Saturday, February 06, 2016

Who can claim the student loan interest deduction?

Can You Claim the Deduction?

Generally, you can claim the deduction if all of the following requirements are met.
  • Your filing status is any filing status except married filing separately.
  • No one else is claiming an exemption for you on his or her tax return.
  • You are legally obligated to pay interest on a qualified student loan.
  • You paid interest on a qualified student loan.
Claiming an exemption for you.   Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c.
Example 1.
During 2015, Josh paid $600 interest on his qualified student loan. Only he is legally obligated to make the payments. No one claimed an exemption for Josh for 2015. Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2015 Form 1040 or 1040A.
Example 2.
During 2015, Jo paid $1,100 interest on her qualified student loan. Only she is legally obligated to make the payments. Jo's parents claimed an exemption for her on their 2015 tax return. In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2015.
Interest paid by others.   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest.
Example 1.
Darla obtained a qualified student loan to attend college. After Darla's graduation from college, she worked as an intern for a nonprofit organization. As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. This payment was treated as additional compensation and reported on her Form W-2, box 1. Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return.
Example 2.
Ethan obtained a qualified student loan to attend college. After graduating from college, the first monthly payment on his loan was due in December. As a gift, Ethan's mother made this payment for him. No one is claiming a dependency exemption for Ethan on his or her tax return. Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return.

Sunday, January 31, 2016

Figuring a Shareholder's Basis

The Calculation for figuring shareholder basis is as follows:
1) Beginning Stock Basis (cost or FMV of Stock)

Increases to Basis
2) Money or property contributed to the corporation
3) Your percentage of a corporation's  earnings (or a decrease if the corporation sustains loses)
4) Other increases, such as your share of excess deductions of a depleatible asset

Decreases to Basis
5) Distributions of money and FMV of property
6) Your share of the corporation's nondeductible expenses, if applicable, your share of corp loses under Reg section 1.1367-1(g), your share of the Sec 179 deduction, or any corporation charitable deductions
7) If Reg Section 1.1367-1(g) applies, add the amount of a corp's nondeductible expenses
8) The smaller of the excess, at 1/1/xx, of the amount you are owed for loans you made to the corp OR the sum of lines 1-7 above.  (This amount increases you loan basis)

9) Equals: Your stock basis in the corporation at the end of the year..

We would love to help with the computation!  Call me at my cell to talk more (813)309-0504.

Friday, January 29, 2016

Tax changes to Partnerships and Due Dates for 2016

A large number of important tax changes go into effect for partnerships this year, along with due dates for business tax returns.
Many were ushered in by the Protecting Americans from Tax Hikes (PATH) Act of 2015, although legislation enacted earlier in 2015 and in 2014 also contributed a fair share. Still other changes are the result of various administrative pronouncements by IRS.
This article reviews the important changes that apply to partnerships and those that apply to due dates for business returns. There are a number of other important business tax changes this year that I covered in a previous article (seeMajor Business Tax Changes for 2016).
Partnership ChangesThe recent legislation responsible for the lion's share of the changed rules for 2016 consists of the Protecting Americans from Tax Hikes (PATH) Act of 2015; the Fixing America's Surface Transportation (FAST) Act; the Bipartisan Budget Act of 2015; the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015; the Trade Preference Extension Act of 2015; and the Achieving a Better Life Experience Act of 2014 (ABLE Act), part of the Tax Increase Prevention Act of 2014
Taxpayers may elect new partnership rules: The Bipartisan Budget Act of 2015 repeals the TEFRA uniform partnership audit rules and similarly repeals the electing large partnerships rules. These rules are replaced with a streamlined single set of rules for auditing partnerships and their partners at the partnership level. Under the new streamlined audit approach, any adjustment to items of income, gain, loss, deduction or credit of a partnership for a partnership tax year (and any partner's distributive share of such adjustment) is determined at the partnership level. Similarly, any tax attributable to such an adjustment is assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share is determined, at the partnership level.
The new rules generally apply to partnership tax years that begin after Dec. 31, 2017. However, except for certain small partnership election-out rules, partnerships may also elect (as directed by the IRS) for the changes to apply to any return of the partnership filed for partnership tax years beginning after Nov. 2, 2015 and before Jan. 1, 2018.
Family partnership rule clarified: A partnership generally is an unincorporated organization in which the parties (i.e., partners) have joined together to conduct an active trade or business. Under former Code Sec. 704(e)(1), a person can also be recognized as a partner if capital is a material income-producing factor, whether his partnership interest was obtained by purchase or by gift (the so-called "family partnership rule").
Some taxpayers have argued that this family partnership rule provides an alternative test for determining who is a partner without regard to how the term is generally defined in the partnership tax rules. Thus, they asserted that if a partner holds a capital interest in a partnership, the partnership must be respected regardless of whether the parties have demonstrated that they joined together to conduct an active trade or business.
For partnership tax years beginning after Dec. 31, 2015, the Bipartisan Budget Act of 2015 (1) amends the general definition of a partner to provide that, in the case of a capital interest in a partnership in which capital is a material income-producing factor, whether a person is a partner with respect to that interest is determined without regard to whether that interest was derived by gift from any other person (Code Sec. 761(b)) and (2) eliminates the pre-Act rule (at Code Sec. 704(e)) regarding the recognition of partners.
These changes clarify that family partnership rules were not intended to provide an alternative test for whether a person is a partner in a partnership. The determination of whether the owner of a capital interest is a partner is made under the generally applicable rules defining a partnership and a partner.
Due Dates for Business Returns
Revised due dates for partnership and C corporation returns: Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by March 15 of the following year. The partnership return is due on the 15th day of the fourth month after the end of the partnership's tax year. Thus, partnerships using a calendar year must file their returns by April 15 of the following year. Since the due date of the partnership return is the same as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.
Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after Dec. 31, 2015 (i.e., for 2016 tax year returns filed in 2017):
• Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by Mar. 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same.
• C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by Apr. 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month. (Under a special rule, for C corporations with fiscal years ending on June 30, the rule change won't apply until tax years beginning after Dec. 31, 2025.)
Revised automatic extension rules for corporations: Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, effective generally for returns for tax years beginning after Dec. 31, 2015, the three-month automatic extension of time for corporate returns in Code Sec. 6081(b) is changed to an automatic six-month extension (this change conforms the statutory rule with the six-month automatic extension for corporate returns in Reg. § 1.6081-3(a)).
However, for any return for a tax year of a C corporation which ends on Dec. 31 and which begins before Jan. 1, 2026, the automatic extension period is five months (not six months). And, for any return for a tax year of a C corporation which ends on June 30 and begins before Jan. 1, 2026, the automatic extension period is seven months (not six months).
Note that the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 also revised the extended due dates for various other returns.
Thanks to Thompson Reuter's Robert Trinz  for much of this research

