AB Tax Accounting

Top Tax Facts about Exemptions and Dependents

2015-01-26T07:18:00.002-08:00

Income Tax Service For Individuals - Nearly everyone can claim an exemption on their tax return. It usually lowers your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

1. E-file your tax return. Filing electronically is the easiest way to file a complete and accurate tax return.

2. Exemptions cut income. There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $3,950 for each exemption you claim on your 2014 tax return.

3. Personal exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:

had no gross income,
is not filing a tax return, and
was not the dependent of another taxpayer.

4. Exemptions for dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

5. Report health care coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:

Have qualifying health insurance, called minimum essential coverage, or
Have an exemption from this coverage requirement, or
Make a shared responsibility payment when you file your 2014 tax return.

6. Some people don’t qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

7. Dependents may have to file. A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like the amount of their income, whether they are married and if they owe certain taxes.

8. No exemption on dependent’s return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person is your dependent.

9. Exemption phase-out. The $3,950 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income.

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What's new on Form 1040 for tax year 2014–Part II

2015-01-23T06:01:00.003-08:00

IRS has electronically released final tax forms and instructions for the 2014 tax year, including Forms 1040, 1040-A, and 1040-EZ, along with some related schedules. They reflect key health coverage changes that first went into effect in 2014, including the premium assistance credit and the penalty for failing to have coverage, and other changes.

FORM 1040—SCHEDULE A, ITEMIZED DEDUCTIONS

Line 1. Medical and dental expenses. The 2014 standard mileage rate for medically-related use of an auto is 23.5¢ per mile.

Line 21. Unreimbursed employee expenses. The 2014 standard mileage rate for business travel is 56¢ per mile.

Line 29. Limit on itemized deductions. Itemized deductions for taxpayers with adjusted gross incomes in excess of the “applicable amount” ($305,050 for joint filers or a surviving spouse, $279,650 for a head of household, $254,200 for a single individual who isn't a surviving spouse, and $152,525 for marrieds filing separately) may be reduced.

FORM 1040—SCHEDULE B, INTEREST AND ORDINARY DIVIDENDS

Line 1. Interest. Accrued interest on Series EE U.S. savings bonds issued in '84 is taxable.

Line 3. Excludable interest on Series EE or Series I U.S. savings bonds. The exclusion for education related savings bond interest phases out at higher income levels. For 2014, the phaseout begins at modified AGI above $76,000 ($113,950 on a joint return).

FORM 1040—SCHEDULE C, PROFIT OR LOSS FROM BUSINESS

Part II. Expenses. Line 9. Car and truck expenses. The 2014 standard mileage rate for business travel is 56¢ per mile.

Part II. Expenses. Line 13. Depreciation and section 179 expense. See entries for Form 4562, see below.

FORM 4562, DEPRECIATION AND AMORTIZATION

Part I. Election to expense certain tangible property under Sec. 179. For tax years beginning in 2014, the maximum section 179 expense deduction is $500,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2 million.

Part II. Special depreciation allowance. For qualified property acquired and placed in service after 2011 and before Jan. 1, 2015 (before Jan. 1, 2016 for certain longer-lived and transportation property), a 50% bonus first-year depreciation allowance applies under Code Sec. 168(k).

Part V. Listed property. First-year luxury auto depreciation deduction limits for vehicles first placed in service in 2014 are $3,160 for autos and $3,460 for light trucks or vans. The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is “qualified property” under the 50% bonus first-year depreciation rules of Code Sec. 168(k)and which isn't subject to a taxpayer election to decline bonus depreciation.

FORM 1040—SCHEDULE D, CAPITAL GAINS AND LOSSES

Form 1099-B. Form 1099-B has been redesigned so that the information is reported in boxes that are numbered to match the corresponding line and column on Form 8949 (Sales and other Dispositions of Capital Assets). (Form 8949 is used to report the sale or exchange of a capital asset not reported on another form or schedule. One of the functions of Schedule D is to figure the overall gain or loss from transactions reported on Form 8949.) A new box has also been added at the top of Form 1099-B to tell the taxpayer which box to check when completing Form 8949. These changes are designed to make it easier to complete Form 8949.

