Wednesday, July 02, 2014

New, easier, way to become a non-profit organiazation!

New 1023-EZ Form Makes Applying to be Tax-Exempt Easier; Most Charities Qualify

The Internal Revenue Service today introduced a new, shorter application form, Form 1023-EZ, to help small charities apply for 501(c)(3) tax-exempt status more easily. Most organizations with annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible. See news release for details.

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog.

The new 1023-EZ form must be filed on www.pay.gov, accompanied by a $400 user fee. The instructions include an eligibility checklist that organizations must complete before filing the form.

Wednesday, June 25, 2014

Estate Tax Changes in 2014

2014 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

  1. New and more favorable estate tax, gift tax and generation-skipping transfer tax exemptions and less favorable tax rates have gone into effect. Under the provisions of ATRA, the federal estate tax exemption  (Definition: The amount that is excluded from calculating the amount of estate taxes owed at the federal level.) has been indexed for inflation and therefore increased to $5.12 million in 2012, $5.25 million in 2013, and $5.34 million in 2014, but the estate tax rate for estates valued over this amount was increased from 35% in 2012 to 40% in 2013 and future years. In addition, the lifetime gift tax exemption has also been indexed for inflation and therefore increased to $5.12 million in 2012, $5.25 million in 2013, and $5.34 million in 2014, and the maximum gift tax rate was increased from 35% in 2012 to 40% in 2013 and future years. Finally, the generation skipping transfer tax exemption has also been indexed for inflation and therefore increased to $5.12 million in 2012, $5.25 million in 2013, and $5.34 million in 2014, and the maximum generation skipping transfer tax rate was increased from 35% in 2012 to 40% in 2013 and future years. These unified exemptions will continue to be indexed for inflation in 2015 and later years but the tax rate will remain at 40%.  In addition, the annual exclusion from gift taxes will remain at $14,000 for 2014.

  2. "Portability" of the federal estate tax tax exemption between married couples has become permanent. In 2009 and prior years, married couples could pass on up to two times the federal estate tax exemption by including "AB Trusts" in their estate plan. TRA 2010 eliminated the need for AB Trust planning for federal estate taxes in 2011 and 2012 by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption, which is commonly referred to as "portability of the estate tax exemption." ATRA makes portability of the estate tax exemption between married couples permanent for 2013 and beyond, which means that in 2014 a married couple can pass on $10.68 million to their heirs free from federal estate taxes with absolutely no planning at all. Note, however, that even if the deceased spouse's estate will not be taxable (in other words, is valued less than $5.34 million in 2014), the surviving spouse will nonetheless be required to file IRS Form 706, United States United States Estate (and Generation-Skipping Transfer) Tax Return, in order to take advantage of the deceased spouse's unused estate tax exemption, otherwise the deceased spouse's exemption will be lost.

  3. The "pick up tax" was not resurrected. In 2005 the "pick up tax" was phased out under federal law. The pick up tax was a state estate tax that was equal to a portion of the federal estate tax bill and was collected by state taxing authorities. If the estate tax laws were allowed to revert back to the laws that were in effect in 2001, then the pick up tax would have suddenly reappeared in 2013, which would have meant that states such as California, Florida and Texas would have once again collected a state estate tax in the form of a pick up tax. Unfortunately for states without a freestanding estate tax, ATRA did not resurrect the pick up tax, so it continues to remain dormant and will not reappear any time soon. Refer to the State Estate Tax and Exemption Chart for the list of states which currently have a freestanding estate tax.

  4. Special planning will be required for state estate taxes in some states. To date, only one state, Hawaii, has made the state estate tax exemption portable between married couples. This means that in states where there is a difference between the state estate tax exemption and federal estate tax exemption (such as in Maine, where the 2014 estate tax exemption is only $2 million, which leaves a $3.34 million gap between the state and federal exemptions), married couples will need to include special planning in their estate planning documents in order to take advantage of both spouses' state estate tax exemptions. Refer to the State Estate Tax and Exemption Chart for the list of states which currently have a freestanding estate tax.

  5. Special planning will be required for generation skipping trusts. While as mentioned above the estate tax exemption has been made portable between married couples, the generation skipping transfer tax exemption has not. This means that in order for married couples to take advantage of both spouses' generation skipping transfer tax exemptions, special planning will be required in married couples' estate planning documents.

Monday, June 23, 2014

The effects of Obamacare

Obamacare, one word brings such emotion, of both good and bad!  Love them or hate them, there’s one thing everyone can agree upon about the major government-mandated changes sweeping through the world of health care insurance: They’re confusing. And since so many of the changes involves taxes, don’t be surprised if your clients expect you to have all the answers.

