Congressional leaders unveiled a wide-ranging deal on tax extenders, making some items permanent.
The Protecting Americans from Tax Hikes Act of 2015 is a culmination of recent work done in both chambers of Congress and renews and makes permanent important tax incentives that support both individuals and job creators. Among the provisions that would be made permanent are the enhanced Child Tax Credit, the enhanced American Opportunity Tax Credit, the enhanced Earned Income Tax Credit, the above-the-line deduction for teachers who buy school supplies, the charitable deduction of contributions of real property for conservation purposes, along with the Research & Development Tax Credit and Section 179 expensing.
The permanent R&D Tax Credit provision permanently extends the research & development tax credit and, for the first time, allows for eligible small businesses to claim the credit against the alternative minimum tax liability or against the employer’s payroll tax liability. The Section 179 provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014; and sets a new threshold at $500,000 and $2 million, respectively, from the current amounts of $25,000 and $200,000, respectively.
In addition, the legislation suspends the 2.3 percent excise tax on medical devices through 2017 and delays for two years the so-called “Cadillac tax” on high-priced health insurance plans that was supposed to begin in 2018. It also phases out bonus depreciation. Another provision permanently extends the exception from subpart F income for active financing income. The legislation also permanently extends the rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.
Another provision permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs) of up to $100,000 per taxpayer in any tax year.
Congress is expected to vote by the end of the week on the tax legislation along with an omnibus spending bill that was also unveiled late Tuesday night (see Congress Reaches Deal on Tax Extenders).
“Santa came early this year with gifts for almost everyone in the form of numerous tax relief provisions, although the IRS may view its gift as a lump of coal,” said Peter Mills, managing editor of federal taxes for Bloomberg BNA. “Tax planners would gain more certainty because the bill would make permanent many important tax provisions, most notably the research and development credit, the expanded §179 expensing limitations, the enhanced child tax credit, and the earned income tax credit, as well as extending some popular temporary provisions, such as bonus depreciation. Foreign investors would gain advantages in increasing investment in U.S. real estate by increasing their ownership percentage of publicly traded REITs without being taxed on sales of the interests, and by exempting foreign retirement and pension funds from being taxed on sales of REITS holding U.S. real estate. It also would delay some of the taxes associated with the Affordable Care Act. The IRS fares less well under the bill with new restrictions, including a rule providing for the termination of any IRS employee who takes official actions for political purposes. Moreover, the IRS has the burden of processing these changes in time for the upcoming tax season.”
The Internal Revenue Service would receive $11.23 billion in fiscal year 2016, an increase of $290 million over the current level, specifically for customer service, identity theft and cybersecurity, according to the National Treasury Employees Union. While that figure is $1.7 billion less than the administration’s request of $12.9 billion, the NTWU noted, the final amount is an improvement over the House proposal to cut the IRS budget by almost $838 million compared to the current level.
The bill would make permanent a provision that allows retailers to depreciate remodeling and other improvements to their stores over 15 years rather than the previous standard of 39 years, the National Retail Federation pointed out. The provision, which also applies to restaurants, is important because retailers typically remodel every five to seven years. In addition to helping keep stores attractive to customers and profitable, the remodeling work creates tens of thousands of construction jobs each year.
A separate provision that allows 50 percent of the cost of improvements to be written off under “bonus deprecation” would be extended for five years, and would be expanded to cover stores and restaurants that are owned rather than just those that are leased.
Section 179 expensing, which determines the amount of an investment a small business is allowed to write off entirely in the first year rather than being depreciated over multiple years, would be made permanent and its level would be increased.
The Work Opportunity Tax Credit, which gives retailers a tax incentive to hire the disabled, welfare recipients and other economically challenged individuals, would be renewed for five years.
Paul Gevertzman, a tax partner at Anchin, Block & Anchin, sees benefits in having more certainty about the tax provisions. “The most positive aspect of this extender package is that many of the perennially expiring provisions are either made permanent, or at least pushed off beyond another New Year’s morning expiration,” he said. “What it means for businesses is that they can now plan properly. They can operate with the knowledge that if they follow the prescribed steps they can achieve the anticipated tax result. I had one client tell me just this morning how he’s been sweating it out because they spent $20+ million dollars on equipment purchases in 2015 not knowing for certain how much of that spend could be written off this year. This bill takes the guesswork out of the equation. This certainty allows tax incentives to actually incentivize businesses to spend, rather than to simply provide a benefit to businesses post facto for what they’ve already done.”