Form 1040—SCHEDULE E, SUPPLEMENTAL INCOME AND LOSS

Standard mileage rate. The 2014 standard mileage rate for miles driven in connection with the taxpayer's rental activities is 56¢ per mile.

FORM 1040—SCHEDULE F, PROFIT OR LOSS FROM FARMING

Part II. Farm Expenses—Cash and Accrual Method. Line 10. Car and truck expenses. The 2014 standard mileage rate for business travel is 56¢ per mile.

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Democrats introduce legislation to curb corporate tax inversions

2015-01-23T05:44:00.003-08:00

Four Democratic lawmakers have introduced the “Stop Corporate Inversions Act of 2015,” which would tighten restrictions on corporate tax inversions. The proposed legislation is expected to save the U.S. nearly $34 billion in revenue, according to a recent estimate from the Joint Committee on Taxation. If enacted, the proposed legislation would be effective for any inversion transactions completed after May 8, 2014.

Background. In general, an inversion is a transaction in which a domestic corporation or partnership becomes foreign (i.e., an expatriated entity), without moving out of the U.S. in a practical sense. For example, a U.S. parent corporation of a multinational group may undertake a series of transactions to become a subsidiary of a foreign corporation, after which the foreign corporation is the parent of the multinational group. Furthermore, by restructuring to move the foreign subsidiaries out from under the U.S. ownership chain, U.S. taxpayers attempt to avoid the U.S. anti-deferral rules.

A corporate inversion occurs when a U.S. corporation moves to a foreign jurisdiction and becomes domiciled in the foreign country. Corporate inversions have received much attention, with legislators expressing concern over the loss of corporate tax revenue from U.S. corporations moving to lower tax jurisdictions.

In 2004, to discourage U.S. companies from entering into inversion transactions, Congress enacted Code Sec. 7874. However, since the provision was enacted in 2004, there have been approximately 40 corporate inversions, according to the press release accompanying the introduction of the Stop Corporate Inversions Act of 2015.

On Sept. 22, 2014, Treasury and IRS issued Notice 2014-52, 2014-42 IRB 712, to take targeted action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. Treasury and IRS viewed corporate inversions as motivated substantially in part by the ability to undertake certain post-transaction steps to reduce U.S. taxation. The Notice announced the intention to issue regulations under Code Sec. 304(b)(5)(B), Code Sec. 367, Code Sec. 956(e), Code Sec. 7701(l), and Code Sec. 7874. According to the Notice, such future anti-inversion guidance would apply prospectively from the date of issuance, but only to groups that completed their business combinations on or after Sept. 22, 2014.

Stop Corporate Inversions Act of 2015. On Jan. 20, 2015, Senate Minority Whip Dick Durbin (D-IL), House Ways and Means Committee Ranking Member Sander Levin (D-MI), Senator Jack Reed (D-RI), and Representative Lloyd Doggett (D-TX) introduced the Stop Corporate Inversions Act of 2015. The proposed legislation was originally introduced in May by Levin and three dozen other Democrats.

Under current law, a corporate inversion will not be respected for U.S. tax purposes if at least 80% of the new combined corporation (incorporated outside the U.S.) is owned by historic shareholders of the U.S. corporation (or, in the case of a partnership, interest owners of the partnership). Alternatively, if at least 60% (but less than 80%) of the combined foreign corporation is owned by historic shareholders of the U.S. corporation, the inversion itself will be respected, but the expatriated entity will be subject to certain adverse tax consequences (i.e., inversion gain). However, these anti-inversion rules do not apply if the expanded affiliated group that includes the combined corporation has substantial business activities in the foreign country where it is incorporated.

The proposed legislation includes the following amendments to Code Sec. 7874:

(1) It would treat a combined foreign corporation as a domestic corporation if the historic shareholders of the U.S. corporation own more than 50% of the combined foreign corporation.

(2) It would treat a combined foreign corporation as a domestic corporation if the affiliated group that includes the combined foreign corporation is managed and controlled in the U.S. and engages in significant domestic business activities in the U.S., regardless of the percentage ownership in the new combined foreign corporation.

(3) It would repeal the 60% to 80% ownership test as well as the inversion gain applicable where there is 60% to 80% ownership.