The Affordable Care Act, a.k.a. Obamacare, mandates penalties for lack of health insurance: 1 percent of a client’s yearly household income above the tax filing threshold; or $95 per person for the year ($47.50 per child under 18), with the penalty maxing out at $285. The penalty is pro rated based on how many months an individual lacks coverage; annual increases are also built into the law.
Only a little more than half of small businesses understand and are prepared for the changes required by the ACA, according to a recent survey by payroll service provider Paychex.

Nonetheless, clients aren’t exactly beating down doors with questions – yet. “The only questions I have had so far (and they have been very few) center around the tax credits associated with employer provided health insurance,” said Stephen DeFilippis, an EA at DeFilippis Financial Group in Wheaton, Ill.
“For the 2013 year, we haven’t seen too many of these questions in our practice,” said Twila Midwood, an EA at Advanced Tax Centre in Rockledge, Fla. “Most clients are currently covered under a plan. We are advising them, however, that should their coverage change, to contact us or a health insurance provider to ensure that they meet the requirements to maintain minimal essential coverage or to at least be aware of the requirements and possible penalties.”
Clients are “not particularly” asking for health care advice from EA Stephen Jordan, in Salem, N.H., “although it is a popular discussion topic at tax prep meetings. Clients seem to know what they are doing well enough and are accomplishing things on their own. I refer clients to an insurance consultant I work with if they need further help.”

Future points
Chuck McCabe, founder and president of Peoples Income Tax and The Income Tax School, recently spelled out for preparers some of the issues of Obamacare and the nature of help clients might soon expect. Among his points:
  • The next open enrollment for Obamacare begins November 15.
  • Some clients may qualify for the special enrollment period while the ACA insurance marketplace is closed. This applies to people who had a “qualifying life event” such as changes to family size or a “complex situation related to applying in the Marketplace.”
  • Those exempt from the individual responsibility payment include clients uninsured for less than three months; those for whom the lowest-priced available ACA coverage exceeded 8 percent of household income; those who didn’t have to file a return because of low income; and members of federally recognized tribes or those eligible for services through an Indian Health Services provider, among others.
  • Clients who have obtained health care coverage through the Marketplace may be eligible for a premium tax credit.
  • Preparers should bone up on what forms are and will be needed concerning the ACA, how to verify clients’ compliance, and any penalties for preparers who stray from ACA compliance.

Friday, May 30, 2014

Sales & Use Tax Exemption available to Industrial Machinery and Equipment

Sales and Use Tax Exemption for
Purchases of Industrial Machinery and Equipment




Effective April 30, 2014, an exemption from sales and use tax is available for purchases of industrial machinery and equipment used at a fixed location in Florida by an eligible manufacturing business that will manufacture, process, compound, or produce for sale items of tangible personal property. The exemption also includes parts and accessories for the industrial machinery and equipment if they are purchased before the date the machinery and equipment are placed in service.
An "eligible manufacturing business" means any business whose primary business activity at the location where the industrial machinery and equipment are located is within the industries classified under manufacturing NAICS (North American Industry Classification System) codes 31, 32, and 33 published in 2007 by the Office of Management and Budget, Executive Office of the President. The primary business activity of an eligible business is that activity which represents more than 50 percent of the activities conducted at the location where the industrial machinery and equipment are located.
Examples of types of manufacturing establishments represented by the applicable NAICS codes include, but are not limited to, food, apparel, wood, paper, printing, chemical, pharmaceutical, plastic, rubber, metal, transportation, and furniture. A search of qualifying establishments by keyword or NAICS code can be conducted via the internet at http://www.census.gov/cgi-bin/sssd/naics/naicsrch.
The selling dealer (vendor) should obtain a signed certificate from the purchaser certifying the purchaser's entitlement to tax exemption under the exemption statute. The signed certificate will relieve the selling dealer of any potential tax liability on nonqualifying purchases. Below is a suggested certificate the selling dealer can have the purchaser complete to document the exempt nature of the sales transaction.
Qualifying purchases made after the effective date of the exemption are eligible for refund of any tax paid under the refund provisions provided by section 215.26, Florida Statutes (F.S.), Repayment of Funds Paid into State Treasury Through Error, and Rule 12A-1.014, Florida Administrative Code (F.A.C.), Refunds and Credits for Sales Tax Erroneously Paid.
The exemption is scheduled for repeal effective April 30, 2017.
This exemption does not replace the exemption provided for qualifying purchases by a new or expanding business under section 212.08(5)(b) and (d), F.S. Each of these exemptions remains in effect under current statute without change. See also Rule 12A-1.096, F.A.C.
References:  Section 6, Chapter 2013-39, Laws of Florida; and Section 212.08(7)(kkk), Florida Statutes

