Last Minute Tax “Relief”

Western Snowy Plover

Whew!  I am so relieved to have a full two weeks to do an entire year of tax planning for our clients.  Thank you, Congress.  Nice holiday gift.

2014 Tax Increase Prevention Act

In the recently enacted “Tax Increase Prevention Act of 2014,” Congress has once again extended a package of expired or expiring individual, business, and energy provisions known as “extenders.” The extenders are a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. Congress has repeatedly temporarily extended the tax breaks for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” The new legislation generally extends the tax breaks retroactively, most of which expired at the end of 2013, for one year through 2014.

This is an overview of the key tax breaks that were extended by the new law.

Individual extenders

The following provisions which affect individual taxpayers are extended through 2014:

… the $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom;

… the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income;

… parity for the exclusions for employer-provided mass transit and parking benefits;

… the deduction for mortgage insurance premiums deductible as qualified residence interest;

… the option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes;

… the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;

… the above-the-line deduction for qualified tuition and related expenses; and

… the provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70 and ½ or older.

Business extenders

The following business credits and special rules are generally extended through 2014:

… the research credit;

… the temporary minimum low-income housing tax credit rate for nonfederally subsidized new buildings;

… the military housing allowance exclusion for determining whether a tenant in certain counties is low-income;

… the Indian employment tax credit;

… the new markets tax credit;

… the railroad track maintenance credit;

… the mine rescue team training credit;

… the employer wage credit for activated military reservists;

… the work opportunity tax credit;

… qualified zone academy bond program;

… three-year depreciation for racehorses;

… 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;

… 7-year recovery period for motorsports entertainment complexes;

… accelerated depreciation for business property on an Indian reservation;

… 50% bonus depreciation (extended before Jan. 1, 2016 for certain longer-lived and transportation assets);

… the election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation;

… the enhanced charitable deduction for contributions of food inventory;

… the increase in expensing (up to $500,000 write-off of capital expenditures subject to a gradual reduction once capital expenditures exceed $2,000,000) and an expanded definition of property eligible for expensing;

… the election to expense mine safety equipment;

… special expensing rules for certain film and television productions;

… the deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;

… the exclusion from a tax-exempt organization’s unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity;

… the special treatment of certain dividends of regulated investment companies (RICs);

… the definition of RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act;

… exceptions under subpart F for active financing income;

… look-through treatment for payments between related controlled foreign corporations (CFCs) under the foreign personal holding company rules;

… the exclusion of 100% of gain on certain small business stock;

… the basis adjustment to stock of S corporations making charitable contributions of property;

… the reduction in S corporation recognition period for built-in gains tax;

… the empowerment zone tax incentives;

… the American Samoa economic development credit; and

… two provisions dealing with multiemployer defined benefit pension plans (dealing with an automatic extension of amortization periods and shortfall funding method and endangered and critical rules), are extended through 2015.

Energy-related extenders

The following energy provisions are retroactively extended through 2014:

… the credit for nonbusiness energy property;

… the second generation biofuel producer credit (formerly cellulosic biofuels producer tax credit);

… the incentives for biodiesel and renewable diesel;

… the Indian country coal production tax credit;

… the renewable electricity production credit, and the election to claim the energy credit in lieu of the renewable electricity production credit;

… the credit for construction of energy efficient new homes;

… second generation biofuels bonus depreciation;

… the energy efficient commercial buildings deduction;

… the special rule for sale or disposition to implement federal energy regulatory commission (FERC) or State electric restructuring policy for qualified electric utilities;

… the incentives for alternative fuel and alternative fuel mixtures; and

… the alternative fuel vehicle refueling property credit.

Happy Shopping!

IRS Phone Scams and Email Phishing

scam

For many U.S. residents, nothing is more frightening than hearing from the IRS.  We seem to all suffer from an irrational fear that “the government” is going to take our money, our freedom, and maybe even our 1st born child.