Tuesday, January 26, 2016

Obama care required documents

The reporting requirements are considered the glue that holds together two of the largest pieces of PPACA: the individual and employer mandates. Since 2014, the individual mandate has required most Americans to purchase minimum essential coverage, qualify for an exemption from this requirement, or pay a penalty on their tax return. Beginning in 2015, the employer mandate places a requirement on applicable large employers (ALEs)—which are businesses with 50 or more full-time plus full-time equivalent (FTE) employees—to provide health insurance to 95% or more of their employees and dependents up to age 26.
Several new forms have been issued for both employers and insurance providers to file to comply with the new reporting rules. ALEs will file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. The type of information reported by an ALE on the forms is meant to help the IRS pinpoint those employers that are required to but do not offer minimum essential coverage to their employees and their employees’ spouses and dependents. If it fails to provide the appropriate insurance, the employer is subject to steep penalties. The information reported on the returns also lets the IRS know if an employee is eligible for the premium tax credit.
Providers of minimum essential coverage will file Form 1095-B, Health Coverage, and Form 1094-B, Transmittal of Health Coverage Information Returns, to report information to the IRS and enrollees about individual coverage. Recipients of Form 1095-B can show they have minimum essential coverage and will not owe a penalty on their tax return associated with the individual mandate.
Who is subject to the information-reporting requirements?
ALEs are subject to the information-reporting requirements of Sec. 6056.
Any provider, such as an insurance company that issues minimum essential coverage to an individual, is subject to the information-reporting requirements of Sec. 6055.
Which form to file?
Which form to file?

What information is necessary to complete the forms?
The type and sheer volume of data that an employer has to gather to file Forms 1095-C and 1094-C is overwhelming, especially since certain information must be tracked by month. Employers have found themselves in the difficult position of having to implement new systems to track reportable data such as the following:
  • Whether the employer offered minimum essential coverage each month to the employee and the employee’s spouse and dependents;
  • Whether the employee and the employee’s spouse and dependents were enrolled in the coverage;
  • Whether the employee’s share of the lowest-cost monthly premium for self-only minimum essential coverage provides minimum value;
  • Which affordability safe harbor was used for each employee;
  • Whether the employee was full-time or part-time, on a monthly basis;
  • The total number of employees, by month, and the total number of full-time employees, by month;
  • Whether the employee was a new hire eligible for the coverage waiting period;
  • Whether the employee was a new variable-hour, seasonal, or part-time employee in the initial measurement period; and
  • Whether the employer was a member of a controlled group or affiliated service group.
An insurer will have to report the following information on Forms 1095-B and 1094-B:
  • Enrollee’s name, address, and Social Security number;
  • Employer’s name, address, and federal employer identification number;
  • Insurance provider’s name, address, and federal employer identification number; and
  • Covered individual’s name, Social Security number, and months of coverage.
What are the penalties for noncompliance?
The information-reporting rules are a serious business. ALEs as well as providers of minimum essential coverage can be hit with penalties of $250 for each information return not filed and another $250 for not providing each employee/enrollee with an accurate return. The total amount of penalties is capped at $3 million annually—a staggering amount! As you can see, the penalties provide employers and insurers a significant incentive to file the forms correctly and on time.
Thanks for the compilation of this info to Kristin Esposito, CPA, MST, is the senior technical manager–tax advocacy at the AICPA.