Thursday, May 22, 2014

S Corp Revocation

Some times the S corp election just doesn't work out!  Here are the steps to end the election:
Shareholder revocation.
The S corporation election may be revoked with the consent of shareholders holding more than 50%  of the shares of stock of the corporation. A revocation made on or before the 15th day of the third month of the taxable year is effective as of the first day of the taxable year (March 15 for a calendar year corporation).
Revocation made after the 15th day of the third month of the tax year is effective for the following taxable year.
Revocation can be made for a prospective date which is on or after the date the revocation is made. [IRC §1362(d)(1)]
Corporation statement. The corporation files a statement of revocation, signed by an officer who is authorized to sign Form 1120S, with the IRS Service Center where the original election was filed.
Include the following information:
• A statement that the corporation is revoking its S corporation election under IRC Section 1362(a).
• The corporation’s name, address, and EIN.
• The number of shares of outstanding stock.
• The effective date of the revocation.
Shareholder statement. A statement signed by the shareholders, under penalty of perjury, which includes:
• The name, address, and EIN of the consenting shareholder.
• The number of shares owned by the shareholder.
• The date the shareholder acquired the stock.
• The shareholder’s tax year end.
From the CFS Tax Corresponder program:   
Statement to Revoke Sub chapter S Election (IRC Section 1362(d))
To:  Internal Revenue Service
    
Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
    [Client: City, State  Zip]
    ID: [Client: Taxpayer's SSN/Company FEIN]
The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  , there are shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].
[Client: Taxpayer & Spouse name(s)/Company Name]
By: ____________________________
             (Title)
Date: _____________________
Attachment of Shareholders to Statement of Consent to Subchapter S Revocation
The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer's SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective .
By:  _____________________________________    ___________________
        Date
    
    
    ID:
By:  _____________________________________    ___________________
        Date
    
    
    ID:
By:  _____________________________________    ___________________
        Date
    
    
    ID:
At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:
       
       

Monday, May 19, 2014

Summer Time Jobs for the kids, and the tax effects of those jobs....

Tax Information for Students Who Take a Summer Job
Many students take a job in the summer after school lets out. If it’s your first job it gives you a chance to learn about the working world. That includes taxes we pay to support the place where we live, our state and our nation. Here are eight things that students who take a summer job should know about taxes:
1. Don’t be surprised when your employer withholds taxes from your paychecks. That’s how you pay your taxes when you’re an employee. If you’re self-employed, you may have to pay estimated taxes directly to the IRS on certain dates during the year. This is how our pay-as-you-go tax system works.
2. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use it to figure how much federal income tax to withhold from your pay. The IRS Withholding Calculator tool on IRS.gov can help you fill out the form.
3. Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.
4. Money you earn doing work for others is taxable. Some work you do may count as self-employment. This can include jobs like baby-sitting and lawn mowing. Keep good records of expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction may help lower your taxes.
5. If you’re in ROTC, your active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training isn’t taxable.
6. You may not earn enough from your summer job to owe income tax. But your employer usually must withhold Social Security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself. They count toward your coverage under the Social Security system.
7. If you’re a newspaper carrier or distributor, special rules apply. If you meet certain conditions, you’re considered self-employed. If you don’t meet those conditions and are under age 18, you are usually exempt from Social Security and Medicare taxes.
8. You may not earn enough money from your summer job to be required to file a tax return. Even if that’s true, you may still want to file. For example, if your employer withheld income tax from your pay, you’ll have to file a return to get your taxes refunded

Monday, April 21, 2014

Missed the 4/15 deadline?

The IRS has some advice for taxpayers who may have missed the April 15 tax filing deadline.
According to the service, those who were late should:
  • File soon. Taxpayers who owe taxes should file and pay as soon as they can, to minimize interest and penalty charges. The IRS did note, though, that there is no penalty for late filing if the taxpayer is due a refund.
  • E-file. It’s available through October 15, and is the fastest way to file taxes.
  • Pay as much as they can. If they owe tax but can’t pay it all at once, they should pay as much as they can when they file, and then pay the remainder as soon afterward as they can, to stop further penalties and interest.
  • Make a payment agreement online. If they need more time to pay, the IRS said the easiest way to apply for a payment plan is through its Online Payment Agreement tool. They can also mail in Form 9465, Installment Agreement Request.
The agency also noted that the IRS Free File service was still available, and that taxpayers should be aware that even those who are not required to file may still be eligible for a refund – but only if they file within three years.

Thursday, March 13, 2014

DD in box 12 of your W-2?

What You Need to Know about the Amount of Health Insurance Reported on Form W-2
You may be wondering if you have to report the value of your employer-sponsored health insurance coverage, which may appear on your W-2, Wage and Tax Statement when you file your 2013 federal income tax return.
Here is what you need to know about the value shown on your W-2.
  • The health care law requires certain employers to report the cost of coverage under an employer-sponsored group health plan.
  • The amount of employer-sponsored health insurance coverage appears in Box 12 of the W-2, and has the code letters “DD” next to it.
  • Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable or that it needs to be reported on your tax return.
  • The amount is only for information, and shows the payments made by you and your employer and is not included in the amount shown in Box 1, which is the amount of taxable earnings.

