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2014 Roundup of Tax and Business Law Developments

One fact that never changes is that tax and business law always change. Even in a year that has seen (to date!) no major legislation, annual indexing, phase-ins and phase-outs of rules, and rulemaking by government agencies create changes that impact business owners.

Here is a sampling of key changes that will be of interest to small business owners. It is by no means an inclusive list. Instead, we’ve surveyed the legal landscape and selected items that are likely to affect a broad range of businesses. Ongoing conversations with your tax and business professionals are the best way to help ensure you are aware of the developments in your industry and area.

Annual Tax Rate Indexing Produced Only Small Increases

Each year, the IRS and the Social Security Administration are legally required to adjust certain statutory amounts to account for inflation. Although there are dozens of inflation-adjusted amounts, the most common ones are the individual income tax brackets, personal exemption amounts (and, now, the phase-out amounts for personal exemptions), retirement plan contributions amounts, and the Social Security wage base.

In years when inflation is low, as it has been recently, the adjustments are generally relatively small. And, because there are different statutory formulas required for various rates, some amounts change, while others do not.

Here are a few of the key rates for 2015. The entire list can be found on the IRS website.

  • Tax Brackets for 2015. Your tax bracket determines not only your tax on ordinary income; it also determines your capital gains tax rate. Taxpayers in the 10 percent and 15 percent brackets have a zero percent capital gains tax rate. In contrast, those in the 39.6 percent bracket face a 20 percent capital gains tax rate. For all the other brackets, the capital gains tax rate is 15 percent.
    • Single Taxpayers. Taxpayers whose income exceeds $413,200 will be in the 39.6 percent tax bracket. Those with income of at least $411,500 but not over $413,200 will be in the 35 percent bracket. The 33 percent bracket will include those with income of at least $189,300 but not over $411,500. The 28 percent bracket will apply to taxable income of at least $90,750 but not over $189,300.The 25 percent bracket will apply to those with taxable income of at least $37,450 but less than $90,750. Those with taxable income of at least $9,225 but not over $37,450 will be in the 15 percent tax bracket. Finally those with up to $9,225 in income will be in the 10 percent tax bracket.
    • Married taxpayers, filing joint return. Taxpayers whose income exceeds $464,850 will be in the 39.6 percent tax bracket. Those with income of at least $411,500 but not over $464,850 will be in the 35 percent bracket. The 33 percent bracket will include those with income of at least $230,450 but not over $411,500. The 28 percent bracket will apply to taxable income of at least $151,200 but not over $230,450. The 25 percent bracket will apply to those with taxable income of at least $74,900 but less than $151,200. Those with taxable income of at least $18,450 but not over $74,900 will be in the 15 percent tax bracket. Finally those with up to $18,450 in income will be in the 10 percent tax bracket.
  • Standard Deduction. The standard deduction will be $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly. This is an increase from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.
  • Phase-out of Itemized Deductions. The phased reduction in the amount of certain itemized deductions begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
  • Phase-out of Personal Exemption. The value of each personal exemption increases to $4,000, up from the 2014 exemption of $3,950. However, the value of the personal exemption is phased out for higher-income taxpayers. In 2015, this phase-out will begin with adjusted gross income (AGI) of $258,250 for single taxpayers ($309,900 for married couples filing jointly). The full value of the personal exemption is lost when the AGI reaches $380,750 for a single taxpayer ($432,400 for married couples filing jointly).
  • Alternative Minimum Tax. The tax bracket amounts given above apply to ordinary income tax, but many taxpayers may find themselves faced with the Alternative Minimum Tax. Business owners may be particularly at-risk because among the more common AMT triggers are exercising stock options, using home-equity loans to other purposes than home improvement, and claiming depreciation on business assets. The Alternative Minimum Tax exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).
  • Flexible Spending Accounts. The amount that an employee can contribute to a health care flexible spending account (FSA) is $2,550, up $50 dollars from the amount for 2014. The amount that can be contributed to a dependent care FSA remains at $5,000.

The Social Security Administration has also released its inflation-adjusted amounts for 2015. There is a limit to the amount of Old-Age, Survivors, and Disability Insurance (OASDI) tax that can be collected from an individual’s earning over the course of the year. For 2015, this limit is $118,500, up from $117,000 in 2014. The OASDI tax rate is set by statute at 6.2 percent for employees and employers, each—bringing the total contribution 12.4 percent.

This means that the maximum amount of OASDI tax that can be withheld from an individual’s wages in 2015 is $7,347.00; the employer contribution is capped at the same amount. The OASDI tax rate for self-employment income, which is relevant for those who operate their business as an LLC or who are independent contractors, is 12.4 percent—although a tax deduction is allowed for one-half of the amount of tax paid.


Breaking News Update: After publication of blog, on December 16, 2014, the Senate passed the one-year extenders package, and President Obama intends to sign it as soon as the enrolled bill is prepared and forwarded to the White House. This legislation retroactively reinstates over 50 expired tax provisions, including the crucial small business ones discussed below. The extension is only for one year—all the provisions will expire (yet again) as of January 1, 2015. For complete details on the tax extender legislation, see our blog post "Tax Extenders Legislation Contains Holiday Presents for Small Businesses."


2014 Means No More Bonus Depreciation and Expanded Expensing (Maybe)

As a general rule, if an asset purchased for your business will be used for more than one year, you can’t deduct the full cost in the year of purchase. Instead, you deduct a portion of the amount over a period of years—the period of time is established by the IRS for different types of assets. Until 2014, generous provisions were in place that allowed more (and, in some cases, all) of the cost to be deducted in the year the asset was required. One provision, bonus depreciation, vanished completely when the ball dropped to herald the start of 2014. The other, the expensing election, continued but with maximum amounts as insubstantial as the ghosts Scrooge encountered in his flight through the night sky with Marley. 

