 2016, the penalty increases further to the greater of $695 per adult and $ per child or 2.5% of income above the tax-filing threshold. Overall, there are many opportunities for taxpayers to take advantage of the favorable tax provisions and limit the impact of the unfavorable provisions if they plan wisely. With this in mind, we have compiled a checklist of strategies to help you save tax dollars if you act before 1 SC&H Year End Tax Planning Guide 2015

2 year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We have also included a list of the tax provisions that may be extended before year-end, a brief synopsis of the net investment income tax, and a chart of inflation adjusted tax items. Please review the list, and feel free to contact us directly to discuss the most optimal strategies for your situation. EXTENDERS Some of the tax provisions that expired at the end of 2014, but may be extended, involve: 1. MORTGAGE DEBT Exclude from taxation the loan amounts, up to $2 million, forgiven by lenders in connection with mortgage modifications, short sales, and foreclosures on primary residences. 2. HOME IMPROVEMENTS Reauthorize tax credits for home improvements that are energy efficient such as windows, insulation, and appliances. The maximum credit is $ MORTGAGE INSURANCE PREMIUMS Private mortgage insurance premiums are deductible for taxpayers with income of less than $110, SALES TAX DEDUCTION Allow individuals to deduct state and local sales taxes in lieu of reporting a deduction for state and local income taxes. 5. CHARITABLE CONTRIBUTIONS MADE FROM AN IRA Taxpayers aged at least 70 1/2 years are able to donate up to $100,000 from their IRA directly to charitable organizations. The donations satisfy the IRA required minimum distributions for the year. 6. TUITION DEDUCTIONS Tuition and fees would be deductible above-the-line for taxpayers with modified adjusted gross income of less than $160,000 if married filing a joint return or $80,000 if single, head of household, or qualifying widower. 7. BONUS DEPRECIATION Allow businesses to deduct 50% of the cost of qualifying new assets as bonus depreciation. For those taxpayers with unused AMT credits, the credits can be accelerated in lieu of claiming bonus depreciation. 8. EXPENSE UP TO $500K OF ASSET ADDITIONS Allow businesses to deduct the cost of up to $500K of qualifying asset purchases if such purchases do not exceed $2 million per year. Purchases in excess of the $2M threshold reduce the deduction dollar-fordollar. Without this extender, the current provision limits the total amount of equipment purchased to $200,000 (in 2015) with a total amount writtenoff of $25,000. Furthermore, qualified leasehold improvements can be an eligible property class. 2 SC&H Year End Tax Planning Guide 2015

3 9. RESEARCH AND DEVELOPMENT TAX CREDIT Provides businesses with a tax credit for qualifying research and development expenses incurred in the U.S. that exceed company-specific spending thresholds YEAR LIFE FOR LEASEHOLD IMPROVEMENTS, RESTAURANT BUILDINGS, AND RETAIL IMPROVEMENTS Permits taxpayers to depreciate qualifying leasehold improvements and other assets over a 15-year life as opposed to a 39-year life. 11. S CORPORATIONS - REDUCED BUILT-IN GAIN PERIOD For S corporations with assets subject to the built-in gains tax (corporate level tax), the recognition period through 2016 would be reduced to five years. INFLATION ADJUSTED ITEMS Listed below are a few of the amounts that the IRS adjusts each year to account for inflation. By factoring inflation into the tax rates and certain other items, the law protects taxpayers from losing the value of various benefits. Standard Deduction Single or married filing separately $6,300 Married filing jointly or surviving spouse $12,600 Head of Household $9,250 Exemption Amount $4,000 Flexible Spending Account $2,550 Health Savings Account Limit - Single $3,350 Health Savings Account Limit - Family $6, (K) Limit $18, (K) Catch=up contribution, age 50 $6,000 and over Annual Compensation Limit for $260,000 Determining Contributions Estate Tax Exemption $5,430,000 Annual Gift Exclusion $14,000 Maximum Estate and Gift Tax Rate 40% Foreign Earned Income Exclusion $100,800 OASDI (FICA) Maximum Base $118,500 Transportation Business Mileage Rate $0.560 Medical and Moving Mileage Rate $0.235 Charitable Mileage Rate $ % Tax Rate Single $413,200 Married filing jointly $464,850 Limitation on itemized deductions Single $258,250 Married filing jointly $309,900 AMT Exemption Single $53,600 Married filing jointly $83,400 NET INVESTMENT INCOME TAX The Net Investment Income tax is a 3.8% tax assessed on the passive income of those taxpayers whose modified adjusted gross income exceeds certain thresholds. The tax is assessed on passive income. For most taxpayers, the modified adjusted gross 3 SC&H Year End Tax Planning Guide 2015