Thursday, January 14, 2016

Biodiesel mixture and Alternative Fuel taxes

Notice 2016-05 provides rules for claimants to make one-time claims for the 2015 biodiesel mixture and alternative fuel excise tax credits that were retroactively extended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), Pub. L. 114-113 Div. Q.  It also provides guidance for claimants to claim the other retroactively extended credits for 2015, including the alternative fuel mixture excise tax credit.
Notice 2016-05 will be published in Internal Revenue Bulletin 2016-06 on Feb. 8, 2016.

Wednesday, January 06, 2016

Obamacare and your tax return!

The Individual Shared Responsibility Provision and Your 2015 Income Tax Return
The Affordable Care Act requires you, your spouse and your dependents to have qualifying health care coverage for each month of the year, qualify for a health coverage exemption, or make an Individual Shared Responsibility Payment when filing your federal income tax return.   If you had coverage for all of 2015, you will simply check a box on your tax return to report that coverage.
However, if you don’t have qualifying health care coverage and you meet certain criteria, you might be eligible for an exemption from coverage. Most exemptions are can be claimed when you file your tax return, but some must be claimed through the Marketplace.
If you or any of your dependents are exempt from the requirement to have health coverage, you will complete IRS Form 8965, Health Coverage Exemptions and submit it with your tax return. If, however, you are not required to file a tax return, you do not need to file a return solely to report your coverage or to claim an exemption.
For any months you or anyone on your return do not have coverage or qualify for a coverage exemption, you must make a payment called the individual shared responsibility payment. If you could have afforded coverage for yourself or any of your dependents, but chose not to get it and you do not qualify for an exemption, you must make a payment. You calculate the shared responsibility payment using a worksheet included in the instructions for Form 8965 and enter your payment amount on your tax return.
Whether you are simply checking the box on your tax return to indicate that you had coverage in 2015, claiming a health coverage exemption, or making an individual shared responsibility payment, you or your tax professional can prepare and file your tax return electronically.  Using tax preparation software is the best and simplest way to file a complete and accurate tax return as it guides individuals and tax preparers through the process and does all the math. Electronic filing options include IRS Free File for taxpayers who qualify, freevolunteer assistancecommercial software, and professional assistance.
More Information
Determine if you are eligible for a coverage exemption or responsible for the Individual Shared Responsibility Payment by using our Interactive Tax Assistanton IRS.gov.
For more information about the Affordable Care Act and filing your 2015 income tax return, call us!  (813)309-0504 DIRECT LINE or (813)657-4137 OFFICE

Wednesday, December 30, 2015

Section 179 details

Section 179 at a Glance for 2015 (updated for the PATH Act of 2015)
2015 Deduction Limit = $500,000
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2015, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2015.
2015 Spending Cap on equipment purchases = $2,000,000 
This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true "small business tax incentive".
Bonus Depreciation: 50% for 2015
Bonus Depreciation is generally taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation is available for new equipment only.
The above is an overall, "simplified" view of the Section 179 Deduction for 2015. For more details on limits and qualifying equipment, as well as Section 179 Qualified Financing, please read this entire website carefully. We will also make sure to update this page if the limits change.
Here is an updated example of Section 179 at work during this 2015 tax year after the recent passage of the PATH Act of 2015:
...
What is the Section 179 Deduction?
Most people think the Section 179 deduction is some mysterious or complicated tax code. It really isn't, as you will see below.
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
Several years ago, Section 179 was often referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV's and Hummers). But, that particular benefit of Section 179 has been severely reduced in recent years, see 'Vehicles & Section 179' for current limits on business vehicles.
Today, Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses - and millions of small businesses are actually taking action and getting real benefits.
Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it's true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That's the whole purpose behind Section 179 - to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2015 tax return (up to $500,000).
Limits of Section 179
Section 179 does come with limits - there are caps to the total amount written off ($500,000 for 2015), and limits to the total amount of the equipment purchased ($2,000,000 in 2015). The deduction begins to phase out dollar-for-dollar after $2,000,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.
Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease less than $2,000,000 in new or used business equipment during tax year 2015 should qualify for the Section 179 Deduction.
Most tangible goods including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2015 and December 31, 2015.
The deduction begins to phase out if more than $2,000,000 of equipment is purchased - in fact, the deduction decreases on a dollar for dollar scale after that, making Section 179 a deduction specifically for small and medium-sized businesses.
What's the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn't. Right now in 2015, it's being offered at 50%.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,000,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.