(4) It would maintain the foreign substantial business exception under Code Sec. 7874, by exempting the affiliated group if the combined foreign corporation has substantial business activities in the foreign country where the combined foreign corporation is incorporated.

Comments from the sponsors. The sponsors of the proposed legislation made a number of comments concerning the proposed legislation. Senator Reed stated as follows:

Congress needs to close the inversion loophole to protect American taxpayers and businesses that pay their fair share for our national defense, our infrastructure, and the education of our workforce. Our bill would help put a stop to the corporate shell game that allows some companies to shift their address abroad for tax purposes while remaining in the U.S. and increasing the tax burden to American taxpayers. Middle-class families and small Main Street businesses don't have that option when it comes to paying taxes.

Large multinational corporations are exploiting the current system and this is a pragmatic, sensible solution to put a stop to the inversion trend. If Congress fails to act quickly on inversions it could seriously erode the corporate tax base and make improving the tax code that much harder.

Checkmark RIA observation: Of course, the proposed legislation must make its way through a Republican controlled Congress.

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What's new on Form 1040 for tax year 2014—Part I

2015-01-22T06:03:00.002-08:00

FORM 1040—NEW HEALTH-CARE-RELATED FORMS

Form 8965. Beginning in 2014, taxpayers must have health care coverage, have a health coverage exemption, or make a shared responsibility payment with their tax return. Form 8965 (Health Coverage Exemptions) is used to report a coverage exemption granted by the Marketplace (also called the “Exchange”) or to claim an IRS-granted coverage exemption on the tax return.

Form 1095-A. If the taxpayer, his spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace, he should receive Form(s) 1095-A (Health Insurance Marketplace Statement). This Form provides information needed to complete Form 8962 (Premium Tax Credit (PTC)), see below.

Form 8962. A taxpayer must complete Form 8962 and file it with his tax return if he received premium assistance through advance credit payments (whether or not the taxpayer is otherwise required to file a tax return) or if the taxpayer wants to claim the premium tax credit (PTC) when he files his return. Form 8962 is used to figure the amount of the taxpayer's PTC and reconcile it with any advance payment of the premium tax credit (APTC). See also the entry below for Line 46.

FORM 1040—U.S. INDIVIDUAL INCOME TAX RETURN—OTHER

GROSS INCOME

Adoption exclusion. For 2014, the maximum exclusion for employer-provided adoption assistance is $12,190 per eligible child.

Exclusion for Medicaid waiver payments. An individual care provider who received certain payments under a Medicaid waiver program for caring for someone who lives in the taxpayer's home with him may be able to exclude the payments from income.

ADJUSTED GROSS INCOME

Line 26. Moving expenses. The 2014 standard mileage rate for moving expenses is 23.5¢ per mile.

Line 32. IRA deduction. In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to the lesser of: (1) a statutory dollar limit, or (2) 100% of the compensation that's includible in his gross income for that year. For 2014, the statutory dollar limit is $5,500, plus an additional $1,000 for those age 50 or older. If the individual (or his spouse) is an active plan participant, the deduction phases out over a specified dollar range of modified AGI (MAGI). For 2014, a taxpayer may be able to take an IRA deduction if he was covered by a retirement plan and his 2014 MAGI is less than $70,000 ($116,000 if married filing jointly or qualifying widow(er)). If the taxpayer's spouse was covered by a retirement plan, but the taxpayer was not, he may be able to take an IRA deduction if his 2014 MAGI is less than $191,000.

TAX AND CREDITS

Line 40. Itemized deductions or standard deduction. For 2014, the standard deduction is $6,200 for single filers and for married persons filing separately, $12,400 for joint filers and qualifying widow(er)s, and $9,100 for heads of household.

Line 42. Exemptions. The amount for each exemption for 2014 is $3,950. Exemptions are reduced for taxpayers with adjusted gross incomes in excess of the “applicable amount” ($305,050 for joint filers or a surviving spouse, $279,650 for a head of household, $254,200 for a single individual who isn't a surviving spouse, and $152,525 for marrieds filing separately).

Line 45. Alternative minimum tax. Under Code Sec. 55(d), the AMT exemption amount for 2014 is $52,800 ($82,100 if married filing jointly or a qualifying widow(er); $41,050 if married filing separately).