4 income will be equal to their adjusted gross income (the amount shown on the last line on page 1 of Form 1040). For taxpayers with foreign earned income, the amount by which the excluded foreign income exceeds the related disallowed deductions must be added to the adjusted gross income to determine if the threshold has been met. For those taxpayers where the threshold is met, then the NIIT is based on the lesser of the amount that the taxpayer s modified adjusted gross income exceeds the threshold or the taxpayer s net investment income. Common examples of the income subject to the NIIT include: 1. Gains from the sale of stocks, bonds, and mutual funds 2. Capital gain distributions from mutual funds 3. Gains from sale of passive interests in partnerships and S corporations 4. Interest and dividend income 5. Rent and royalty income Examples of income not subject to the NIIT include: 1. Operating income from a nonpassive business 2. Federally tax-exempt interest and dividends 3. Social Security benefits 4. Alimony 5. Distributions from certain qualified plans The NIIT can also apply to estates and trusts. If an estate or trust has undistributed net investment income and also has adjusted gross income in excess of $12,301 then the NIIT will apply. Based upon recent court holdings, it may be possible that certain trust income from pass-through entities is not subject to the NIIT if a trustee is considered active in the particular pass-through entity from which the income is being allocated to the trust. Beware though - a trustee may result in taxation of the trust in the state in which the trustee is located. INDIVIDUAL INCOME TAX PLANNING 1. RECOGNIZE CAPITAL LOSSES Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. Or, you can sell and replace with a similar but NOT substantially identical investment. It may be advisable to meet and discuss year-end trades you should consider making, and of course, be sure to discuss any actions/next steps with your financial advisor. 2. POSTPONE INCOME AND/OR ACCELERATE DEDUCTIONS Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, 4 SC&H Year End Tax Planning Guide 2015

5 that in some cases, it may pay to actually accelerate income into For example, this may be the case where a person s marginal tax rate is much lower this year than it will be next year. Additionally, this may be the case where lower income in 2016 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit. 3. CONSIDER ROTH IRAS If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-ira money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for UNDO A ROTH ROLLOVER If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous. 5. DEFER THE YEAR-END BONUS It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until PAY WITH CREDIT CARD Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don t pay your credit card bill until after the end of the year. 7. LIKE-KIND EXCHANGES Consider a like-kind exchange instead of a sale of business or investment property in Also consider an installment sale where some cash is received by you in 2016 and beyond, to defer some of the capital gain from a sale in STATE AND LOCAL TAX PAYMENTS If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015 if doing so won t create an alternative minimum tax (AMT) problem. 9. DON T FORGET ABOUT THE AMT Speaking of AMT, estimate the effect of any yearend planning moves on the alternative minimum tax (AMT) for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the 5 SC&H Year End Tax Planning Guide 2015

6 tax year. As a result, in some cases, deductions should not be accelerated. 10. ROLLOVER DISTRIBUTIONS FROM RETIREMENT PLAN TO PAY ESTIMATED TAXES Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding isn t viable or won t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax. 11. PAYMENT STRATEGIES FOR ITEMIZED DEDUCTIONS You may be able to save taxes this year and next by applying a bunching strategy to miscellaneous itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses, and other itemized deductions. By bunching payments, the total amount paid may exceed the dollar threshold required before a deduction is permitted. Furthermore, bunching can allow payments that would otherwise go towards satisfying the threshold go towards being deductible. 12. CHARITABLE CONTRIBUTIONS Make charitable contributions with appreciated stock. You can get a deduction equal to the fair market value of the stock without paying tax on the appreciation. 13. MORTGAGE PAYMENTS Make your January mortgage payment in December to capture that December interest expense on your 2015 income tax return. Repeat in the following year. 14. CASUALTY LOSSES You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year. 15. PASS-THROUGH INVESTMENTS: PASSIVE OR NONPASSIVE ACTIVITY Review your pass-through investments to confirm which activities are passive/nonpassive and document the reason. If done in a timely fashion, there may still be enough time to change a passive activity into a nonpassive activity. 16. PASS-THROUGH INVESTMENTS: BASIS Review your basis in pass-through activities to determine if there is sufficient basis to recognize losses, if any. Furthermore, review your basis to determine if any distributions are considered distributions in excess of basis. If so, there could be capital gain to recognize. If done soon enough before year-end, there could be adequate time to get a sufficient amount of basis in place before year-end, be it equity or debt basis. 17. PASS-THROUGH INVESTMENTS: DISPOSITIONS Consider the disposition of passive activities if doing so will allow you to deduct suspended passive activity losses. 6 SC&H Year End Tax Planning Guide 2015