Leasehold Improvements, Restaraunt and Retail property 

You can elect to treat certain qualified real property you placed in service as section 179 property for tax years tax years beginning before 2015. If this election is made, the term “section 179 property” will include any qualified real property that is:
  • Qualified leasehold improvement property,
  • Qualified restaurant property, or
  • Qualified retail improvement property.
The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 for tax years beginning in 2014. For more information, see Special rules for qualified section 179 real property, later. Also, see Election for certain qualified section 179 real property, later, for information on how to make this election.
Qualified leasehold improvement property.   Generally, this is any improvement (placed in service before January 1, 2015) to an interior portion of a building that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met.
  In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions.
  1. A transaction to which section 381(a) applies,
  2. A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,
  3. A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or
  4. Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Examples include the following.
    1. A complete liquidation of a subsidiary.
    2. A transfer to a corporation controlled by the transferor.
    3. An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.
Qualified restaurant property.   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2015. Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals.
Qualified restaurant property.   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2015. Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals.
Section 179's "More Than 50 Percent Business-Use" Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.

Thanks to the Section179.org group for delivering this information so concisely!

Tuesday, December 22, 2015

1095-B forms as well as 1095-C-Why am I getting these form???

Eight Facts about New ACA Information Statements
Many individuals will receive new ACA information statements for the first time in 2016:
Here are eight facts about these forms:
  • While the information on these forms may help you complete your tax return, they are not needed to file. You can file your federal tax return even if you have not received one of these statements.
  • Form 1095-B, Health Coverage, is used by coverage providers to report certain information to the IRS and to taxpayers about individuals who are covered by minimum essential coverage and therefore aren't liable for the individual shared responsibility payment.
  • Form 1095-C, Employer-Provided Health Insurance Offer and Coverage is used by employers with 50 or more full-time employees, including full-time equivalent employees, in the previous year use, to report the information required about offers of health coverage and enrollment in health coverage for their employees. 
  • Form 1095-C is also used by employers that offer employer-sponsored self-insured coverage to report information to the IRS and to employees about individuals who have minimum essential coverage under the employer plan and therefore are not liable for the individual shared responsibility payment for the months that they are covered under the plan.
  • Individuals who worked for multiple employers that are required to file Form 1095-C may receive a Form 1095-C from each employer.
  • The Form 1095-B and 1095-C sent to you may include only the last four digits of your social security number or taxpayer identification number, replacing the first five digits with asterisks or Xs.
  • In general, 1095-B and 1095-C must be sent on paper by mail or hand delivered, unless you consent to receive the statement in an electronic format.
  • Health coverage providers should furnish a copy of Form 1095-B, to you if you are identified as the “responsible individual.”

Guidance regarding the health coverage tax credit

Notice 2016-02 provides guidance regarding the health coverage tax credit (HCTC) under section 35 of the Internal Revenue Code, as modified by the Trade Preferences Extension Act of 2015, Pub. L. 114-27 (June 29, 2015).  This notice provides information on who may claim the HCTC, the amount of the HCTC, and the procedures to claim the HCTC for tax years 2014 and 2015.  This notice also provides guidance for taxpayers eligible to claim the HCTC who enrolled in a qualified health plan offered through a Health Insurance Marketplace in tax years 2014 or 2015, and who claimed or are eligible to claim the premium tax credit under section 36B.
Notice 2016-02 will be in IRB 2016-02, dated January 11, 2016.

Friday, December 18, 2015

No more annual Section 179 "wait and see". 

The Senate this morning approved a bill that permanently enacts a number of tax provisions that expired at the end of 2014. Other provisions were extended for shorter periods. The House approved it yesterday, so it now goes to the President for signature. The White House has already announced its support for the bill. 

Key provisions to be enacted permanently, retroactive to the beginning of 2015, include, among others:

-The $500,000 Section 179 deduction limit

-The five-year “recognition period” for built-in gains taxes for C corporations electing to be S corporations.

-The ability of IRAs of taxpayers reaching age 70 1/2 to make $100,000 annual charitable contributions that will not be included in the IRA holders income.

-The 100% exclusion for gains on certain original issue C corporation stock held for five years.

-The research credit.

-The alternative deduction for state and local sales taxes.

Other provisions to be made permanent include special breaks for conservation easements and the above-the-line deduction for out-of-pocket educator expenses.