However, there is considerable speculation that Congress will bring back the generous 2013 limits, but when and whether the extension will be retroactive is very unclear. Bundled into the “extenders” mix are numerous tax credits. When making their financial forecasts, many larger companies banked upon the Congressional tax record of stepping back from the brink whenever these tax provisions expire. If the expired and expiring provisions aren’t reinstated (retroactively) many of these companies will not be able to deliver on those forecasts. The specter of these missed financial estimates is putting more pressure on the lame-duck Congress to act before year-end. 

The current uncertainty creates a dilemma for business owners that need to purchase an asset that will be used for more than a year: Buy now and hope the extension is retroactive, or wait until Congress acts? A session of number crunching with your accountant is likely to provide the best answer to that question.

Workers Aren’t Entitled to Pay for Time Involved In Security Screenings

Amazon warehouse workers often have to spend a significant amount of time at the end of their shifts, up to 25 minutes after the shift ends, processing through security screenings prior to leaving the facility. On December 9, the U.S Supreme Court unanimously ruled that the workers were not entitled to be paid for that time because that process was not an “integral and indispensable” part of the jobs they were hired to perform. Writing for the Court, Judge Clarence Thomas stated that the appellate court made the mistake of focusing on the fact that that the screenings were required by the company, rather than whether the screening was “tied to the productive work that the employee is employed to perform.”

Although few employers have as many warehouse employees as Amazon, many do require security checks before workers can exit the facility. This decision resolves conflicts among various courts and ensures that employers can take steps to prevent theft without having to incur extra payroll costs for the time required to complete the end-of-shift screening.

You Can Deduct Repair Expenses—Provided You Follow the Rules

As discussed above, if you purchase an asset that lasts more than a year, you usually have to deduct the cost over a number of years. But, what if you repair one of these long-lasting assets? Do you get to deduct the cost of repairs, or do you have to deduct those repair costs over the same time period? The IRS attempted to bring clarity to these questions by issuing guidance commonly known as the “repair regulations.” But, as is often the case when a government agency strives for clarity, the resulting rules are complex—with numerous definitions, tests and safe harbors. In fact, despite their nickname, the regulations actually address far more than simply repairs and can apply to assets that are built, acquired or produced by the taxpayer in a variety of situations.

The final rules became effective in 2014. Interpreting the guidance is challenging, but utilizing safe harbors and proper classifications of the property, the rules may provide tax-advantaged planning opportunities for some business owners. For example, there is a small business exception for low-cost improvements and there is de minimis” safe harbor that allows a items that cost up to $5,000 to be deducted in full. Expert guidance is needed to avoid accounting nightmares and costly missteps.

Unpaid Internships Can Be Costly

What do Fox News and PBS have in common? How about Calvin Klein and Coach? Or, Conde Nast and NBCUniversal? All these companies—and many others—have been on the losing end of litigation brought by unpaid interns. For example, at the end of last month, Conde Nast tentatively agreed to a $5.85 million settlement in a class-action brought by former interns. In October, NBCUniversal agreed to a tentative settlement of $6.4 million in a similar action.

In light of these lawsuits, every company would do well to reconsider the use of unpaid interns. Many employers view unpaid internships as a win-win: the intern gets valuable experience and the company saves the costs of hiring an employee for the position. However, that equation is changing as interns realize that in many cases the “educational” experiences they receive amount to unpaid hours fetching coffee, making copies and running errands.

The recent spate of lawsuits should prompt any for-profit company to carefully examine their policies regarding internships. The Department of Labor spells out six factors that it will use to determine whether the “intern” is actually an “employee.” But, these guidelines can be distilled to these questions: “Is the intern doing work that you would have to hire an employee to do?” and “Is the intern primarily being provided educational experiences—such as job shadowing—rather performing work.” If interns are functioning as employees, then it is prudent to pay them at least minimum wage, including any applicable overtime.

myRA: A New Form of Roth IRA Designed to Jumpstart Retirement Savings

There will soon be a new kid on the retirement plan block. The Treasury Department has unveiled a new type of retirement savings arrangement dubbed “myRA.” Designed for wage earners, amounts can only be contributed to the myRA account through payroll deductions that are deposited directly into the account. In order to open a myRA, an unmarried individual must have an annual income of less than $129,000. For married couples filing jointly, their income must be less than $191,000 per year. The employee can set the contribution per paycheck at any amount desired, but the maximum that can be contributed in 2015 will be $5,500 ($6,500 for individuals who are at least 50 years of age at the end of the year).

This account is designed as a “starter” retirement account for people who may not be able to meet initial deposit requirements for other types of savings programs. As a result, the maximum balance that an account can have is $15,000. Once that maximum is reached, the account must be rolled over to a private sector IRA. If the account holder desires, the account can be rolled over at any point—it is not necessary to wait until the maximum is reached.

Until the limit is reached or 30 years has elapsed, whichever comes first, the account will earn interest at the same variable rate as the government securities fund for federal employees, which has had an average annual return of 3.39 percent over the past 10 years. The amounts in the account are federally insured, so there is no risk of loss. Like a Roth IRA, amounts contributed can be withdrawn at any time without taxes or penalties. Accrued interest can be withdrawn without penalties under certain circumstances.

The flexibility and ease of administration may make the myRA account popular with both employees and employers.

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