7 18. IRA MINIMUM DISTRIBUTIONS Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in the amount required for 2015 plus the amount required for Think twice before delaying 2015 distributions to bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year. 19. FLEXIBLE SPENDING ACCOUNTS Increase the amount you set aside for next year in your employer s health flexible spending account (FSA) if you set aside too little for this year. The maximum contribution to an FSA that a cafeteria plan can allow is $2,550 for Also, employers are allowed to either let employees carryover $500 of unused funds in a health FSA account to the subsequent year or provide a grace period of two-and-a-half months to use the remaining FSA money before losing it. Check your plan because employers can provide only one of the available options or not allow any carryover at all. 20. HEALTH SAVINGS ACCOUNTS If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year s worth of deductible HSA contributions for even if you first became eligible on Dec. 1, Consider creating plans for adult children who you do not claim as a dependent as well. 21. GIFTS Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2015 to each of an unlimited number of individuals but you can t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. BUSINESS INCOME TAX PLANNING 1. FIXED ASSETS Prior to year end, taxpayers should review their fixed asset purchases to determine they are applying the correct life and using the correct convention. Under the generally applicable half-year convention, a half-year s worth of depreciation deductions may be obtained in the first ownership year. 2. DEDUCTING FIXED ASSET PURCHASES Although the business property expensing option is greatly reduced in 2015 (unless legislation enhances this option for 2015), consider making expenditures that qualify for this option. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200, SC&H Year End Tax Planning Guide 2015

8 3. LIKE-KIND EXCHANGES AND INSTALLMENT SALES Consider a like-kind exchange instead of a sale of business or investment property in Also consider an installment sale where some cash is received by you in 2016 and beyond, to defer some of the capital gain from a sale in DEDUCTING DE MINIMIS FIXED ASSET PURCHASES Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit-ofproperty can t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA s report). If there s no AFS, the cost of a unit of property can t exceed $500. Where the UNICAP rules aren t an issue, purchase such qualifying items before the end of BE AWARE OF CORPORATE TAX BRACKETS A corporation should consider accelerating income from 2016 to 2015 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2016 where doing so will prevent the corporation from moving into a higher bracket this year. 6. ALTERNATIVE MINIMUM TAX EXEMPTION A corporation should consider deferring income until next year if doing so will preserve the corporation s qualification for the small corporation alternative minimum tax (AMT) exemption for Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year. 7. ESTIMATED TAX PAYMENTS A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income. 8. DOMESTIC PRODUCTION ACTIVITIES DEDUCTION: W-2 LIMITATION If your business qualifies for the domestic production activities deduction for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to ownershareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year. 9. DEBT FORGIVENESS To reduce 2015 taxable income, consider deferring a debt-cancellation event until SC&H Year End Tax Planning Guide 2015

9 10. CASH BASIS - DEDUCTIBLE PAYMENTS Liabilities that are deductible when paid can be deducted if paid using credit cards or bank loans. Payments to qualified retirement plans are deductible if paid before the timely filing of the return. Prepaid items may also be deductible if paid with credit cards and other third-party loans. 11. ACCRUAL BASIS - BONUSES Accrued bonuses and other compensation items are generally deductible only if fixed and determinable at year-end. Review your agreements to verify whether or not they meet the fixed and determinable requirements. 12. ACCOUNTING METHOD CHANGES Review accounting methods for opportunities to change methods and obtain the desired effect to either defer or accelerate income. Accounting method changes can either be automatic and don t require the IRS to approve beforehand. Other changes are considered nonautomatic and do require the IRS to approve the change before being adopted by the taxpayer. Nonautomatic changes must be filed before the end of the taxable year to be effective that year. These are just some of the year-end steps that can be taken to save taxes. We can tailor a particular plan that will work best for you. We will also keep you informed in the event Congress revives expired tax breaks, to assure that you don t miss out on any resuscitated tax saving opportunities. STATE INCOME TAX PLANNING 1. NEXUS We encourage multistate businesses to review where they have sufficient contact with a state such that income tax filings are required ( nexus ). Changes in nexus impact how much income tax is owed to each particular state in a given year. 2. APPORTIONMENT - SALES FACTOR Once it is determined that a business has nexus with more than one state, the taxable income/ (loss) for the year must be apportioned to the states. Revenues are frequently either the only factor, or one of three factors, used to apportion income/(loss) to the states. The rules for determining how revenues are sourced to a given state, particularly for service providers, have been changing quite frequently in the past few years. Service providers generally allocate revenues to a state either based upon where the benefit of the services was received ( market-based ) or where the cost of performance occurred ( cost of performance ). Each year it seems more states are requiring the marketbased approach. Two taxing jurisdictions recently modified their apportionment rules: DC and Virginia. DC now requires taxpayers to source service-based revenues based upon where the benefit was received. Furthermore, DC has changed its apportionment computation to a single-factor using only revenues. Meanwhile, Virginia has changed the apportionment computation for qualifying manufacturers. Manufacturers may now use only the sales factor in apportioning income to Virginia. 9 SC&H Year End Tax Planning Guide 2015

