Recommended By: Tom Byers
This article points out tax planning moves that can be considered by C Corporations not only to minimize tax for the current year, but also to preserve cash flow (via reduced estimated payment requirements) for 2015. This is an interesting article and provides a checklist of ideas to be considered as 2014 winds down.
As year-end approaches, it would be worthwhile for practitioners to consider whether corporate
clients could benefit from the following “last minute” tax-saving moves, including adjustments to
income to preserve favorable estimated tax rules for 2015, deferral of certain advance
payments to next year, and fine-tuning bonuses to make the most of the Code Sec. 199
domestic production activities deduction.
Accelerating or deferring income can preserve estimated tax break. Corporations (other than certain “large” corporations, see below) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the
preceding year. Otherwise, they must pay estimated taxes based on 100% of the current year’s
tax. However, the 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed
a return for the preceding year that showed a liability for tax. A return showing a zero tax
liability doesn’t satisfy this requirement. Only a return that shows a positive tax liability for the
preceding year makes the safe harbor available.
RIA recommendation: A corporation (other than a “large” corporation) that
anticipates a small net operating loss (NOL) for 2014 (and substantial net income
in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to
defer just enough of its 2014 deductions) to create a small amount of net income
for 2014. This will permit the corporation to base its 2015 estimated tax
installments on the relatively small amount of income shown on its 2014 return,
rather than having to pay estimated taxes based on 100% of its much larger 2015
taxable income. Also, by accelerating income from 2015 to 2014, the income may
be taxed at a lower rate in 2014, e.g., at 15% instead of at 25% or 34%. However,
where a 2014 NOL would result in a carry back that would eliminate tax in an earlier year, the value of the carry back should be compared to the cost of having to pay only a small amount of estimated tax for 2015.
RIA recommendation: Generally speaking, a taxpayer will be treated as a
“large” corporation for estimated tax purposes only if it had taxable income of $1
million or more in any one of the three preceding tax years. As a result, a
corporation that didn’t reach that threshold in 2012 or 2013, but expects net income
of $1 million or more in 2014 and later tax years, will have an additional incentive
for deferring income into (or accelerating deductions from) 2015. If such a shifting
of income or deductions lets the corporation avoid reaching the $1 million threshold
in 2014, it will be able to use the 100%-of-last-year’s-tax safe harbor in 2015.
References: For corporate estimated taxes, see FTC 2d/FIN ¶ S-5320 et seq.; United States
Tax Reporter ¶ 66,554 ; TaxDesk ¶ 609,200 et seq.; TG ¶ 5906 .
Accrual basis business can take a 2014 deduction for some bonuses not paid till 2015.
An accrual basis corporation can take a deduction for its current tax year for a bonus not
actually paid to its employee until the following tax year if (1) the employee doesn’t own more
than 50% in value of the corporation’s stock, (2) the bonus is properly accrued on its books
before the end of the current tax year, and (3) the bonus is actually paid within the first 2 1/2
months of the following tax year (for a calendar year taxpayer, within the first 2 1/2 months of
References: For when year-end bonuses must be paid—i.e., for the “two and a half month”
rule, see FTC 2d/FIN ¶ H-3919 ; United States Tax Reporter ¶ 4044.16 ; TaxDesk ¶
279,511 ; TG ¶ 7577 .
For employees on the cash basis, the bonus won’t be taxable income until the following year.
The 2014 deduction won’t be allowed, however, if the bonus is paid by a personal service
corporation to an employee-owner, or by an S corporation to an employee-shareholder, or by a
C corporation to a direct or indirect majority owner.
References: For deduction for accrued expenses owed to a related taxpayer, see FTC 2d/FIN
¶ G-2701 et seq.; United States Tax Reporter ¶ 2674 ; TaxDesk ¶ 442,027 ; TG ¶ 6225 .
Accrual-basis taxpayers can defer inclusion of certain advance payments. Accrual-basis
taxpayers generally may defer including in gross income advance payments for goods until the
tax year in which they are properly accruable for tax purposes if the income inclusion for tax
purposes isn’t later than it is under the taxpayer’s accounting method for financial reporting
An advance payment is also eligible for deferral—but only until the year following its receipt—if:
(1) including the payment in income for the year of receipt is a permissible method of
accounting for tax purposes;
(2) the taxpayer recognizes all or part of it in its financial statement for a later year; and
(3) the payment is for (a) services, (b) goods (other than goods for which the deferral
method discussed above is used), (c) the use of intellectual property (including by lease or
license), (d) the occupancy or use of property ancillary to the provision of services, (e) the
sale, lease, or license of computer software, (f) guaranty or warranty contracts ancillary to
the preceding items, (g) subscriptions in tangible or intangible format, (h) organization
membership, and (i) any combination of the preceding items.
