Year-End Tax Considerations for Financial Institutions
Daniel Gayer, Tax Senior Manager
As 2013 draws to a close, financial institutions should consider a number of tax issues in order to ensure compliance with tax laws and minimize 2013 tax liability where possible. The following is a summary of key issues that may be relevant to your business.
Estimated Tax Payments
As a reminder, fourth quarter estimated tax payments are due on December 16 this year. Most financial institutions are classed as “large corporations” for estimated tax purposes, meaning as a general rule corporations with taxable income in excess of $1 million in any of the preceding three years. Financial institutions who are considered to be large corporations cannot base estimated tax payments on last year’s tax – the method typically used by individuals and smaller businesses. Financial institutions must instead project their current year taxable income as accurately as possible and base their estimated tax payments on this projected income. By December 16, most financial institutions must have paid estimates greater than or equal to 100% of their actual 2013 tax liability in order to avoid underpayment penalties.
Accrued Bonus Deduction
Business entities operating on an accrual basis are allowed to take a current deduction for employee bonuses accrued but not yet paid at year-end, providing the following conditions are satisfied:
- The amount is fixed and determinable at year-end;
- Cash payment is made within 2 ½ months of year-end, i.e. by March 15 for calendar year taxpayers;
- Employees are not required to still be employed on the payment date in order to receive the bonus, OR if continued employment is required, amounts forfeited by employees who leave between year end and the payment date are reallocated to other employees.
If you have previously only deducted bonuses when paid or used some other method, you can easily switch to the method described above. However, the switch does require an additional tax filing, so please consult your BNN tax professional if you think this change could benefit your business.
Fixed Asset Acquisitions
If you are considering a significant fixed asset purchase near the end of 2013 or early in 2014, you may wish to accelerate that purchase into 2013 in order to take advantage of favorable tax depreciation rules set to expire on December 31, 2013. Currently, you may elect to expense up to $500,000 (with a phase-out for purchases in excess of $2,000,000) by making a Section 179 election for most types of furniture, fixtures, and equipment. Alternatively, you may take bonus depreciation on the same assets, allowing you to currently deduct 50% of the cost and depreciate the remainder over the regular class life.
Absent Congressional action – which is uncertain at best in the current political environment even for provisions with broad support for renewal – the expensing limit under Section 179 will be reduced from $500,000 to $25,000 and 50% bonus depreciation will expire completely on January 1, 2014. For more information, please see our recent article.
Capitalization of Tangible Personal Property
Final regulations providing guidance on whether to expense or capitalize and depreciate amounts paid to acquire, produce, or improve tangible property were issued in September 2013. These regulations explain when businesses must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing and replacing property. In general, the cost of repairs or improvements to an existing building or other fixed asset must be capitalized if the result is a betterment, restoration, or adaptation of the asset to a new or different use. Costs to maintain fixed assets in good working order so that they can continue to function in their current use can generally be expensed. In the case of a newly constructed or renovated building, certain building components such as HVAC, plumbing and electrical systems, elevators and escalators, fire and alarm systems, and others should be separately capitalized and depreciated, which may be advantageous when the building components are replaced.
The regulations also provide a de minimis safe harbor rule, under which the taxpayer may adopt a written policy for both financial statement and tax purposes allowing immediate expensing of assets up to $5,000 per invoice. (Therefore if you intend to take advantage of this safe harbor, you should be sure that you have a written policy in place by the end of 2013 in order to qualify for 2014.) The taxpayer makes the de minimis safe harbor election annually by attaching a statement to the tax return for the year elected.
The new regulations apply to taxable years beginning on or after January 1, 2014. However, taxpayers may choose to apply the final regulations to tax years beginning on or after January 1, 2012.
1099-A and 1099-C Reminder
Lending institutions should review their 2013 activity for situations which would require the filing of Form 1099-C (Cancellation of Debt) or 1099-A (Acquisition or Abandonment of Secured Property). Form 1099-C is required to be filed when the bank cancels any portion of a customer’s debt. Form 1099-A is required when the bank forecloses on property in full or partial satisfaction of the customer’s debt. If the foreclosure action also releases the customer from liability, the bank does not need to file both forms – filing Form 1099-C only will be sufficient. Note that 1099-C reporting is only required if the customer is relieved of liability – through the terms of a workout, bankruptcy or any other circumstances which take the customer “off the hook.” If the bank is writing down the loan on its books but not legally cancelling the debt, no 1099 reporting is required.
If you have any questions or would like more detailed information or year-end planning assistance tailored to the specific situation of your business, please contact your BNN tax professional.
This article focuses on tax issues of concern to businesses; for year end planning considerations for individuals please see BNN’s individual year end tax planning article.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
IRS CIRCULAR 230 DISCLOSURE
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.