Monday, March 10, 2014

Health Care Tax Credit for Small Businesses

Small Business Health Care Tax Credit
 
The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees.
A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. For example, two half-time employees equal one employee for purposes of the credit.
For 2013, the average annual wages of employees must be less than $50,000, and the employer must pay a uniform percentage for all employees that is equal to at least 50% of the premium cost of the insurance coverage.
The maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.
If you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years.
For small tax-exempt employers, the credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.

Friday, February 28, 2014

Ownership change in an S Corp

Steps to Buy Out a Partner in a 50/50 S Corp


 
S corporations typically represent a closely held business owned by a few individuals. This business type is similar to a partnership, but offers different benefits for the owners. A common issue is how to buy out a partner who wants to leave the company. S corporations can have shares of ownership stock, but the company doesn't usually sell them on the open market. During the buyout process, you can ensure an amicable process where each owner receives a fair share of the company's asset value.
       


    • 1
      Review the S corporation agreement. Like most businesses, an S corporation will have specific guidelines detailed in the starting business agreement. If no provision exists for the buyout process, the company should handle the process according to common business standards.
    • 2
      Obtain a third-party valuation of the company. This valuation provides both owners with a firm idea of the company's economic value. 
    • 3
      Apply the business's total value to each share in the company. For example, if a company's total value is $1.2 million and each partner has 100 shares, each share is worth $6,000. Therefore, the buyout amount for the partner is $600,000.
    • 4
      Set a schedule for paying off the partner. Partners may be willing to accept a scheduled buyout rather than a single one-time payment. This can help the company avoid a large decrease in capital at one time.

Wednesday, February 05, 2014

Gift Tax


Gift tax

Although there’s no income tax on gifts, there is such a thing as a gift tax. The gift tax is imposed on the donor. The person receiving the gift does not have to pay this tax.
Most people don’t have to worry about this tax because it generally doesn’t apply until you make gifts exceeding the annual exclusion amount to one person within a single year. And there are other exclusions that often prevent the gift tax from applying. There is an unlimited exclusion for gifts to your spouse. (An annual limit applies if your spouse is not a U.S. citizen.) And there’s an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.

The annual exclusion

The annual exclusion is adjusted for inflation and applies to each person every year. The amount is $14,000 as of 2014.
Example: On December 31 you give $14,000 to your son and $14,000 to your son’s wife. On January 1 (the next day) you give another $14,000 to your son and another $14,000 to your son’s wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion.
If you’re married, your spouse can also make the gifts described in the example. You and your spouse each have your own annual exclusion amount, even if you file joint federal income tax returns.

Giving more than the annual exclusion amount

If you give more than the annual exclusion amount to one person in a single year you’ll have to file a gift tax return. But you still won’t have to pay gift tax unless you gave a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2014 the amount is $5,340,000.
You don’t use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount described earlier. For example, if you make a $15,000 gift in 2014, you have used up only $1,000 of your lifetime limit.
Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is also $5,340,000 as of 2014. This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can pass through your estate free of the estate tax. So you shouldn’t ignore your lifetime limit even if you feel certain that your lifetime gifts will never add up to that amount. It pays to plan your gifts around the annual exclusion amount and the exclusions

Sunday, January 12, 2014

S Corps and Taxes!!!!

S Corporation Compensation and Medical Insurance Issues

When computing compensation for employees and shareholders, S corporations may run into a variety of issues. The information below may help to clarify some of these concerns.

Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes.
Authority to ReclassifyJoly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000)
Reinforced Employment Status of ShareholdersVeterinary Surgical Consultants, P.C. vs. Commissioner, 117 T.C. 141 (2001)
Joseph M. Grey Public Accountant, P.C. vs. Commissioner, 119 T.C. 121 (2002)
Reasonable Reimbursement for Services PerformedDavid E. Watson, PC vs. U.S., 668 F.3d 1008 (8th Cir. 2012)
The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation. As such, we need to look to the source of the S corporation's gross receipts.
The three major sources are:
  1. Services of shareholder,
  2. Services of non-shareholder employees, or
  3. Capital and equipment.
If the gross receipts and profits come from items 2 and 3, then that should not be associated with the shareholder-employee's personal services and it is reasonable that the shareholder would receive distributions along with compensations.
On the other hand, if most of the gross receipts and profits are associated with the shareholder's personal services, then most of the profit distribution should be allocated as compensation.
In addition to the shareholder-employee direct generation of gross receipts, the shareholder-employee should also be compensated for administrative work performed for the other income producing employees or assets. For example, a manager may not directly produce gross receipts, but he assists the other employees or assets which are producing the day-to-day gross receipts.
Some factors in determining reasonable compensation:
  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