Scammers know just how to exploit this fear which is why their scams are so successful.  By playing on your emotions, they can trick even a sophisticated mark.  Here are a few ways to determine if you are being scammed:

  1. You got an email from IRS:  NO YOU DIDN’T!  The IRS DOES NOT EVER use email to communicate with taxpayers.  ANY email purporting to be from IRS is a scam.  The IRS is strictly forbidden from using email to communicate with taxpayers, primarily due to privacy reasons.
  2. You got a phone call from IRS: VERY UNLIKELY!  While the IRS may try to contact you by telephone, this will only occur after you have ignored many, many IRS notices bombarding your mailbox.  ALL initial communications from IRS come via the mail.  Always hang up the call, never respond or give out any information about yourself, and immediately call the Treasury Inspector General to report the call:  1-800-366-4484.
  3. You got a text from IRS: NEVER!  The IRS does not use texting as a form of communication.

If you have been scammed or are worried that the caller has obtained personal information, contact the Federal Trade Commission at FTC.gov and initiate a complaint.  Be sure to save your evidence:  caller id, voice mail messages and email messages so that you can include this in your complaint.  You should also contact law enforcement and notify your CPA firm.

One thing you should always do is open any mail that seems to be from the IRS and respond appropriately.  If you suspect the IRS correspondence is a scam, forward it to your CPA, and if you don’t have a CPA, contact the IRS at 1-800-829-1040.

Here is a link to IRS’ latest phone scam alert:  http://www.irs.gov/uac/Newsroom/IRS-Repeats-Warning-about-Phone-Scams

 

IRS 1099-K Notices: has IRS noticed you?

higas-sos-fly-fishing-fly

Remember those pesky 1099-K forms you received earlier this year?  Well, even though IRS gave up on “matching” the income reported on those forms into your business or personal tax returns, they have undertaken something much worse:  a fishing expedition with your name on the bait.

IRS is now sending out four different types of 1099-K notices called “Letters”:

Letter 5035 – a letter hinting that you “may have” underreported your income with no response required.  A shot across the bow.

Letter 5036 – a letter that does more than hint that you have underreported your income – it provides dollar amounts showing that an unusually high percent of your income came from credit cards and 3rd party payers, and demanding a written response in 30 days explaining why you should not file an amended return and which describes your internal controls and cash receipts procedures and other reasons why a high percentage of total gross receipts comes from credit card transactions.

Letter 5039 – a letter which makes the same assertions as Letter 5036 and requires the taxpayer to complete Form 14420 within 30 days to explain why your income reflects an unusually high percentage of credit card and other 3rd party transactions reported on 1099-K.

Letter 5043 – a letter which alleges that compared to others in your industry, you have underreported your income, citing specific percentages and dollar amounts, and demanding a written response within 30 days explaining why you should not file an amended return and which describes your internal controls and cash receipts procedures and other reasons why a high percentage of total gross receipts comes from credit card transactions.

The response-required letters go to the Tax Examiner section of the IRS, so that should give you a clue that if your response is unsatisfactory it is highly likely that an audit will be initiated.

I have a number of concerns about these notices, but my primary one has to do with the fact that the taxpayer is not being notified of an audit.  These 1099-K Letters are an end run around IRS’ obligations to properly inform taxpayers of their rights and duties during an examination, which includes the right to representation.  Taxpayers may blithely respond, or perhaps even ignore these notices without realizing the implications.

Secondly, IRS makes bald-faced assertions in Letter 5043 which allege specific amounts of unreported income, using statistics which are not cited, and which are supposedly based on the industry code used on the tax return.  As we know, these codes are very broad and somewhat outdated, so that your business may be nothing at all like another business using the same catch-all code.  And, where do their statistics come from?  Are they 10 years old or 1 year old?  Knowing how understaffed IRS is, I am going to guess that the statistics used are not recent.

Finally, the whole idea of 1099-K reporting was to tap the underground economy.  That is a very good goal and one that I fully support.  Unfortunately, these 1099-K letters do no such thing.  Instead of matching 1099-K’s into tax returns, the IRS is going after legitimate businesses whose cash receipts model may not fit their idea of the norm.  This approach will have no impact whatsoever on the multitude of eBay sellers, construction contractors, and others who make up a chunk of the underground economy in the U.S.  We need IRS to go back to the drawing board to re-think the 1099-K matching process and come up with a solution that meets the public policy objective from which this requirement originated.

 

 

Mission Impossible? Last Minute Tax Planning for 2013

mission impossible

While the concept of “tax extenders” is debated by economists and policy wonks, the real fact is that certain provisions of our tax code have for years been written with a self-destruct code imbedded in them.  The reasons for this vary, but the main one is that a budget cannot be balanced without plugging in “sunset” dates for some of these more generous provisions of the code – known as “tax expenditures”.