IRS has added a worksheet to the instructions for line 45. A taxpayer who is not sure whether he needs to complete Form 6251, Alternative Minimum Tax – Individuals, can use this worksheet to see whether he should complete it.

Line 46. Excess advance premium tax credit repayment. The premium tax credit helps pay premiums for health insurance purchased from the Health Insurance Marketplace. If advance payments for this credit were made for the taxpayer, his spouse, or his dependent, the taxpayer must complete Form 8962. If the advance premium credits were more than the taxpayer can claim, the taxpayer must enter the amount, if any, from Form 8962, line 29.

Line 54. Other credits. For 2014, the maximum adoption credit is $13,190 per eligible child for both non-special needs adoptions and special needs adoptions.

OTHER TAXES

Line 57. Self-employment tax. Maximum amount of self-employment income subject to FICA tax is $117,000; no ceiling on Medicare.

An individual may use the farm optional method only if (a) his gross farm income was not more than $7,200 or (b) his net farm profits were less than $5,198. Using this method, farm self-employment earnings equals the smaller of (1) two-thirds of gross farm income, or (2) $4,800.

An individual may use the nonfarm optional method only if (a) his net nonfarm profits were less than $5,198 and also less than 72.189% of his gross nonfarm income and (b) he had net earnings from self-employment of at least $400 in 2 of the prior 3 years. Individuals may compute their self-employment earnings as the smaller of two-thirds of gross nonfarm income or $4,800

A self-employed individual with both farm and nonfarm incomes is allowed to use both optional computation methods if the farm income qualifies for the farm optional method and the nonfarm income qualifies for the nonfarm optional method. If both optional methods are used to compute net earnings from self-employment, the maximum combined total net earnings from self-employment for any tax year can't be more than $4,800.

Line 61. Health care: individual responsibility. A taxpayer who had qualifying health care coverage (called minimum essential coverage) for every month of 2014 for himself, spouse (if filing jointly), and anyone the taxpayer could or did claim as a dependent, checks the box on this line and leave the entry space blank.

Line 62. Additional Medicare tax. IRS has issued final regs on the additional 0.9% Medicare tax on employee compensation and self-employment income above a threshold amount received in tax years beginning after Dec. 31, 2012. For most individuals, many provisions of the regs effectively first apply on Jan. 1, 2014 (the technical effective date is geared to calendar quarters beginning after Nov. 29, 2013 or certain actions taken on or after that date). The tax is calculated on Form 8959 (Additional Medicare Tax).

Line 62. 3.8% surtax on unearned income. IRS issued final and proposed regs on the new 3.8% surtax on net investment income (NII) that first went into effect in 2013. The surtax is 3.8% of the lesser of: (1) NII, or (2) the excess of MAGI over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). The voluminous final regs clarify many aspects of this new tax and are generally effective for tax years beginning after 2013. They explain, among other items, how NII is calculated, the individuals subject to or excepted from the tax, and the deductions taken into account in figuring the tax. The proposed regs (upon which taxpayers may rely) provide guidance on the computation of NII with respect to a number of specialized provisions and situations including various payments to partners and former partners. The tax is computed on form 8960 (Net Investment Tax of Individuals, Estates and Trusts).

PAYMENTS

Line 66. Earned income credit (EIC). The maximum credit is higher, and the AGI-based phase-out figures are revised.

Line 68. American Opportunity Credit from Form 8863, line 8. Choosing to include otherwise tax-free scholarships or fellowships (e.g., Pell grants) in the taxpayer's income can increase an education credit and lower the total tax or increase the taxpayer's refund.

Line 69. Net premium tax credit. A taxpayer may be eligible to claim the PTC if he, his spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace. Complete Form 8962 to determine the amount of the premium tax credit, if any.

Line 71. Excess social security and RRTA tax withheld. Maximum Social Security (OASDI) tax for 2014 is $7,254.00 (computed on the first $117,000 of wages) for purposes of credit for excess tax withheld.

If you would like more details about these or any other aspect of the law, please do not hesitate to call.