50% bonus depreciation is to be extended from the beginning of 2015 through 2019, along with the Work Opportunity Tax Credit.

To get the Democratic leadership to sign off on the deal, Republican negotiators agreed to make permanent the child tax credit, the enhanced earned income tax credit, and the “American Opportunity Tax Credit” for college costs.

At least 30 other provisions are to be extended through 2016. The credits for biodiesel, renewable diesel, wind energy and residential solar are among these, along with the exclusion for qualified mortgage forgiveness and the above-the-line deduction for qualified college costs. These shorter-lived extenders also include special interest confections such as the 7-year depreciable life for speedways and special film expensing rules. 

There’s more than extenders here. This thing has 233 pages of stuff, much of which has nothing to do with extenders. A few of the major items I note:


-Acceleration of the deadline for filing W-2s with the government to January 31, from the current February 28 deadline for paper copies and March 31 for electronic filers. This is to make it easier to match refund claims to W-2s before refunds are issued. This will be effective for W-2s issued for 2016 wages.

-Allowing the purchase of computers for students as a qualified Section 529 plan expenditure, effective for 2015.

-A new charitable deduction for contributions to “agricultural research organizations.”

-New restrictions on the ability to qualify as a tax-exempt small insurance company.

-A moratorium on the ACA medical device tax.


The annual extenders frenzy is bad tax policy. Now that the most important "temporary" provisions are not so temporary, maybe Congress will take a harder look at some of the special-interest deals remaining in the list of regularly-resurrected provisions.



54 cents. 

Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
  • 54 cents per mile for business miles driven, down from 57.5 cents for 2015
  • 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
  • 14 cents per mile driven in service of charitable organizations
The business mileage rate decreased 3.5 cents per mile and the medical, and moving expense rates decrease 4 cents per mile from the 2015 rates. The charitable rate is based on statute.
Gas has come down.

Thanks to Joe Kristanson with Roth & Co CPA's for much of the tax info above.


Thursday, December 17, 2015

2016 Standard Mileage Rates

The rates seem to reflect a lowering of gas prices.  However, the cost of vehicles continues to climb and I think these standard rates miss that point.

SECTION 3. STANDARD MILEAGE RATES
The standard mileage rate for transportation or travel expenses is 54 cents per mile for all miles of business use (business standard mileage rate). See section 4 of Rev. Proc. 2010-51.
The standard mileage rate is 14 cents per mile for use of an automobile in rendering gratuitous services to a charitable organization under § 170. See section 5 of Rev. Proc. 2010-51.
The standard mileage rate is 19 cents per mile for use of an automobile (1) for medical care described in § 213, or (2) as part of a move for which the expenses are deductible under § 217. See section 5 of Rev. Proc. 2010-51.

Tax Incentives close to passing government hurrdles

Budget deal on tax incentives is close to passing congress.    This bill leaves in place many of the incentives for businesses and families.  It is expected to pass ny the end of the week.

Wednesday, November 25, 2015

Repairs expensing just allowed to $2,500, new safe harbor rules (was $500 which was tough)

Inside This Issue


Notice 2015-82 increases the de minimis safe harbor limit provided in the new Tangible Property Regulations (§ 1.263(a)-1(f)(1)(ii)(D)) of the Income Tax Regulations for a taxpayer without an applicable financial statement (“AFS”) (in other words, clients without audited financial statements) from $500 to $2,500.
Notice 2015-82 will be published in Internal Revenue Bulletin 2015-50 on Dec. 14, 2015.

