PLANNING FOR BUSINESSES [Part 7/7]
Renewable Resources Credit
ATRA modified the Code Sec. 45 renewable electricity production tax credit for electricity produced from wind and other qualified facilities. ATRA replaced certain placed-inservice deadlines with new deadlines and revised certain definitions, including the term “municipal solid waste.” The amount of the credit varies depending on the type of technology.
Other energy tax incentives scheduled to expire after 2013 include:
- Credits for alternative fuel vehicle refueling property;
- Credits for cellulosic biofuel production;
- Credits for biodiesel and renewable diesel;
- Production credits for Indian coal facilities;
- Credit for energy-efficient new home construction;
- Credit for energy-efficient appliance manufacture;
- Allowance for cellulosic biofuel plant property;
- Special rules for sales of electric transmission property; and
- Tax credits and outlay payments for ethanol.
TRADITIONAL INCOME AND DEDUCTIONS DEFERRAL/ACCELERATION STRATEGIES
Year-end 2013 presents unique challenges. Traditional year-end planning techniques nevertheless remain important both to maximize benefits in connection with what’s new and to do so within the usual ebb and flow of the taxpayer’s personal economy. The following traditional income and deduction acceleration techniques and their reciprocal deferral strategies should be considered:
- Enter into/ Sell installment contracts
- Defer/ Receive bonuses before January
- Hold/ Sell appreciated assets
- Hold/ Redeem U.S. Savings Bonds
- Accumulate/ Declare special dividend
- Postpone/ Complete Roth conversions
- Delay/ Accelerate debt forgiveness income
- Minimize/ Maximize retirement distributions
- Delay/ Accelerate billable services
- Structure/ Avoid mandatory like-kind exchange treatment
Deductions and Credits Acceleration/Deferral:
- Bunch itemized deductions into 2013 and take standard deduction into 2014/reverse steps
- Pay bills in 2013/ Postpone payments until 2014
- Pay last state estimated tax installment in 2013/ delay payment until 2014
- Accelerate economic performance/ postpone performance
- Watch AGI limitations on deductions/credits
- Watch net investment interest restrictions
- Match passive activity income and losses
AFFORDABLE CARE ACT
When Congress passed the Affordable Care Act in 2010, it delayed the effective date of several key provisions until 2014. In July 2013, the Obama administration announced a further delay in the Affordable Care Act’s employer shared responsibility payment provision (also known as the employer mandate). The individual shared responsibility provision (known as the individual mandate) has not been delayed and starting in 2014, individuals must carry health insurance or otherwise pay a penalty unless exempt.
The Affordable Care Act requires that an applicable large employer pay an assessable payment if either:
- The employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to the employer as having received a premium assistance tax credit or cost-sharing reduction; or
- The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and one or more full-time employees is certified as having received a premium assistance tax credit or cost-sharing reduction.
These two methods of calculating the tax are mutually exclusive for any particular period. The amount of the assessable payment for an employer that does offer coverage to its full-time employees is capped so that it can never exceed the assessable payment if it had not offered coverage. The IRS in proposed regulations has softened the rules somewhat by treating an employer as offering coverage to its full-time employees even if it fails to offer coverage to up to 5 percent of them.
Code Sec. 4980H defines an applicable large employer with respect to a calendar year as an employer that employed an average of at least 50 full-time equivalent employees on business days during the preceding calendar year. Proposed regulations issued by the IRS treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week. Hours worked by part-time employees (individuals working fewer than 30 hours per week) are converted into FTEs and are included in the calculation used to determine whether a firm is a large employer. Seasonal workers are excluded from this calculation if the number of full-time employees and FTEs exceeds 50 for 120 days or less during the preceding calendar year, and the employees in excess of 50 during those days are seasonal workers.
In July 2013, the Obama administration announced that employer (and insurer) reporting requirements (discussed below) under the Affordable Care Act will be delayed for an additional year (to 2015). As a result, the administration also delayed the employer mandate for one additional year (to 2015).
Part-time employees (those working fewer than 30 hours per week) are counted to determine employer size. However, penalties are assessed only with respect to full-time employees that work 30 or more hours per week. The testing period for the average 50 full-time employee threshold under the employer mandate is generally the preceding calendar year with some transition relief available. For the 2015 mandate, therefore, staffing numbers starting January 1, 2014 will be immediately relevant and may call for a taxpayer’s review of its workforce as part of 2013 year-end planning.
Employer and Insurer Reporting
The Affordable Care Act generally requires applicable large employers to file an information return (known as a Code Sec. 6056 return) that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the year. Health insurance issuers, sponsors of self-insured health plans, government agencies, and other entities that provide minimum essential coverage must file similar information returns (known as Code Sec. 6055 returns). Following the White House’s announcement of the delay in employer and insurer reporting, the IRS issued transition relief and proposed regulations.