One example of a tax expenditure is the Section 179 “expensing” provision that allows businesses to deduct, rather than depreciate equipment purchases up to a certain threshold.  In 2013, this threshold is, generally, $500,000, but drops to a mere $25,000 in 2014.  The purpose for the high immediate expensing was to give “small” businesses a tax benefit for investing in equipment, providing in theory a stimulating effect on the economy.

If you are in the mood to do last minute tax planning, here is a brief list of some of the more popular 2013 expiring provisions:

Business Provisions:

  • Section 179 deduction – drops to $25,000 from $500,000 after 2103.
  • 50% bonus depreciation – no longer available after 2013 except for certain long-period property and aircraft.
  • Qualified Leasehold Improvements – depreciable life goes to 39 years in 2014, from 15 years.
  • Section 179 deduction for certain qualified real property – the 179 deduction of up to $250,000 for qualified leasehold improvements, restaurant property, and retail property is gone after 2013.
  • Research credit – expires after 2013.

Individual provisions:

  • Direct charitable contributions from an IRA – no longer permitted after 2013.
  • Sales tax deduction – no longer available after 2013.
  • Tuition and fees deduction – expires after 2013.
  • Cancellation of Debt – the exclusion of up to $2 million of COD income from a qualified principal residence is no longer available after 2013.

Of course, Congress could still act in early January to restore some or all of the expiring provisions, as it might do with the unemployment benefits that have now also expired for the long-term unemployed.  To be on the safe side, though, if any of these provision affect you or your business, this might be a good day to do a little shopping.

And remember that each of these provisions, very briefly summarized above, are actually quite complex, so it’s a good idea to check with your tax professional before taking action to make sure that you qualify for the deductions in question.

AICPA Requests IRS Clarification in Wake of DOMA Ruling

gaymarriage

The AICPA recently submitted a 5 page letter to the IRS Chief Compliance Officer, requesting clarification and additional guidance for same sex couples attempting to navigate the SCOTUS DOMA ruling.

Among the many issues raised are questions about Registered Domestic Partners and Civil Unions.  Some states, such as Oregon, have statutes which state that this status is the full equivalent of marriage.  While Oregon is not specifically mentioned in the AICPA’s letter, several examples of possible confusion are given:  Vermont permits both same sex marriages and civil unions.  Are these both marriages for IRS purposes?  And, Connecticut automatically considers prior civil unions as marriages.  Does this mean that such couples are married in IRS’ eyes?

Another interesting wrinkle for Oregon couples is the fact that there are currently same sex couples who were actually married in Oregon during the brief time that Multnomah County issues such marriage licenses – back in 2004.  Does that mean that these couples have actually been married all along under IRS’ interpretation of the DOMA ruling?

There are a total of 17 income tax and estate tax issues raised by the AICPA, which points to the complexity of the issues involved and the confusion that both same sex couples and their advisors are experiencing.  Among these issues are when, whether and how each member of a couple should file amended returns.  If one amends, is the other required to?  And, if IRS audits one member of the couple does that mean they will then require a change to their filing status?

Another interesting issue is whether same sex couples can file Form 706, United States Estate Tax Return, late to claim portability, and if so, can they go beyond the normal statute of limitations?  And, what about gift tax returns filed by same sex couples who are now considered married?  Can prior filed Forms 709 be amended, and how far back can you go?

These are great questions raised by the AICPA, and I only hope that IRS can address them in a timely way, which may be difficult given their recent budget cuts and the extra work load they have related to the Affordable Care Act and other new tax legislation.

Marriage Equality in the Aftermath of the DOMA Ruling

franlebowitz

“Why do gay people want to get married and be in the military, which are the two worst things about being straight?”Fran Lebowitz

But, we do.

One day after the SCOTUS ruling overturning Section 3 of federal DOMA, the IRS issued this statement:  “We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.”

One day later, the Office of Personnel Management (OPM) issued its memorandum describing how the ruling will affect federal employees with respect to health, dental, life and long-term care insurance, federal retirement benefits, and flexible spending accounts.  These federal benefits were extended to all “legally married” same sex couples.  Later, the OPM clarified that the “state of celebration” rule would govern how to determine the “legality” of a marriage.

