Conquering Taxes: Expert advice for dealing with the tax code

Death and taxes are said to be the only certain things in life, and we’ll let you decide which event is the most certain, but please keep in mind that taxes are somewhat more flexible.

Case in point: Many of the 55 Bush-era tax breaks that expired at the end of 2013 could be resurrected in the lame duck session of Congress that follows the mid-term elections in November. Those tax breaks, plus once-delayed compliance deadlines associated with the Affordable Care Act and a host of other possible changes with business impacts, are worth monitoring as organizations plan for 2015.

With that planning in mind, we devote this accounting feature to pending and possible accounting law changes for 2015 and beyond, particularly as they pertain to employers. We contacted the following industry experts to get their respective takes: Tom Milliken, a principal with SVA Certified Public Accountants; Brad McGuire, a partner with Baker Tilly Virchow Krause; and Vicki Buening, senior tax manager for KMA Bodilly CPAs and Consultants. They and other accountants and CPA firms are in the process of working with business clients on year-end planning, and here is some of what they are watching out for:

Tax extenders

Some experts believe there’s a high likelihood that Congress will rescue some popular “tax extenders” that expired on Dec. 31, 2013, and that impact individuals, businesses, and different industries. Several bills have been introduced in the House of Representatives and the U.S. Senate to extend many of the expired provisions, especially the research and experimentation credit (in a slightly modified form), the Code 179 deduction, and bonus depreciation.

The R&E tax credit, sometimes called the research and development credit, was annually renewed before last year. The previous measure was a 20% credit on incremental research expenses (i.e., the expenditures you had in the current year over a base expenditure amount for prior years). There also was an alternative credit that did not factor in the base; it was a simplified 7% credit on eligible expenditures during the year.

One legislative proposal would get rid of the base credit and increase the simplified credit from 7% to 10%, so there would be only one way to calculate the credit. There have also been proposals to make the credit permanent, but of all the R&E proposals in Congress, Milliken believes the increase in the simplified credit has the most support.
Given the industries that operate in Madison and Wisconsin, what happens with the R&E tax credit is closely watched here. “It’s very prevalent in biotechnology and also in the manufacturing industries,” Buening noted, “as they are constantly designing new items for us, or new-and-improved items.”

Elsewhere, the 179 deduction, involving the expensing of existing assets that normally would be capitalized, has been reduced from $500,000 to $125,000, and various proposals would increase it back to $500,000 (with a phase-out after $2 million in capital purchases) and make it permanent.

Meanwhile, bonus depreciation (50% under expired law) could once again apply to the acquisition of new assets that have not been used before. It has not always been in the United States tax code because it’s viewed as a short-term booster for the economy, but with lingering doubt about the sustainability of economic growth, lawmakers could bring it back. As its name suggests, bonus depreciation is an additional amount of depreciation, and in the past it has been taken in the first year depreciable assets are in service.

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While separate from 179 expensing, bonus depreciation is often used in conjunction with it. Before the tax extenders expired, it worked like this: “We’ve had 50% bonus depreciation, and so you would first take 179,” said Milliken. “If you exceed the [old] limit of $500,000 [now $25,000], you would normally then start depreciating the 50% bonus depreciation. You would be able to expense 50% of what you would otherwise depreciate immediately, and then depreciate the remaining 50%.”

McGuire cited the possible resurrection of the work opportunity tax credit (WOTC) f, an incentive of up to $9,600 for employers who hire people who consistently face barriers to employment: veterans and people on food stamps or those who receive long-term aid to families with dependent children (AFDC). The credit, also considered an incentive for workplace diversity, impacts McGuire’s restaurant clients because they hire many people who are eligible for it.

When lawmakers renew the WOTC, they typically expand the categories of people who are eligible, and McGuire likes the chances for bipartisan support in both the House and Senate. “This is one that we think is likely, but how it will be extended and what the categories will be may or may not be significantly different than when it expired,” he said.
The decision to extend these tax breaks is based on whether they actually impact behavior. At some point, McGuire noted, Congress might conclude that it no longer needs to take such measures to stimulate the economy.

Milliken does not believe Congress has reached this point. “I really do feel there will be some reinstatement of faster depreciation, either with the 179 deduction or some form of bonus depreciation like we’ve had in the past,” Milliken said. “I think the R&D credit will also be reenacted. Those are kind of the big things that impact our client base, which is mostly privately held small businesses in a variety of industries.”

Whatever measures are part of a post-election package, the timing of their passage could include more brinkmanship that extends beyond Jan. 1. Two years ago, when Washington was trying to avoid the so-called fiscal cliff, national leaders actually didn’t get a bill passed and signed by President Obama until early January. Its provisions were made retroactive back to the beginning of the previous year, but waiting too long creates problems for a certain federal agency that’s already under fire, and also for taxpayers.