Under proposed regulations, an applicable large employer would generally report information about coverage (including contact information for the employer and the number of full-time employees) as well as a list of full-time employees and information about coverage offered to each, by month, including the cost of self-only coverage. Applicable large employers also must furnish Code Sec. 6056 statements to qualified employees. The statements would describe, among other things, information about coverage.
Because of the delay in reporting, Code Sec. 6056 returns must be filed with the IRS no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates. The IRS explained that the first Code Sec. 6056 returns required to be filed for calendar year 2015 must be filed no later than March 1, 2016 (February 28, 2016 falls on a Sunday) or March 31, 2016, if filed electronically. Employee statements must be furnished on or before January 31 of the year immediately following the calendar year to which the employee statement relates. The first Code Sec. 6056 employee statements (statements for 2015) must be furnished no later than February 1, 2016 (January 31, 2016 falls on a Sunday), the IRS explained.
The IRS has encouraged voluntary compliance with the employer and insurer information reporting requirements for 2014 and is expected to issue additional guidance before January 1, 2014. Additionally, electronic filing of Code Sec. 6056 returns is required except for an applicable large employer filing fewer than 250 returns during the calendar year. All returns (including Forms W-2) are aggregated for the purpose of applying the 250-return threshold, the IRS explained. Code Sec. 6056 employee statements may be provided electronically if notice, consent and other requirements are met.
Separate from Code Sec. 6056 reporting (discussed above), the PPACA requires employers that provide applicable employer-sponsored coverage to report the cost of that coverage on the employee’s Form W-2, Wage and Tax Statement. Small employers – generally employers filing fewer than 250 Forms W-2 for the previous calendar year – are temporarily exempt from reporting. Other entities, such as multi-employer plans, are also eligible for the temporary relief.
At the time this Briefing was prepared, the IRS had not announced any change in the temporary relief available to small employers and others. The IRS has advised that when the temporary relief is terminated, it will give small employers and others sufficient lead time to plan to meet the reporting requirements.
Beginning January 1, 2014, the Affordable Care Act generally requires individuals to carry minimum essential coverage for each month, qualify for an exemption or make a payment when filing his or her return. Minimum essential coverage for purposes of the individual mandate is employer-sponsored coverage, coverage through a state or federal Marketplace, Medicare, Medicaid, and other plans. Certain individuals may be exempt, including individuals whose income is below the minimum threshold for filing a return, members of a health care sharing ministry, individuals unlawfully present in the U.S., and others.
The individual shared responsibility payment (penalty) is $95 in 2014 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).
An individual is treated as having coverage for a month so long as he or she has coverage for any one day of that month.
Individuals who have short gaps in coverage will not be subject to the individual shared responsibility payment. Gaps of three months or less are generally allowed.
Certain individuals must obtain an exemption certificate from a Marketplace to verify their exemption from the individual mandate. However, individuals who are not required to file a return are automatically exempt for that year.
Premium Assistance Tax Credit
The Affordable Care Act created the Code Sec. 36B premium credit to help offset the cost of health insurance coverage obtained through a Marketplace. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.
The Code Sec. 36B credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for credit. The credit for 2014 is based on the 2013 FPL guidelines.
Eligibility for the Code Sec. 36B credit may be more widespread than initially apparent. For 2013, for residents of one of the 48 contiguous states or Washington, D. C., the following illustrates when household income would be between 100 percent and 400 percent of the federal poverty line: $11,490 (100%) up to $45,960 (400%) for one individual; $15,510 (100%) up to $62,040 (400%) for a family of two; $23,550 (100%) up to $94,200 (400%) for a family of four.
The employer mandate penalty is triggered for an applicable large employer if one or more of its full-time employees obtains a premium tax credit. Lower paid employees are likely to qualify for the credit if they are not offered minimum essential coverage from the employer.
Small Employer Health Insurance Credit
The Affordable Care Act provides a tax credit to encourage eligible small employers to provide health insurance coverage to their employees. Starting in 2014, a taxpayer may claim the Code Sec. 45R credit for two-consecutive tax years, beginning with the first tax year in or after 2014 in which the eligible small employer attaches Form 8941, Credit for Small Employer Health Insurance Premiums, to its income tax return, or in the case of a tax-exempt eligible small employer, attaches Form 8941 to Form 990-T, Exempt Organization Business Income Tax Return. A taxpayer may claim the credit for tax years beginning in 2010 through 2013 without those years counting toward the two-consecutive tax year period.
An eligible small employer for purposes of the Code Sec. 45R credit is an employer that has no more than 25 FTEs for the tax year, whose employees have average annual wages of less than $50,000 per FTE (adjusted for inflation after December 31, 2013), and that has a qualifying arrangement in effect that requires the employer to pay a uniform percentage (not less than 50 percent) of the premium cost of a qualified health plan offered by the employer to its employees through a SHOP Marketplace.
For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer’s premium payments. The maximum credit for tax-exempt employers for those years is 35 percent. For 2010-2013, the maximum credit has been 35 percent for taxable employers and 25 percent for tax-exempt employers.
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