Treating Medical Insurance Premiums as Wages

Heath and accident insurance premiums paid on behalf of the greater than two percent S corporation shareholder-employee are deductible and reportable by the S corporation as wages for income tax withholding purposes on the shareholder-employee’s Form W-2.
These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2.
A 2-percent shareholder-employee is eligible for a deduction in arriving at Adjusted Gross Income (AGI)  for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation and the shareholder meets the other self-employed medical insurance deduction requirements.  A deduction used to arrive at AGI is referred to as an above-the-line deduction. If, however, the shareholder or the  shareholder’s spouse is eligible to participate in any subsidized health care plan then the shareholder is not entitled to the above-the-line deduction.
A medical plan can be considered established by the S corporation if the S corporation paid or reimbursed the shareholder-employee for premiums and reported:
  • The premium payment
  • Reimbursement as wages on the shareholder-employee’s W-2

Health Insurance Purchased in Name of Shareholder

The insurance laws in some states do not allow a corporation to purchase group health insurance when the corporation only has one employee. Therefore, if the shareholder was the sole corporate employee, the shareholder had to purchase his health insurance in his own name.
The IRS issued Notice 2008-1 which ruled that under certain situations the shareholder would be allowed an above-the-line deduction even if the health insurance policy was purchased in the name of the shareholder. Notice 2008-1 provided four examples, three of the examples had the shareholder purchasing the health insurance and the other example had the S corporation purchasing the health insurance.
The Notice held that if the shareholder purchased the health insurance in his own name and paid for it with his own funds the shareholder would not be allowed an above-the-line deduction. On the other hand, if the shareholder purchased the health insurance in his own name but the S corporation either directly paid for the health insurance or reimbursed the shareholder for the health insurance and also included the premium payment in the shareholder’s W-2, the shareholder would be allowed an above-the-line deduction.
The bottom line is that in order for a shareholder to claim an above-the-line deduction, the health insurance premiums had to be paid by the S corporation and had to be included in the shareholder’s W-2.

Friday, January 03, 2014

Reinstatement of Tax-Exempt Status after Automative Revocation

IRS Provides Procedures for Reinstatement of Tax-Exempt Status After Automatic Revocation (Rev. Proc. 2014-11)

Also addressed is the procedure for applying for retroactive reinstatement more than 15 months after revocation, as well as reinstatement of exempt status from the postmark date of the application. The guidance sets forth details of the reasonable cause statement that must accompany the application for reinstatement, including factors that are weighed by the IRS to determine reasonable cause. Finally, the procedure addresses automatic revocations subsequent to reinstatement.
The new procedure is effective for applications submitted after January 2, 2014. Transition relief is provided. Notice 2011-44, I.R.B. 2011-25, 883, is modified and superseded.

Monday, December 30, 2013

Big changes in Depreciation, Section 179, and UOP (what is that? Read on)

Whenever you fix or replace something in a rental unit or building you need to decide whether the expense is a repair or improvement for tax purposes. Why is this important? Because you can deduct the cost of a repair in a single year, while you have to depreciate improvements over as many as 27.5 years.
For example, if you classify a $1,000 expense as a repair, you get to deduct $1,000 this year. If you classify it as an improvement, you'll likely have to depreciate it over 27.5 years and you'll get only a $35 deduction this year.
That's a big difference.
Unfortunately, telling the difference between a repair and an improvement can be difficult. In attempt to clarify matters, the IRS has issued lengthy regulations explaining how to tell the difference between repairs and improvements. Implementation of these rules has been delayed although anyone can opt to use them between now and their required effective date of January 1, 2014.
For more details on current vs. capital expenses refer to the article Current vs Capital Expenses.

If You are a Landlord

Maximize your tax deductions, including how to deduct repairs and losses, depreciate improvements.

What Is an Improvement under IRS Rules?

Under the new IRS regulations, property is improved whenever it undergoes a:
  • Betterment
  • Adaptation, or
  • Restoration.
Think of the acronym B A R = Improvement = Depreciate.
If the need for the expense was caused by a particular event--for example, a storm--you must compare the property's condition just before the event and just after the work was done to make your determination. On the other hand, if you’re correcting normal wear and tear to property, you must compare its condition after the last time you corrected normal wear and tear (whether maintenance or an improvement) with its condition after the latest work was done. If you’ve never had any work done on the property, use its condition when placed in service as your point of comparison.