10 3. DC - QUALIFIED HIGH TECHNOLOGY COMPANY DEFINITION There are tax benefits for Qualified High-Technology Companies (QHTC). One requirement for a QHTC has been modified. To be a QHTC company, an entity must now lease or own an office in DC. Prior to 2015, a QHTC only needed to maintain an office or base of operations in DC. In meeting this definition, a client location could suffice. That is no longer the case for RESEARCH AND DEVELOPMENT TAX CREDITS More states are offering a tax credit for research and development ( R&D ) expenses. Maryland and Virginia are two states that offer such credits. Unlike the federal research and development tax credits, the credits must be approved beforehand. In Virginia, the application must be submitted by April 1st of the following tax year. In Maryland, the application due date is September 15th. 6. DC - TAX RATE CHANGE DC lowered its income tax rate on businesses from 9.975% to 9.4% for taxable years beginning after December 31, With the abundance of taxpayer friendly provisions currently available, or likely to soon be available, many taxpayers have an opportunity to take advantage of them to retain their cash flow if they plan accordingly. Therefore, we encourage you to discuss the opportunities discussed in this tax planning guide at your earliest convenience. Your ability to maximize the potential tax savings are greater the sooner we start the planning process. The information covered in this guide will help with proactive business and individual tax preparation now to prevent costly consequences later. Feel free to contact us directly to discuss the most optimal strategies for your specific situation. We recommend that preparation of the forms be initiated prior to year-end so that only minimal effort is required to complete the forms after year-end in order to get the forms timely filed. 5. MARYLAND: OUT-OF-STATE INCOME TAX CREDITS Our newsletter wouldn t be complete without mention of the fact that out-of-state income tax credits may now be used against the local income taxes. The ability to use more out-of-state income tax credits against an individual or trust s Maryland local income tax liability should be considered when computing the 2015 Maryland state and local income tax liability. 10 SC&H Year End Tax Planning Guide 2015

11 CONTACT INFORMATION ABOUT SC&H GROUP S TAX PRACTICE With increased corporate scrutiny and continuously changing tax regulations, it is critical to enlist experienced tax consultants that have a firm command of all areas of tax law and risk management balanced with a keen eye for tax savings opportunities. The tax experts at SC&H Group possess a strong understanding of all unique business, economic, and regulatory environments that can impact performance. Our tax services professionals work for you to proactively identify potential audit scenarios before they become problematic. Sound advice allows you to be confident in your compliance and to avoid or recover overpayment. OUR TAX ADVISORY EXPERTISE WORKS TO: Ensure fair and equitable tax liability Mitigate areas of risk Uncover hidden value OUR TAX ADVISORY SERVICES INCLUDE: Corporate Tax Merger & Acquisition Transaction Tax International Tax Expatriate Tax Personal Income Tax For further information on our Tax Services, please contact: Baltimore, MD (410) SC&H GROUP McLean, VA (703) Jim Wilhelm Director jwilhelm@scandh.com Angelo Poletis Principal apoletis@scandh.com Joe Ciardiello Senior Manager jciardiello@scandh.com To learn more about our services, please contact us. SC&H GROUP is an audit, tax, and consulting firm applying expertise that works to minimize risk and maximize value. SC&H Group s practices advise leading companies from emerging businesses to the Fortune 500 on accounting, tax, profitability, and business proces solutions. Clients in all states and worldwide benefit from SC&H Group s commitment to delivering powerful minds, passionate teams, and proven results on each and every engagement. We put our subject matter expertise to work for clients in the following areas: Audit Services Tax Services Consulting Services Investment Banking & Advisory Services Personal Financial Planning Services 11 SC&H Year End Tax Planning Guide 2015