You may notice I am using quotes.  Yes, I am intending to be sarcastic.  I know that the debate about “gay marriage” is an artifice.  “Legal marriage” is a societal construct with religious underpinnings.  And, in this country it is a doorway to special federal and state tax and legal benefits not available to those who have not entered through its portals.  Hence, there is institutionalized discrimination against those adults who our society has said cannot legally marry.  The Supreme Court did not strike down DOMA in full, however, but chose to invalidate only Section 3, leaving the federal government with a very big mess on its hands, and allowing states to continue with their institutionalized discrimination against gay couples.

In the days which have ticked away since the DOMA ruling, the IRS has said nothing further, leaving the experts to speculate on the political quagmire which IRS must slog through as it grapples with the complex issues which have arisen in the wake of the SCOTUS ruling.

In addition to trying to conclude WHO is legally married, IRS must also determine whether that status could change merely because the couple decides to move, or perhaps work elsewhere.  Not only that, IRS must consider WHEN to begin acknowledging such legal marriages.  Is it 2013?  Is it when the couple got married?  Is it when they moved to a state that acknowledged their marriage as legal?  Is it for all the open tax years?

This is perhaps why we have heard nothing further from IRS.  They have a lot on their plates right now recovering from the faux Tea Party targeting scandal and dealing with high level staffing changes as well as threatened budget cuts.

Meanwhile,  the Lambda website page on the SCOTUS DOMA ruling contains some helpful guidance.

Corrected Broker 1099s: ‘Tis Better to Extend than to Amend

Bridge_Wallpaper_by_tonvanalebeekWith the advent of IRS’ new 1099-B matching rules requiring brokerage firms to report “covered” and “non-covered” securities beginning in 2011, a new standard industry practice has developed:  corrected 1099s from brokers received long after the April 15th deadline has passed.

If you are an investor, you are now experiencing the headaches and hassles of dealing with these corrected forms.  One problem is that you have no way of knowing whether or not the 1099s you have in hand now will end up being the final ones for the year.

For this, and other important reasons, we recommend that our investor clients simply extend their returns each year, which allows another 6 months to receive and process the corrected forms.

By extending your tax returns, you’ll also solve a few other problems as well:  extensions are, by far, less costly to prepare than are amended tax returns.  Amended returns must be prepared by hand at both the federal and state level, and they require special attachments that are specifically labeled.  They are also “hand-processed” by IRS and require more people-power on their end as well.  Extensions can be e-filed with IRS, and most states accept IRS’ extension, so there’s no action required except to pay any tax due.

By filing an extension, you help to reduce the problem of “tax season compression” – especially bad this year due to the late start caused by Congress’ fiscal cliff debacle.  With less time to prepare returns, and data changing even as the returns are being processed, the risk of errors and omissions increases dramatically.  Even good CPA firms with great reputations may find themselves cutting corners in the quality control department in order to meet a client’s demand that the returns be completed by the deadline.

Another good reason to extend your tax returns is that sometimes taxpayers will receive an unexpected K-1.  This can happen if your broker decides to invest in publicly traded partnerships, or in private equity investments.  You’ll get a K-1 even if you only owned the units for a brief period of time during the year.  And,  receiving even a small inheritance from a distant relative can trigger a K-1 form from the estate that you don’t even know you are going to receive…until you receive it.

Since partnerships, estates and trusts can all file extensions, this delays the arrival of any related K-1s.  Estates of decedents are not required to select a calendar year end, so their filing deadlines can occur anytime throughout a year.

Some of our clients are reluctant to extend their returns because they have heard that this increases their risk of audit.  Nothing could be further from the truth.  There is absolutely no relationship between returns selected for audits and whether or not an extension was filed.  What CAN trigger an audit, however, is the filing of an amended return.  Since those are looked at by human beings at the IRS, and not by computers, there’s more of a chance that something will catch the eye of the person processing the amended returns.

So, not only will you save tax preparation fees by extending your returns, you’ll be making a smart move to lower the risk of errors and omissions on the originally filed return, and you’ll be eliminating the need to file an amended return if corrected 1099s or surprise K-1s arrive after the April 15th deadline.