Betterments

An expenditure is for a betterment if it:
  • ameliorates a “material condition or defect” in the property that existed before it was acquired or when it was produced--it makes no difference whether or not you were aware of the defect when you acquired the unit of property, or UOP (discussed below)
  • results in a “material addition” to the property--for example, physically enlarges, expands, or extends it, or
  • results in a “material increase” in the property's capacity, productivity, strength, or quality.

Restorations

An expenditure is for a restoration if it:
  • returns a property that has fallen into disrepair to its “ordinarily efficient operating condition”
  • rebuilds the property to a like-new condition after the end of its economic useful life, or
  • replaces a major component or substantial structural part of the property
  • replaces a component of a property for which the owner has taken a loss, or
  • repairs damage to a property for which the owner has taken a basis adjustment for a casualty loss.

Adaptations

You must also depreciate amounts you spend to adapt property to a new or different use. A use is “new or different” if it is not consistent with your “intended ordinary use” of the property when you originally placed it into service.

What Does the IRS Consider a Unit of Property (UOP)?

To determine whether you’ve improved your business or rental property, you must determine what the property consists of. The IRS calls this the “unit of property” (UOP). How the UOP is defined is crucial. The larger the UOP, the more likely will work done on a component be a deductible repair rather than an improvement that must be depreciated.
For example, if the UOP for an apartment building is defined as the entire building structure as a whole, you could plausibly claim that replacing the fire escapes is a repair since it doesn’t seem that significant when compared with the whole building. On the other hand, if the UOP consists of the fire protection system alone, replacing fire escapes would likely be an improvement.
New IRS regulations require that buildings be divided up into as many as nine different UOPs: the entire structure and up to eight separate building systems. An improvement to any of these UOPs must be depreciated. As a result, more costs will have to be classified as improvements, rather than repairs.

UOP #1: The Entire Building

The entire building and its structural components as a whole are a single UOP. A building’s structural components include:
  • walls, partitions, floors, and ceilings, and any permanent coverings on them such as paneling or tiling
  • windows and doors
  • all central air conditioning or heating system components
  • plumbing and plumbing fixtures, such as sinks and bathtubs
  • electric wiring and lighting fixtures
  • chimneys
  • stairs, escalators, and elevators
  • sprinkler systems
  • fire escapes
  • other components relating to the operation or maintenance of the building, and
  • roofs.
For example, replacement of a building’s roof is an improvement to the building UOP.

UOP #2-9: Building Systems

In addition, the following eight building systems are separate UOPs. An improvement to any one of these systems and must be depreciated:
  • Heating , ventilation, and air conditioning (“HVAC”) systems: This includes motors, compressors, boilers, furnace, chillers, pipes, ducts, and radiators.
  • Plumbing systems: This includes pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste.
  • Electrical systems: This includes wiring, outlets, junction boxes, lighting fixtures and connectors, and site utility equipment used to distribute electricity.
  • All escalators.
  • All elevators.
  • Fire-protection and alarm systems: These includes sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detectors, fire escapes, fire doors, emergency exit lighting and signage, and fire fighting equipment, such as extinguishers and hoses.
  • Security systems: These include window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit.
  • Gas distribution system: This includes pipes and equipment used to distribute gas to and from the property line and between buildings.
Example: A landlord purchased an apartment building five years ago for $750,000. This year he spends $5,000 to fix wiring in the electrical system. Under the old IRS rules, the $5,000 likely would be considered a repair because it is relatively small compared to the overall cost of the building, which was treated as a single UOP. Under the new rules, the electrical system is a separate UOP. This means that the $5,000 must be compared with the cost of the electrical system alone, not the cost of the whole building. This makes the expense seem much more significant and likely to constitute an improvement.
For the latest IRS rules on repairs and improvements, see IRS Bulletin 2012-14, Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property.
Thanks to , J.D. for pulling a lot of this together!

Monday, December 23, 2013

Tax items of interest for 2013 & 2014!

2013 1040 In Depth Manual:

  • 2014 Section 179. Use this table:

Section 179 Limits after The 2007, 2010 and 2012 Tax Acts
Description
2007
2008
2009
2010-2013
2014
Section 179 Limit
$125,000
$250,000
$250,000
$500,000
$25,000
Section 179 Phase-out
$500,000
$800,000
$800,000
$2,000,000
$200,000
  • High Income Earners  
The 39.6 percent marginal tax rate will affect single filers with annual income exceeding $406,750 ($457,600 for married couples filing jointly), up from $400,000 and $450,000, respectively, in tax year 2013. Changes to the other marginal tax brackets -- 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent -- are detailed in the release (Rev. Proc. 2013-35;IRS Revenue Procedures).