Speaker of the House Paul Ryan, R-Wis., spoke of the advantages of the tax deal during a press briefing Wednesday. “I cannot tell you how many times I have visited with small businesses and farmers who tell me, ‘Give me some certainty in the tax code, and I can go create jobs.’ We are finally delivering on one of those tax policies we’ve been trying to—for years—to get certainty in the tax code so we can create more jobs,” he said. “I think this is one of the biggest steps toward a re-write of our tax code that we’ve made in many years. And it will help us start a pro-growth, bold tax reform agenda in 2016.”
The Senate Finance and House Ways and Means Committees have worked on efforts in Congress to overhaul the tax code through working groups, hearings, roundtables, issue papers and markups.
“Passing this legislation and making more tax policies permanent will provide significant tax relief for hard-working taxpayers in every walk of American life, from the middle class to military families to the working poor,” said Senate Finance Committee chairman Orrin Hatch, R-Utah, in a speech on the Senate floor Wednesday. “It will do the same for businesses and job creators throughout our country, resulting in a healthier U.S. economy, increased growth, and more American jobs,” Hatch said. “Put simply, more permanence in the tax code will be a good thing for our country, and the PATH Act will provide just the kind of permanence we need.”
Earlier this year, the Senate Finance Committee reported out a bipartisan tax extenders package that extended provisions to help families, individuals and small businesses for two years. The House Ways and Means Committee advanced several tax bills that would make permanent a number of policies, like incentives for innovative research and development, among others.
The PATH Act includes a number of bipartisan legislative policies that were advanced by the two tax-writing committees.
“It makes absolutely no sense the way America handles its tax code,” said House Ways and Means Committee chairman Kevin Brady, R-Texas, in a statement. “How can families and local businesses count on tax relief each year as long as Congress can’t decide what’s permanent and what’s not? That confusion ends now, and our economy will be stronger for it.”
However, the bill will come at a cost of billions of dollars added to annual budget deficit, which may complicate passage in Congress.
“This bill highlights clear priorities for reforming our tax system,” said Wyden. “What does that mean? Millions of working families with children will not find themselves suddenly taxed into poverty. Millions of college students won’t have the rug pulled out from under them when the tuition bill arrives. Charities can confidently plan and expand the good work they do. And small business and enterprises on the forefront of innovation now have the economic certainty they deserve. At the same time we are phasing out provisions like bonus depreciation which were always designed to be temporary. But now is not the time for Congress to slow down and pat itself on the back. Today is a down payment on tax reform and our work continues as we strive towards a complete overhaul of our broken tax system.”
The tax extenders package also includes a five-year extension of the wind energy production tax credit to lead to a phase-down of the industry-specific tax credit. The wind production tax credit will be 100 percent in 2015 and 2016, 80 percent in 2017, 60 percent in 2018 and 40 percent in 2019.
Sen. Chuck Grassley, R-Iowa, had advocated for passage of this provision. “As the father of the first wind energy tax credit in 1992, I can say that the tax credit was never meant to be permanent,” Grassley said in a statement. “I also can say that the wind energy industry is the only energy industry that came forward with a phase-out plan. The oil and nuclear industries have benefited from tax incentives that have been permanently on the books for decades. The five-year extension for wind energy brings about the best possible long-term outcome that provides certainty, predictability and a responsible phase-down of a tax incentive for a renewable energy source.”
The tax package includes an extension of the existing biodiesel fuel blenders credit, the small agri-biodiesel producer credit, the tax credit for cellulosic biofuels producers, the alternative fuel vehicle refueling tax credit, and bonus depreciation for cellulosic biofuel facilities.
Additional information on returns relating to mortgage interest.
Sec. 6050H is amended to require new information on the mortgage information statements that are required
to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be
required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address
of the property securing the mortgage, and the mortgage origination date. This change applies to returns and
statements due after Dec. 31, 2016.
The short-term highway funding extension passed by the Senate on Thursday contains several important tax
provisions. The bill modifies the due dates for several common tax returns, overrules the
Supreme Court’s Home Concrete decision, requires that additional information be reported on mortgage
information statements, and requires consistent basis reporting between estates and beneficiaries.