RIA illustration : An accrual-basis calendar-year taxpayer received a payment
on Nov. 1, 2014 for a contract under which it will repair a customer’s computer
equipment for two years. In its financial statements, the taxpayer recognizes 25%
of the payment in 2014, 50% in 2015, and 25% in 2016. For tax purposes, under
the deferral method discussed above, the taxpayer can report 25% in 2014 and
defer 75% to 2015.
The deferral method cannot be used for (1) rent (unless it’s for items (c), (d), or (e), above), (2)
insurance premiums, (3) payments on financial instruments (e.g., debt instruments, deposits,
letters of credit, etc.), (4) payments for certain service warranty contracts, (5) payments for
warranty and guaranty contracts where a third party is the primary obligor, (6) payments
subject to certain foreign withholding rules, and (7) payments in property to which Code Sec.
If an advance payment is only partially attributable to an eligible item, it may be allocated
among its various parts, and the deferral rule may be used for the eligible part.
Taxpayers wishing to change to the above method may use automatic consent provisions (with
certain modifications). Advance consent procedures apply in certain cases, e.g., where
advance payments are allocated.
References: For advance payments received by accrual-basis taxpayers, see FTC 2d/FIN ¶
G-2540 et seq.; TaxDesk ¶ 441,708 et seq.; United States Tax Reporter ¶ 4514.166 ; TG ¶
6208 et seq.
Making the most of the domestic production activities deduction. Businesses can claim a
domestic production activities deduction (DPAD) under Code Sec. 199 to offset income from
domestic manufacturing and other domestic production activities.
The Code Sec. 199 deduction equals 9% of the smaller of—
(a) the taxpayer’s “qualified production activities income” or QPAI, for the tax year, or
(b) the taxpayer’s taxable income (modified adjusted gross income, for individual
taxpayers), without regard to the Code Sec. 199 deduction, for the tax year.
Qualified production activities eligible for the deduction include items such as: the manufacture,
production, growth or extraction of qualifying production property (i.e., tangible personal
property such as clothing, goods, or food as well as computer software or music recordings) by
a taxpayer either in whole or in significant part within the U.S.; construction or substantial
renovation of real property in the U.S., including residential and commercial buildings and
infrastructure such as roads, power lines, water systems, and communications facilities; and
engineering and architectural services performed in the U.S. and relating to the construction of
real property. (Code Sec. 199(c)(4))
However, the Code Sec. 199 deduction can’t exceed 50% of the W-2 wages of the employer
for the tax year. Generally, these wages are the sum of the aggregate amounts that must be
included on the Forms W-2 of employees under Code Sec. 6051(a)(3) (i.e., wages subject to
withholding) and Code Sec. 6051(a)(8) (elective deferrals). The wages must be allocable to the
taxpayer’s domestic production activities, and they include tips and other compensation as well
as elective deferrals to 401(k) and other plans. (In addition, the otherwise allowable Code Sec.
199 deduction of a taxpayer with oil-related QPAI is subject to a special reduction.)
It is important for businesses to calculate the tentative Code Sec. 199 deduction and the W-2
deduction cap before year-end. If the deduction cap will limit the otherwise available
deduction—for example, in the case of a closely held business whose owners do not draw
substantial salaries—the business may want to bonus out additional compensation to
maximize the Code Sec. 199 deduction. Bear in mind that in some cases, an accrual-basis
corporation can deduct a bonus that is declared before year-end but not paid until the following
year (see discussion above).
Taxpayers also need to factor the Code Sec. 199 deduction into other year-end tax planning
strategies. For example, when determining whether to defer or accelerate income, a taxpayer
must determine the marginal tax rate for each year. Depending on the type of income or
deduction that the taxpayer is dealing with when working on such strategies, the Code Sec.
199 deduction may have the effect of decreasing the taxpayer’s marginal rate.
References: For the domestic production activities deduction, see FTC 2d/FIN ¶ L-4385 et
seq.; United States Tax Reporter ¶ 1994.001 ; TG ¶ 16545 ; TaxDesk ¶ 307,801 ; TG ¶