  • Standard Deduction
The standard deduction for singles and married couples filing separately in tax year 2014 will rise to $6,200 (from $6,100 in tax year 2013), and to $12,400 for married couples filing jointly (from $12,200 a year ago). The standard deduction for heads of household will rise to $9,100 from $8,950.
  • Limits on Itemized Deductions
The limit on itemized deductions claimed on tax year 2014 returns begins with incomes of $254,200 for singles and $302,050 for married couples filing jointly.
  • Personal Exemption
The personal exemption will rise to $3,950, from $3,900 in 2013. However, the exemption will begin phasing out at adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly), and phases out completely at $376,700 ($427,550 for married couples filing jointly).



  • AMT
The alternative minimum tax exemption for tax year 2014 will be $52,800 ($82,100 for married couples filing jointly), up from $51,900 and $80,800, respectively, last tax year.


  • Earned Income Credit
The maximum earned income tax credit will be $6,143 for taxpayers filing jointly who have three or more qualifying children. That's up from $6,044 in tax year 2013.


  • Foreign earned income exclusion
The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.

 

  • For filers who itemize
Schedule A
    IRS Notice 2013-80 gives 2014 mileage rates at 56 cents for business, 14 cents for charity and 23.5 cents for medical and moving.
  
 
  • New Depreciation measures being enactedCan not just expense replacements any longer....
  • Form 4562 Depreciation
    Example Repair and Capitalization Policy

    Note this policy is an annual irrevocable election and must be included with the timely filed Federal Tax Return upon adoption.

    "XYZ Company hereby adopts for book and Federal income tax purposes the following policy regarding capitalization expenses for the year beginning January 1, 2014. In accordance with Internal Revenue Code Sections 167 and 168 and related Regulations XYZ Company has determined that amounts whose individual cost (including tax, installation and delivery costs) does not exceed $500 will be deducted as incurred as an operating expense. Amounts exceeding this dollar limit will be examined individually to determine if their use or purpose requires capitalization under the betterment, adaptation or restoration rules used by the Internal Revenue Service and will be capitalized or expensed as incurred as a result of the application of those rules." (Companies with audited financial statements should replace $500 with $5,000.
        •  
        •  
    •  
  • Net Investment Tax
        •  Form 8960 Net Investment Income Tax
          On November 26, 2013 the IRS released final regulations at TD 9644 regarding the net investment income tax. The regulations included significant changes to the proposed regulations and addressed many concerns taxpayers had raised with the IRS, including rules on regrouping, self-rented property, self-charged interest income, trader's gains and losses, and real estate professionals. The new rules permit a single property to be a rental trade or business.
      •  
  • Regrouping
        •  Regrouping
          In the original proposed regulations the IRS allowed taxpayers whose income exceeded the threshold limits and who had NII the ability to regroup activities one time for 2013 and report the regrouping via a new grouping election. This rule was retained.

          In the final regulations, the IRS allows a taxpayer to regroup activities if the otherwise non-qualifying taxpayer becomes qualifying upon an amended return or as a result of an IRS examination. The taxpayer can apply the regroup to the year of the amended return (reg. section 1.469-11(b)(3)(iv)(C)(1)).

          Also, if a taxpayer correctly elects to regroup and upon amending the return no longer qualifies for regrouping, the regroup is considered void.
          The final regulations do not allow regrouping for partnerships and S corporations.
 
  1.  Self Rented Property
        • Self Rented Property
          Reg. section 1.1411-4(g) provides special rules for self-rented property and self-charged interest income. The final regulations provide that, in the case of rental income that is treated as non-passive by reason of § 1.469-2(f)(6) (which generally re-characterizes what otherwise would be passive rental income from a taxpayer's property as non-passive when the taxpayer rents the property for use in an activity in which the taxpayer materially participates) the gross rental income is treated as derived in the ordinary course of a trade or business, meaning that self-rental income is not subject to the surtax! If the gain or loss from the disposition of property is treated as non-passive gain or loss under some conditions, the gain or loss is deemed to be derived from property used in the ordinary course of business also meaning that the sale of the property is not subject to the surtax!
        •  
    •  
    • Interest of WC
        •  Interest On Working Capital
          Generally exempted if normally charged as a business policy on all account
        •  
    • Self Charge Interest
      •  Self Charged Interest
        The IRS added a special rule that permits taxpayers to exclude from net investment income the amount of interest income equal to the taxpayer's allocable share of the non-passive deduction for self charged interest expense. However, this special rule does not apply in situations when the interest deduction is taken into account in determining self-employment income that is subject to tax under section 1401(b).

      •  
    • R/E Professionals
      •  Real Estate Professionals
        The final regs also offer limited relief from net investment income tax in the form of a safe harbor for rental income of real estate professionals that is derived in the ordinary course of a trade or business.

        The safe harbor test provides that, if a real estate professional (within the meaning of section 469(c)(7)) participates in rental real estate activities for more than 500 hours per year, the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. Alternatively, if the taxpayer has participated in rental real estate activities for more than 500 hours per year in five of the last ten taxable years (one or more of which may be taxable years prior to the effective date of section 1411), then the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. This means that most real estate professionals will not be subject to the NII surtax.