“If they wait that long, it really creates a nightmare for the IRS and people preparing tax returns because the IRS has its forms ready to go and then these changes are made, and they have to go and redo the forms with the new instructions,” Milliken said. “So they are generally late in being able to accept returns and, in particular, electronically filed returns.”

Play or pay

Next year, the two biggest compliance requirements affecting businesses are related to the Affordable Care Act and provisions that were originally scheduled to go into effect in 2014 before being delayed. They relate to the requirements imposed on insurance companies and self-funded employers to report to the IRS the premiums they are collecting — confirming who actually gets health insurance and proving that you are offering it through the company. If it’s an insurance company, it’s required to report the premiums it’s receiving on employer plans. If it’s an employer with a self-funded insurance plan and it’s charging a certain portion of the premium to the employees, those shared costs also must be reported.

In delaying this reporting requirement, the Obama administration said it would apply only to large employers, defined in the original law as those with 50 or more employees, in 2015. “Part of that is the reporting of the insurance, the cost of the insurance, and doing the reporting to the IRS gives the IRS the ability to monitor whether employers are satisfying the employer mandate,” Milliken explained. “Companies need to gear up for the fact they now need to determine what information needs to be reported so that once they hit 2015, they can have systems in place to collect that information.”

According to Buening, the IRS has sample forms for review called Form 1095B for self-funded businesses and Form 1095C for either health insurance providers who will be filing on behalf of the employer or for large employers that file.

Also on tap for 2015 and beyond is the employer mandate — more specifically, the shared-responsibility payment associated with the employer mandate. In 2015, the mandate to provide insurance or pay a penalty applies to large employers — in this case, defined as companies that employ 100 or more employees (FTE). These employers must cover 70% of their employees with what is deemed to be minimum acceptable benefits in 2015 and 95% in 2016.

The shared responsibility payments were supposed to apply to large employers with 50 or more employees, but in delaying their implementation, the Obama administration carved out an employer category of between 50 and 99 full-time equivalent employees and delayed the application of the shared responsibility payment for these companies until 2016. Businesses of this size must adequately cover 95% of their workers that year.

Employers on the border of the 50-employee full-time equivalency threshold must pay attention to the definition of a full-time employee — anyone who works 30 or more hours per week. “You see clients who are taking different approaches to that,” McGuire said. “Some are saying we value our employees, and we already provide coverage, and we will continue to keep the minimum benefits.”

In an attempt to stay under the threshold, others are creating schedules. A number of industries have variable time, where people might be asked to cover other shifts and exceed 30 hours. “That happens regularly,” McGuire stated. “If somebody has to be offered coverage, there are a lot of decisions that have to be made.”

Moreover, if you have affiliated companies, that is classified as one company for the purpose of determining full-time equivalency, as Buening explained. “If I own a company that employs 49 people, and then I have another company that I’m part owner of, maybe majority owner of, and they have 49, and then I have a third company where I’m a majority owner and they all sell back and forth, those three companies can be classified as one when you are counting the number of employees.”

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For employers electing not to offer qualifying coverage — also known as minimum essential coverage — the penalties (shared-responsibility payments) would equal the product of the applicable payment amount (1/12th of $2,000) and the number of full-time employees. Ultimately, the penalty would apply to all employers with 50 or more workers, but the formula would subtract the first 30 workers from the payment calculation.

Therefore, if a mid-sized company has 51 full-time employees and does not offer its employees the minimum essential coverage, it would pay an amount equal to 51 minus 30, or 21 times the payment amount (up to $2,000 per full-time employee).

The mandate does not apply to employers with 49 or fewer employees.

If employer-provided insurance exceeds 9.5% of the employee’s household income, or the employer plan has an actuarial value of less than 60%, the coverage does not qualify as minimum essential coverage. Actuarial value pertains to the percentage of medical expenses that a health insurance plan is expected to cover; an actuarial value of 100% means the plan would pay for all medical expenses.

In complying with the reporting requirement, employers that provide qualifying coverage will have to file information returns with the IRS that identify the individual employee, the coverage, and the amount of premium (if any) paid by the individual.

The Affordable Care Act gives the IRS the information it needs to determine whether companies are providing insurance coverage to the employees, and what the employees are paying for it. The IRS has the employee’s income information from the W-2 form, and by referencing the amount of premiums from this new reporting, the agency can determine if the premium cost to the employee exceeds 9.5% of the employee’s household income.

