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2015 Year-End Tax Planning for Businesses #5

November 30, 2015

Planning for 2015 Tax Increases and Potential Expiration of Tax Relief Provisions

S Corporation Built-In Gains Tax: An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation's income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all unrealized gains that were built in at the time of the election if the gains are recognized during a special holding period which is generally 10 years. Although the special holding period was significantly shorter in recent years, it is uncertain whether legislation will be passed to shorten the special holding period for 2015 or subsequent years and, if passed, whether that legislation would have retroactive application.

Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property: The rule that the basis of an S corporation shareholder's stock is decreased by charitable contributions of property by the S corporation in an amount equal to the shareholder's pro rata share of the adjusted basis of the contributed property expired for contributions made in taxable years beginning after December 31, 2014. As a result, absent congressional action retroactively extending the prior rule for charitable contributions made in 2015, your stock basis will be reduced by your pro rata share of the S corporation's charitable contributions. For example, if you contributed property with a $200 adjusted basis and $500 fair market value to a charity, your stock basis will be reduced by $500 instead of $200 unless Congress enacts legislation extending the prior rule.

Exclusion of Gain Attributable to Certain Small Business Stock: Stock acquisitions that qualify as “small business stock” under §1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. For qualified small business stock sold in 2015, the five-year look-back period is to 2010. A 50% exclusion applies for qualified small business stock acquired before February 18, 2009, and after December 31, 2014. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. A 100% exclusion applies for qualified small business stock acquired after September 27, 2010, and on or before December 31, 2014. For qualified small business stock acquired in 2015, only 50% of the gain is excluded from gross income (after the five-year holding period is met). Unless Congress acts before the end of 2015 to reinstate the 100% exclusion for stock acquired in 2015 (and held for at least five years), gain on the sale of such stock acquired in 2015 may be subject to the 50% exclusion rate.

Employer Wage Credit for Employees in the Military: Some employers continue to pay all or a portion of the wages of employees who are called to active military service. If the employer has fewer than 50 employees and has a written plan for providing such differential wage payments, the employer is eligible for a credit. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. The credit expired at the end of 2014 and it is uncertain whether legislation providing for this credit will be passed and if so whether such legislation will provide for the credit retroactively.

Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit based on the wages paid. The credit is available for first-year wages paid or incurred for employees hired and who began work on or before December 31, 2014. The credit expired at the end of 2014 and it is uncertain whether legislation providing for this credit will be passed and if so whether such legislation will provide for the credit retroactively.

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