        Interestingly the IRS recognizes that some real estate professionals with substantial rental activities may derive such rental income in the ordinary course of a trade or business, even though they fail to satisfy the 500 hour requirement in the safe harbor test. As a result, the final regulations specifically provide that such failure will not preclude a taxpayer from establishing that such gross rental income and gain or loss from the disposition of real property, as applicable, is not included in net investment income. Special new rules are also provided for the treatment of suspended passive losses once an activity becomes active. The approved approach allows suspended losses from former passive activities in calculation of net investment income but only to the extent of the non-passive income from such former passive activity that is included in net investment income in that year.
    •  
    • Penalty Relief 
        • Penalty Relief
          Although the surtax law was passed over three and 1/2 years ago, and the imposition of the tax began a year ago IRS failed to provide guidance on many surtax issues. They declined in these final regulations to provide penalty relief for late tax payments.

          The foreign tax credit is specifically not allowed to apply against the NII tax under 1.1411-1(e) of the Regulations.
        •  
      •  
    • Attack on the Clergy?
      • Clergy
        A U.S. district court held that section 107(2), which excludes the rental allowance paid to a minister from gross income, is an unconstitutional violation of the establishment clause and enjoined its enforcement, finding that it provides a benefit to religious persons that it does not give to others.

        The Freedom From Religion Foundation (FFRF) and its co-presidents filed a suit in U.S. district court challenging the availability of federal income tax exemptions for "ministers of the gospel" under section 107, arguing that the exemptions violate the Constitution's establishment and equal protection clauses.

        U.S. District Judge Barbara B. Crabb addressed the merits of the case and found that based on the Supreme Court's decision in Texas Monthly Inc. v. Bullock, 489 U.S. 1 (1989), the exemption in section 107(2) violates the establishment clause. In that decision, the Supreme Court held that a state sales tax exemption provided only to publishers of religious writings was unconstitutional. Crabb acknowledged that the withdrawal of the exemption would greatly affect ministers and their churches, but she said that only underscores the preferential treatment that she found to have violated the First Amendment. Crabb concluded her opinion by saying the government isn't powerless to provide exemptions to benefit religion and that Congress can rewrite the provision so that it complies with the principles established by the Supreme Court.

        The judge put a stay on enforcement of the case pending appeal. If the stay is lifted the case would apply in the 7th circuit of Illinois, Indiana and Wisconsin.
        •  
        •  
    • Fringe Benefits
      • Fringe Benefits
        The IRS announced October 31 that it is modifying the "use it or lose it" rule that applies to health flexible spending accounts (FSAs) under section 125's proposed regulations.

        The modification announced in Notice 2013-71, 2013-47 IRB 1 2013 TNT 212-10: Internal Revenue Bulletin permits employers to amend section 125 cafeteria plans to carry over up to $500 of unused amounts remaining in a health FSA at the end of the plan year. Before the change, any amount remaining in an employee's FSA at the end of the plan year was forfeited and returned to the employer.

        The $500 carryover does not limit an employee's ability to elect the maximum in salary reduction contributions under section 125(i), which limits employee salary reduction contributions to $2,500.

        The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.

        The change announced by the IRS is not automatic and will require employers to amend plans for the $500 carryover to apply to employee health FSAs. Any plan adopting a carryover provision is not also permitted to provide the 2 1/2-month grace period. A plan amendment adopting the carryover provision applies retroactively to the first day of the plan year. A plan may be amended to adopt the carryover provision for a plan year beginning in 2013 at any time on or before the last day of the plan year that begins in 2014.

 IRA,  Pensions
  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $17,500.
  •           The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $5,500.
The limit on annual contributions to an Individual  retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not                    subject to an annual cost-of-living adjustment and remains $1,000.
  •  
  •            The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  •           The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  •            The AGI limit for the saver's credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.



  • IRS info
    • IRS
      IRS Taxpayer Advocate, Nina Olson, announced that walk-in tax assistance at IRS offices will end December 31, 2013 due to budget cuts. At the same time, the IRS has been unable to regulate un-enrolled tax preparers due to litigation and the failure of Congress to pass applicable legislation. Ms. Olson also stated that the levels of tax return preparer fraud are "astonishing" and that much of it stems from un-enrolled preparers.
  • Social Security
  •  Social Security
    For 2014, maximum taxable earnings with respect to Social Security was increased from $113,700 to $117,000, and the tax rate for employees and self-employed individuals did not change, according to a fact sheet from the Social Security Administration.
I would like to thank my friend Jim Newland, CPA in Eastlake, Ohio for sharing this with us!