“One of the reasons they want to track it is that payments are typically deductible payments by the employer, but tax-free to the employees,” Milliken explained. “In the long-term, big-picture standpoint, the government is trying to get its arms around the total amount of nontaxable fringe benefits in the form of health insurance that are being provided to employees, because down the road they are going to start making that taxable. It’s an easy revenue-raiser.”

One post-election item on KMA Bodilly’s high-watch list that is not a tax extender is the remote sales tax, which was proposed in early 2013 but has gone nowhere in this session of Congress. It pertains to a requirement for the collection of sales tax from catalog or online sales. At the moment, if catalog or online retailers are just selling products and sending them by common carrier to other states in which they don’t have “nexus” (a connection or presence in a state), they are not required to collect sales tax. In those cases, the individuals making purchases are supposed to be paying a use tax and reporting it at tax time.

“Here in Wisconsin, there is a question on Page 2 of your income tax return asking you what [remote] purchases you have not paid taxes on,” Buening noted.

Under the aforementioned proposals in Congress, merchants who conduct remote sales would start collecting those sales taxes. A key aspect of the proposal is that entities that are making sales of $1 million or less in the preceding tax year are excluded as small sellers. “For small companies that are starting up and only making $10,000 in sales over the Internet or through catalog sales, there is an exclusion for them because the sales tax can be very burdensome,” Buening stated, noting that Wisconsin counties have different sales taxes. “What county are you selling it to? Do you collect the 5.5% tax? Do you collect the 5.6% tax? Or just the 5% tax?”

Under the congressional proposals, merchants would have to start collecting sales tax 180 days after enactment, so there would not be much time to get ready.

As we head into 2015, McGuire warns that states are becoming more aggressive in defining nexus and conducting nexus inquiries of who is doing business in their state and who is subject to their income tax laws and their sales and use laws. That’s not necessarily a legislative or regulatory change; it’s an enforcement change. “They are becoming more aggressive in saying, ‘Yes, you are doing business in our state, and you have to file a return in our state no matter what state your domicile is in,’ which complicates the filing process and impacts their tax liability,” said McGuire.

Over the horizon

Beyond 2015, the ACA continues to be a factor, as the looming Cadillac tax, a 40% surcharge on expensive health plans, is still on the books for a 2018 launch. An employer or a health insurer that offers an annual health insurance plan that costs more than $10,200 for an individual or more than $27,500 for a family in 2018 will pay a 40% excise tax on the amount exceeding either of those cost thresholds.

Approaching 2018, employers that offer coverage should be tracking their plan cost trajectory, especially if they have an older workforce with higher medical costs. If they are on track to hit those thresholds and pay the tax, they should be planning to avoid it. To avoid it, they will have to reshape health plans by scaling back more generous benefits, asking for more in terms of cost-sharing (higher deductibles, which result in lower premiums, and higher co-pays for medical services), and having employees pay a higher percentage of co-insurance after the deductible has been met.

Employers will also have to be more engaged with respect to prevention, wellness, and disease management, including more intense care management of employees with co-morbidities such as high blood pressure and diabetes.

In addition, keep your eye on how the federal government treats corporate inversion transactions. After some well-publicized inversions, most recently Burger King’s $12.5 billion merger with Tim Horton’s, a Canadian doughnut and coffee chain, there have been several proposals to address these transactions, which are putting a dent in federal tax collections.

In a corporate inversion transaction, U.S. corporations merge with a foreign corporation, with the foreign corporation emerging as the parent company, creating a tax-free exchange under existing law. The applicable corporate tax rate of the merged entities is typically a lower foreign rate than the 35% they pay in the U.S.
Burger King, which merged with Canada’s answer to Dunkin’ Donuts, would pay a corporate rate of 26.5% (a 15% national rate, plus Ontario’s provincial rate of 11.5%).

Some think American companies that enter into inversion transactions show a lack of economic patriotism, and many are calling for an end to their tax-free treatment; others think the government should lower the corporate rate as part of comprehensive tax reform that makes America’s business climate more inviting.

A comprehensive overhaul of the U.S. tax code has been the subject of groundwork by retiring U.S. Rep. Dave Camp of Michigan and former Montana Sen. Max Baucus, now the U.S. ambassador to China. To sum it up, in exchange for lower tax rates on individuals and businesses, much of the complexity (i.e., loopholes and favoritism) would be removed from the code.

The last major overhaul was enacted in 1986, and even though it had bipartisan support, it wasn’t easy to enact. “You have a lot of people in both the House and the Senate saying we need major tax reform,” McGuire noted. “Obviously, that’s not going to happen in 2014, we don’t believe, because of the elections. We might have an opportunity for that in 2015 into 2016, before we start ramping up for the presidential election, where we might have some movement on some things, or even on a comprehensive overhaul.”

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