Due date modifications
For partnership returns - the new due date is March 15 (for calendar-year partnerships) and the 15th day of the
third month following the close of the fiscal year (for fiscal-year partnerships).
For C corporations – the new due date is the 15th day of the fourth month following the close of the
The new due dates will apply to returns for tax years beginning after Dec. 31, 2015. However, for C
corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning
after Dec. 31, 2025.
The Internal Revenue Service has been doing business with nearly 1,200 vendors that owe back taxes, including one unnamed contractor that owes a whopping $525 million, the new inspector general’s report says.
The IRS’s 1,168 vendors owed back taxes totaling $589 million as of July 2012, according to the report released Tuesday. Only 50 were in a payment plan to pay off their debt.
Apparently the IRS checks whether vendors owe back taxes when the agency awards contracts but it doesn’t continually monitor their tax bills after the contracts have been awarded.
The inspector general’s office is prohibited by law from revealing the name of any delinquent vendor, including the one that owed $525 million. The report says most of the back taxes, including the biggest, were delinquent for less than a year.
The report also excluded back taxes that were being contested, counting only those that either agreed to by the taxpayer or ordered by the court.
The IRS stated, “The vast majority of vendors that conduct business with the IRS meet their federal tax obligations. We appreciate (the inspector general’s) acknowledgement that IRS has effective controls in place to prevent suspended and debarred vendors’ from receiving IRS contracts.”
Huh? What planet are they on?
Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 56 cents per mile for business miles driven
- 23.5 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
The business, medical, and moving expense rates decrease one-half cent from the 2013 rates. The charitable rate is based on statute.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2013-80 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
As either a commercial property owner or a commercial property tenant you may take advantage of qualified leasehold improvements before midnight December 31, 2013.
What will the qualified leasehold improvements mean for you in 2013 and 2014?
In 2013, you’ll be able to take a 15-year depreciation, a Section 179 deduction of up to $250,000 and a 50% bonus depreciation.
In 2014, you’ll be able to take a 39-year depreciation.
$1,000,000 in leasehold improvements applied to 2013 tax year’s 15-year schedule rather than 2014’s 39-year schedule allowing a $24,610 deduction confers these huge savings:
1. $250,000 deduction straight from the top
2. $375,000 bonus depreciation
3. $12,488 additional via IRS’s first year midyear convention on the 15-year depreciation
Adding it all up, you’ll be writing-off $637,488 versus $24,610!
What sort of leasehold improvements qualifies under the 2013 rules?
1. The improvement is made under or pursuant to a lease by the lessee (or sublessee) of the building’s interior portion, or by the lessor of that interior portion.
2. The interior portion of the building is to be occupied exclusively by the lessee (or sublessee) of that interior portion.
3. The improvement is placed in service more than three years after the building was first placed in service by anyone.
Under Section 168(k)(3)(B), the qualified leasehold improvement property does not include any expenditures:
. To enlarge the building
. To any elevator or escalator
. To any structural component benefiting a common area
. To the internal structural framework of the building
Improvements qualifying under the 2013 rules include among others these:
. Pipes and Fittings
. Plumbing Fixtures
. Fire Protection
. Permanent Interior Finishes
. Permanent Floor Coverings
. Millwork and Trim
Other qualifying improvements include movable partitions or carpeting that is not part of the property’s structure. Such improvements will not qualify as leasehold improvements under 2014’s 39-year rules and are generally depreciable over five to seven years.
Cost-segregation is a good way to look at faster depreciation deductions for qualified leasehold improvement property. These depreciations are tax law-approved.
Using cost-segregation, you’ll first pay the cost-segregation fees necessary to obtain the cost-segregation study. The study will show whether or not your cost-segregation passes IRS muster. Qualified leasehold property improvements require no such study and it’s relatively easy to identify property qualifying for the tax breaks.
Putting qualified leasehold improvements in practical terms, imagine the case of a lessee who’s made improvements to the HVAC serving a stand-alone commercial building used for retail sales. The improvements serve only the space occupied by the lessee and the HVAC improvements:
1. Do not benefit a common area.
2. Are not part of the building’s internal framework and structure?
3. Do not enlarge the building.
4. Placed in service more than three years after the building first entered service.
Per the IRS, the HVAC improvements qualify as either 39-year property or as tax-favored 15-year qualified leasehold improvements. Neither the IRS nor the lessor put forward an accelerated five-year personal property depreciation claim on the HVAC improvements.