Wednesday, November 11, 2015

Start Up costs and the tax effects

New businesses, which are vital to a healthy economy, usually incur costs before they begin active conduct of their intended business operations. These costs are frequently generically referred to as startup costs of a business. Typical examples of these costs include expenditures to investigate whether to create or acquire a particular business and, for a business operated through a partnership or corporation, the organization costs to form the entity; however, costs incurred before a business begins active operations can include a wide variety of types of costs.
For financial accounting purposes, these costs are generally included in the category of startup costs and are all treated the same way. However, for tax purposes, costs that are financial accounting startup costs may be required to be further subdivided into smaller more specific categories, each of which is treated differently. This article discusses how these costs incurred by a business before it begins its active operations are treated for financial accounting and tax purposes.
STARTUP COSTS FOR BOOK PURPOSES
For book purposes, startup costs are costs a business incurs in its activities in preparing to begin its active conduct. Under ASC Section 720-15-20, startup activities include:
  • Opening a new facility;
  • Introducing a new product or service;
  • Conducting business in a new territory;
  • Conducting business with an entirely new class of customers ... or beneficiary;
  • Initiating a new process in an existing facility;
  • Commencing some new operation.
Financial accounting standards also treat the costs of organizing a corporation or partnership as startup costs rather than as separate costs (ASC Paragraph 720-15-15-2).
Although companies refer to startup costs using varying terms, including preopening costs, preoperating costs, organization costs, and startup costs, financial accounting standards refer to these costs only as startup costs (ASC Paragraph 720-15-15-3). For financial accounting purposes, a business must expense startup costs as incurred (ASC Paragraph 720-15-25-1). Example 1 shows the financial accounting treatment of these costs.
Example 1: ABC Corp. incurred $65,000 of startup costs. It records the startup costs using the following entry:
Startup expense  $65,000
   Cash                              $65,000
STARTUP COSTS FOR TAX PURPOSES
The treatment of preoperational startup costs is potentially much more complex for tax purposes than financial accounting purposes. Costs that are startup costs for financial accounting purposes must be analyzed and possibly subdivided into smaller categories, each of which is treated differently for tax purposes. Making things more confusing, one of these smaller categories for tax purposes includes the costs described in Sec. 195, which commonly are referred to as startup costs in tax discussions.
The other categories that financial accounting startup costs might fall into for tax purposes are organizational costs, syndication costs, Sec. 197 intangible costs, and tangible depreciable personal property costs. The different book and tax treatment is reconciled on an attachment to the federal tax return using Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.
SEC. 195 STARTUP COSTS
For tax purposes, Sec. 195 defines startup costs as costs incurred to investigate the potential of creating or acquiring an active business and to create an active business. To qualify as startup costs, the costs must be ones that could be deducted as business expenses if incurred by an existing active business and must be incurred before the active business begins (Sec. 195(c)(1)). Startup costs include consulting fees and amounts to analyze the potential for a new business, expenditures to advertise the new business, and payments to employees before the business opens. Startup costs do not include costs for interest, taxes, and research and experimentation (Sec. 195(c)(1)). Once a taxpayer decides to acquire a particular business, the costs to acquire it are not startup costs (Rev. Rul. 99-23), and the taxpayer must capitalize the acquisition costs (Sec. 263(a) and INDOPCO, Inc., 503 U.S. 79 (1992)).
A taxpayer may elect to deduct a portion of startup costs in the tax year in which the active conduct of the business to which the costs relate begins and to amortize the portion of the startup costs not deducted over a 180-month period under Sec. 195(b)(1)(A). A taxpayer is deemed to make the election to deduct and amortize startup costs unless it affirmatively elects to capitalize startup costs by attaching a statement to the taxpayer's timely filed tax return, including extensions, for the tax year in which the active conduct of the business begins (Regs. Sec. 1.195-1(b)). The deemed election to deduct and amortize startup costs or the affirmative election to capitalize them is irrevocable (Regs. Sec. 1.195-1(b)).
A taxpayer that elects to deduct and amortize startup costs may deduct up to $5,000 of startup costs in the year the active conduct of the business begins (Sec. 195(b)(1)(A)). The taxpayer amortizes any startup costs over the deduction limit for 180 months beginning in the month the active conduct of the business to which the costs relate begins (Sec. 195(b)(1)(B)). Because costs that qualify as startup costs will be deductible as ordinary and necessary business expenses when the business becomes active, a taxpayer might want to begin the active conduct of the business before startup costs exceed $5,000. This will help the taxpayer avoid having to amortize costs rather than taking a current deduction.
In addition, if the startup costs related to the business exceed $50,000, the taxpayer must reduce the $5,000 limit on the deduction (but not below zero) by the startup costs over $50,000 (Sec. 195(b)(1)(A)). If the startup costs are $55,000 or more, the taxpayer cannot deduct any of the startup costs except as an amortization deduction. Example 2 illustrates the tax treatment for a corporation that incurred more than $50,000 but less than $55,000 of startup costs.
