United States

There’s still time to take advantage of the holiday tax gift

Consumer products companies may benefit from year-end tax legislation


With tax season in full swing, it is important to remember some new (and renewed) tax opportunities that can be claimed on 2014 tax returns. In December, while consumers shopped for family and friends and dined at their favorite restaurants, you were hard at work serving customers. At the same time, Congress was working on a gift for your businesses. The Tax Increase Prevention Act of 2014 (the Act), provides a one-year retroactive extension through 2014 of business and individual tax provisions that had expired at the end of 2013.

While the Act included over 50 tax provisions, several of the more significant provisions frequently apply to retail and consumer products companies. These fall into two categories: accelerated tax depreciation and tax credits. Here is a quick guide to help you better understand the effect these provisions may have on your business as you prepare for filing your tax returns.

Accelerated Tax Depreciation:
You likely spend a substantial sum of money on capital assets which result in cash outflow without a corresponding immediate tax deduction. Some of the provisions that were extended in December may help reduce that discrepancy.

Bonus depreciation
The Act extended 50 percent bonus depreciation for property placed in service through Dec. 31, 2014, and also extended the election to utilize alternative minimum tax (AMT) credits in lieu of bonus depreciation. Many consumer product companies are capital intensive and should carefully review their 2014 asset additions to identify opportunities to accelerate tax depreciation and reduce tax cash outflow. Doing so requires the careful analysis of property eligible for bonus depreciation and applying proper cost segregation for optimal tax life determination on the portion of the asset that is not immediately expensed. You will further want to determine how the state tax authorities treat these properties and capture the impact that this election may have on future tax liabilities.  Businesses with a tax loss may want to analyze the benefit of not electing bonus depreciation. While considering tangible property it is also important to ensure compliance with the new tangible property regulations . The IRS continues to issue guidance surrounding these regulations, so it is important to be sure your business is following the most current rules and interpretations.

Enhanced section 179 expensing
Section 179 allows taxpayers to deduct the full cost of qualified assets rather than depreciate them. The original expense limit was $25,000, phased out for businesses that purchased above $200,000 of assets. However, an enhanced section 179 expense limit of $500,000 with a $2,000,000 phase-out threshold had been in effect for 2010 through 2013.  The Act reinstated the higher $500,000 and $2,000,000 limits and the expanded definition of qualified property.  This enhanced benefit can equate to savings up to $150,000 or more for eligible businesses.

Qualified leasehold improvements, retail improvements and restaurant property
Because of their frequent replacement and upgrading, qualified leasehold improvements, retail improvements and restaurant property have received enhanced benefits for the past several years. The enhanced 15-year straight-line depreciation (in lieu of 39-year straight-line depreciation for commercial buildings) has been extended for property placed in service through Dec. 31, 2014. In addition, these property types may be treated as section 179 property, with an expensing limit of $250,000. If you lease space for your business you should consider whether these provisions can reduce your tax burden for 2014 and beyond through a significantly reduced tax life.

Tax credits
Consumer product businesses are eligible for many types of tax credits including the tip credit for FICA paid on tip wages and the disability access credit, which provide a small business credit for a portion of expenditures to make a business accessible for the disabled. These credits have remained in effect without disruption; however three of the more significant credits available to consumer products businesses had expired at the end of 2013. Again, the Act extended these credits, making them available for the 2014 tax year.  

Research tax credit
The money you spend to develop new products or processes should be encouraged.  The Research Tax Credit is one of those ways the U.S. government encourages innovation. The Act extended this credit for the 16th time in its history. While the extension is for one year, or through the end of 2014, there is strong support for making the credit permanent. The cost associated with a permanent credit prevented a longer extension; however there is still optimism that a permanent research tax credit may be enacted in 2015 as part of comprehensive tax reform. If your business conducts research activity that would normally qualify for the credit, you should continue to track and document that activity in 2015 so you are in position to capture the credit should itbe extended again later in the year.

Work Opportunity Tax Credit (WOTC)
The WOTC, which especially benefits companies in high-turnover industries such as restaurants and retail, was extended through 2014. The IRS recently issued Notice 2015-13 to provide transition relief to employers claiming the WOTC.  Under the new relief, the 28-day window for submitting employee certifications to state agencies after the hire date, necessary to claim the credit for 2014 has been extended to April 30, 2015. The credit can range from $2,400 to $9,600 per employee depending on the targeted group and comes with a 20 year carry forward. Since this provision has been extended in the past, companies should take steps now to not only claim the 2014 credit but to be prepare for the 2015 credit with the expectation that it will be extended once again.   

Empowerment zone tax incentive
The ability to designate certain economically depressed census tracts as empowerment zones was extended through 2014. If your business operates in or near federally-designated empowerment zones, you may have the opportunity to receive tax benefits, including an available tax credit of up to $3,000 per resident hired from such an empowerment zone.

While the best way for consumer products companies to grow is through excellent products and services that increase customer demand, there are other business decisions that can contribute to the bottom line. Proper tax planning, including staying abreast of changing legislation, can make a tangible difference in your success.

As you finalize your 2014 tax filings, consider how the tax credits and depreciation opportunities related to the Tax Increase Prevention Act of 2014 may be applied to improve your tax profile. Additionally, when looking at your 2015 tax planning, understand that while many of the newly re-expired credits may be reinstated once again for 2015, there is also the possibility that the programs may be adjusted as part of future extensions. Work with your tax advisor to consider varying scenarios and how they may influence your business planning.