Per the IRS, the HVAC improvements do not qualify as leasehold improvements made by the lessor as they’re located on the building’s rooftop and are not located within the building’s interior.
The taxpayer in the example above unfortunately undertook the costly HVAC improvements without good tax advice. Had the taxpayer received knowledgeable advice first, he’d have perhaps considered installing the HVAC upgrades within the leased space.
Landlords and tenants: Remember to take a good look at qualified leasehold improvements. Keep in mind the property in question must have been in service for at least three years and the improvements must be in service before midnight December 31, 2013
Call Kruse and Crawford to assure you get this done correctly.
The IRS has a new tool to see if you may be eligible for an offer in compromise.
An offer in compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay.
Go to web site and enter our financial and tax filing status to calculate a preliminary offer amount. They make their final decision based on your completed OIC application and their associated investigation. This tool should only be used as a guide. Although it may show you can full pay your liability, you may still file an offer in compromise and discuss your individual financial situation with the IRS.
Submitting an offer application does not ensure that the IRS will accept your offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect your ability to pay. Generally, the IRS will not accept an offer if you can pay your tax debt in full via an installment agreement or a lump sum.
A booklet is also available and will lead you through a series of steps to help you calculate an appropriate offer based on your assets, income, expenses, and future earning potential. The application requires you to describe your financial situation in detail, so before you begin, make sure you have the necessary information and documentation.
Straight from the horses mouth . . . IRS Tax Tip 2013-11
Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.
1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.
5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.
7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.
8. Self-employed health insurance deduction - If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.
The General Accounting Office has released a report titled “Federal Tax Debts: Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus.”
The report was provided to Sen. Max Baucus (D-Montana), chairman of the Senate Finance Committee, and Sen. Charles Grassley (R-Iowa), ranking Republican on the Senate Judiciary Committee. At the end of 2011 the IRS was carrying an inventory of $373 billion in receivables: $258 from individuals and $115 from businesses. Under current policy the IRS cannot directly report these debts to credit bureaus, although it does provide indirect clues by filing tax liens to secure its debts. The liens become part of the private record, which can in turn be picked up by credit bureaus and included in their data bases. There are firms that troll these records to solicit IRS representation, as a number of our clients can attest. There is one outfit in California that seems quite aggressive, as I have seen their form letters with regularity.
Credit reporting is not yet IRS policy, but the GAO report does indicate that the Senate tax committee is looking seriously at this matter. As Congress considers ways to address runaway deficits, it seems a viable proposal to raise revenue.
Are there issues here? Of course. Many employers are using credit reports as part of their hiring process, and they are also being increasingly used in housing (think renting) decisions. These credit reports have real-life consequences.
On the flip side, reporting may encourage recalcitrant taxpayers to resolve their IRS issues sooner rather than later.
I am not sure I am comfortable with this proposal. I have worked IRS representation for many years, and while my experience with the IRS has been generally positive, I also have my share of war stories. I have arrived at agreement at examination, only to have exam reverse its decision and force me into Appeals. I have had the IRS battle me on a research credit, where the business owner is a professor at the University of Cincinnati and is commercializing his research. I have a client in Florida with two daughters. He is divorced, and his wife pays child support. We are battling the IRS because they do not want to believe that the two girls live with him. This affects his filing status (head of household), as well as his child credit ($1,000 for each girl). It would seem an easy case, as the girls’ mother lives in northern Kentucky. The girls are in Florida, for goodness sake.
Remember: these are people who can afford to hire me.
Of the $373 billion, $60 billion was in dispute or already in installment plans. $110 billion has been classified as uncollectible (I have several clients included in that total). That leaves about $200 billion that could be brought into the system, I suppose. The distribution curve of the debt is pretty much what one would expect. Well over half the taxpayers owe small dollars – less than $5,000. The big dollars are concentrated in a much smaller group of taxpayers: debts over $5,000 add-up to $310 billion of the $373 billion total.
Still, how much of this is contestable IRS debt but the taxpayer cannot afford a tax pro?