Example 2: The startup costs for XYZ Corp. are $52,000. XYZ may deduct $3,000 ($5,000 — [$52,000 — $50,000]) of these costs currently. XYZ amortizes the remaining $49,000 ($52,000 — $3,000) of startup costs over 180 months, beginning in the month it begins the active conduct of its business (Sec. 195(b)(1)(B)). The entry to record the startup costs for tax purposes is:
Startup costs expense   $ 3,000
Deferred startup costs  $49,000
   Cash                                       $52,000
The IRS is authorized to issue regulations to clarify the date a new business is considered to have begun for amortizing startup costs (Sec. 195(c)(2)(A)), but it has not yet done so. However, the IRS believes that for the amortization period for startup costs to begin, the business must be a going concern for which its expenses would be deductible as ordinary and necessary business expenses under Sec. 162(a) (Technical Advice Memorandum 9027002 and IRS Letter Ruling 9047032).
If a taxpayer acquires a business, Sec. 195(c)(2)(B) deems the acquired business to have begun on its acquisition date. Example 3 shows the tax treatment of startup costs for a sole proprietor who incurred less than $50,000 of startup costs.
Example 3: Assume T incurred startup costs of $23,000 on April 1, 2014, and began business on May 1, 2014. T may deduct $5,000 immediately and the remaining $18,000 of startup costs at the rate of $100 a month ([$23,000 — $5,000] ÷ 180). The entry to record the startup costs for tax purposes is:
Startup costs expense   $ 5,000
Deferred startup costs  $18,000
   Cash                                        $23,000
At the end of calendar year 2014, T would record $800 in amortization expense (8 months × $100 per month) for the deferred $18,000 startup costs:
Amortization expense—startup costs                    $800
    Deferred startup costs                  $800
In 2015 and later years until T has fully amortized the startup costs, she records $1,200 (12 months × $100 per month) in amortization expense for the deferred startup costs:
Amortization expense­—
startup costs                  $1,200
    Deferred startup costs                 $1,200
A taxpayer claims the amortization deduction on Form 4562, Depreciation and Amortization, and then carries the total deductions to the appropriate return. In Example 3, T would show the amortization deduction on Form 4562 and then carry the deduction to Schedule C, Profit or Loss From Business, of Form 1040 because T is a sole proprietor.
If the taxpayer sells or abandons the business before deducting all the startup costs, the taxpayer may deduct the remaining startup costs as a loss (Secs. 165 and 195(b)(2)). Example 4 illustrates this rule.
Example 4: After recording 40 months of amortization of the deferred startup costs, T sold the business. T may deduct $14,000 ($18,000 — [40 × $100]) as a loss. The entry to record this loss for tax purposes is:
Loss on deferredstartup costs                $14,000
    Deferred startup costs           $14,000
EFFECT OF NEW REPAIR REGULATIONS ON STARTUP COSTS
The new tangible property regulations (often called the repair regulations (T.D. 9636)) might require some repair costs to be capitalized as costs of depreciable property. Those costs might have been deducted immediately in the past as startup costs. To be a startup cost, the cost must be deductible if the business was an active business (Sec. 195(c)(1)(B)). Some repair costs that were previously deductible may now have to be capitalized under the new repair regulations. In that case, if the business incurs such a capitalized repair cost before beginning the active business, the cost cannot be a startup cost. The business may be able to recover the cost more or less quickly as a capitalized repair cost than as a startup cost depending on the depreciable life of the asset for which the business capitalizes the cost.
TANGIBLE DEPRECIABLE PERSONAL PROPERTY
The breadth of the definition of startup costs for book purposes means that some of the costs included in book startup costs may be costs for tangible depreciable personal property. The taxpayer should be careful to account for the costs of this property separately. A taxpayer recovers the costs of tangible depreciable property through depreciation (cost recovery) deductions over the depreciable life of the property. A small business may be able to deduct some of the cost of tangible depreciable personal property immediately under Sec. 179, and the depreciable life for tangible depreciable personal property is generally less than 15 years. Thus, any costs properly classified as tangible depreciable personal property can usually be recovered more quickly than costs classified as startup, organization, or Sec. 197 intangible costs that must be amortized.
ORGANIZATION COSTS FOR TAX PURPOSES
For partnerships and corporations, organization costs for tax purposes are costs incurred in forming a partnership or corporation, including the legal fees for drafting a partnership agreement or corporate charter and bylaws, necessary accounting services in forming the entity, filing fees, and costs of organizational meetings of stockholders and directors (Sec. 709(b)(3) and Regs. Secs. 1.709-2(a) and 1.248-1(b)(2)). Corporate reorganization costs are not organization costs unless they directly relate to the creation of a new corporation (Regs. Sec. 1.248-1(b)(4)).
The organization costs of a partnership or corporation are generally not deductible until the business liquidates (Wolkowitz, 8 T.C.M. 754 (1949)), but, as with startup costs, a partnership or corporation may elect to deduct up to $5,000 of organization costs and amortize the remainder of its organization costs over 180 months beginning in the month the entity begins business. The regulations deem a corporation or partnership to have made this election (Regs. Secs. 1.248-1(d) and 1.709-1(b)(2)) unless the entity affirmatively elects to capitalize the organization costs by attaching a statement to a timely filed return, including extensions, for the tax year in which the entity begins business. The partnership or corporation must reduce the $5,000 maximum deduction (but not below zero) by the amount of the total organization costs over $50,000 (Secs. 248(a)(1) and 709(b)(1)(A)). Example 5 shows the tax treatment of organization costs for a corporation that incurred more than $50,000 but less than $55,000 of organization costs.
Example 5: DEF Corp. incurred $51,800 in organization costs; it may deduct $3,200 ($5,000 — [$51,800 — $50,000]) of these organization costs. The entry to record the organization costs on its tax books is:
Organization costsexpense                 $3,200
Deferred organization
costs                     $48,600
    Cash                                $51,800
If the partnership or corporation deducts up to $5,000 of organization costs it paid or incurred, it must amortize any remaining organization costs over 180 months beginning in the month the entity begins business (Secs. 248(a)(2) and 709(b)(1)(B)). Example 6 illustrates the amortization of the organization costs of a corporation.
Example 6: DEF Corp. amortizes its remaining $48,600 ($51,800 — $3,200) of organization costs at the rate of $270 ($48,600 ÷ 180) per month for 180 months beginning in the month it begins business. The entry it makes to record the amortization of its organization costs for one year ($270 × 12 = $3,240) for tax purposes is:
Amortization expense—
organization costs          $3,240
    Deferred organization
    costs                                      $3,240
If a partnership or corporation incurs $55,000 or more in organization costs, it may not deduct any of them immediately. The entity amortizes all organization costs over 180 months beginning in the month it begins business (Secs. 248(a) and 709(b)(1)(B)).
If a partnership or corporation liquidates before it has deducted all the deferred organization costs, it may deduct the unamortized organization costs as a loss (Secs. 165(a) and 709(b)(2), and Regs. Sec. 1.709-1(b)(3)). Example 7 illustrates this rule.
Example 7: When DEF Corp. liquidates 68 months after it began amortizing the remaining $48,600 of organization costs, it recognizes a deductible loss of $30,240 ($48,600 — [68 × $270]). The entry to record this loss for tax purposes is:
Loss on unamortizedorganization costs           $30,240
    Deferred organization
    costs                                         $30,240
If a corporation merges with another corporation and does not dissolve, it may not deduct its unamortized organization costs as a loss (Citizens Trust Co., 20 B.T.A. 392 (1930)). Instead, the unamortized organization costs are a capital cost of the new corporation (Vulcan Materials Co., 446 F.2d 690 (5th Cir. 1971), and Regs. Sec. 1.248-1(b)(4)).
Organization costs do not include the syndication costs of a partnership, which are the costs of issuing and marketing ownership interests in the partnership. Syndication costs are treated differently for tax purposes. Unlike organization costs, syndication costs are not eligible for an immediate deduction or amortization, and instead must be capitalized (Regs. Sec. 1.709-2(b)). Similar to partnership syndication expenses, the expenditures a corporation incurs issuing stock and transferring assets to itself are not organization costs and are not deductible or amortizable (Regs. Sec. 1.248-1(b)(3)). A partnership may not claim a loss for unamortized syndication costs (Regs. Sec. 1.709-1(b)(3)).
Sec. 197 Costs
Another category of costs for tax purposes that may be included in startup costs for book purposes is Sec. 197 intangibles. Among other things, under Sec. 197(d) these include:
  • Goodwill.
  • Going concern value.
  • Workforce in place.
  • Business books, records, and operating systems.
  • Patents.
  • Copyrights.
  • Trade secrets.
  • Licenses.
  • Franchises.
  • Trademarks.
  • Trade names.
  • Covenants not to compete.
The rules for recovering the costs of Sec. 197 intangibles are similar to the rules for recovering startup costs, but there are significant differences. One difference is that while a taxpayer may deduct up to $5,000 of startup costs, a taxpayer may not deduct any cost for goodwill or other intangible assets listed in Sec. 197 except through amortization. A taxpayer amortizes the startup costs not eligible for an immediate deduction over 180 months. Likewise, a taxpayer amortizes goodwill and other intangibles listed in Sec. 197 over 15 years (Sec. 197(a)).
Another difference is if a taxpayer disposes of any Sec. 197 intangible before fully amortizing its cost, the taxpayer may not deduct a loss (Sec. 197(f)(1)(A)(i)). Instead, the taxpayer adds the unamortized cost to the adjusted basis of retained intangibles (Sec. 197(f)(1)(A)(ii)).
CONCLUSION
For financial accounting purposes, the treatment of costs a business incurs before the beginning of the active conduct of its business operations is relatively straightforward, with all the costs falling into one category and all being treated the same way. However, for tax purposes, things are potentially much trickier, with the various costs possibly falling into several categories that are treated differently. For some of the costs, a taxpayer may have a choice as to how the costs are treated. Thus, it is important to correctly account for startup costs to ensure that the costs are treated appropriately for tax purposes and in the manner that is most beneficial to the taxpayer.
Organization costs are subject to the same deduction and amortization rules as startup costs. However, a taxpayer must account for them separately.
- See more at: http://www.journalofaccountancy.com/issues/2015/nov/startup-costs-book-vs-tax-treatment.html#sthash.d8NddL05.dpuf
Thanks to Allen Campbell, CPA for pulling this interesting material together!