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2015 Tax Filing Season Opens

2015-01-21T06:17:00.002-08:00

The IRS announced the on-time opening of the 2015 filing season highlighting online services. The announcement also highlights the Affordable Care Act healthcare provisions included in the 2014 individual income tax return. The IRS expects more than four out of five returns will be filed electronically. They will begin accepting and process all tax returns on 1/20/15. The fastest way to obtain a refund is to e-file choosing direct deposit. Similar to last year, the IRS expects to issue 90% of these refunds within 21 days. Due to budget cuts paper returns are expected to take an additional week or more to process, and refunds are expected to be issued in seven weeks or more. Commissioner Koskinen strongly encourages taxpayers to visit www.irs.gov before calling as phone wait times are routinely topping 30 minutes. If you would like more details about these or any other aspect of the law, please do not hesitate to call.

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Switzerland revises rules on tax deductions for expatriates

2015-01-21T06:15:00.002-08:00

Switzerland's Federal Department of Finance (FDF) has announced in a press release that it has revised certain rules concerning expatriates, and that the revised rules will enter into force on Jan. 1, 2016. Following the revision, the definition of an expatriates will be more narrowly defined. Furthermore, the revised rules define the structure of certain expatriate deductions, including housing and other costs.

Background. In 2009, a parliamentary initiative called for the legality of the Expatriates Ordinance to be examined, according to the FDF's press release. A legal opinion from the Federal Office of Justice (FOJ) basically confirmed its constitutionality and legality.

However, the FOJ recommended that the provisions on deductions relating to private school costs and removal costs should be correspondingly stated more precisely during the next legislative revision. Subsequently, the abolition of the deductions was called for in two other parliamentary initiatives. However, the Council of States rejected these initiatives.

The Federal Council also considered these deductions to be justified in principle, but instructed the FDF to examine the prerequisites and procedures for the individual deductions. On the basis of this examination, several clarifications were recommended for the ordinance, and these were widely accepted in the hearing conducted in spring 2014.

On Jan. 16, 2015, the FDF announced that it has revised the Expatriates Ordinance and that the new rules will be in effect on Jan. 1, 2016.

Definition of an expatriate. To be classified as an expatriate under the Expatriates Ordinance, an individual must be a senior employee or a specialist, with special professional qualifications, who is sent to Switzerland temporarily by their non-Swiss employer.

Deductibility of housing and other costs. According to the press release, in the future, expatriates' housing costs will deductible only if a dwelling abroad is permanently maintained for their own use. Furthermore, moving costs are deductible only if they are directly related to the move.

Private school tuition costs are deductible for minors, for children with a foreign mother tongue attending a foreign language private school, provided that public schools do not provide instruction in the child's native language.

Finally, costs relating to food, transportation, and supervision before and after classes are not deductible, according to the FDF press release. If you would like more details about these or any other aspect of the law, please do not hesitate to call.

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Mortgage interest deduction OK'd for beneficial owner of home

2015-01-16T06:09:00.000-08:00

In a summary opinion, the Tax Court has concluded that a taxpayer could claim home mortgage interest deductions for making payments on a mortgage even though it wasn't held in his name, and even though he didn't hold legal title to the underlying property. An oral agreement granting him an interest in the home in return for paying the mortgage and property expenses, coupled by the fact that his name ultimately was added to the legal title, established that he was an equitable owner of the property.

Background. Under Code Sec. 163, a taxpayer is generally allowed a deduction (within dollar limits) for interest paid or accrued on qualified residence interest, which includes interest paid on acquisition debt with respect to any qualifying residence of the taxpayer. A taxpayer may deduct, as home mortgage interest, interest he paid on a mortgage on real estate of which he is the legal or equitable owner, even though he is not directly liable on the bond or note secured by the mortgage. (Reg. § 1.163-1(b))

Courts consider various factors in determining whether the benefits and burdens of ownership have been transferred to a taxpayer. These factors include whether the taxpayer:

. . . has a right to possess the property and to enjoy the use, rents, or profits thereof;

. . . has a duty to maintain the property;

. . . is responsible for insuring the property;

. . . bears the property's risk of loss;

. . . is obligated to pay the property's taxes, assessments, or charges;

. . . has the right to improve the property without the owner's consent; and

. . . has the right to obtain legal title at any time by paying the balance of the purchase price.

It's well settled that state law determines the nature of property rights, such as legal or equitable ownership, while federal law determines the appropriate tax consequences of those rights. Under California law, the owner of legal title to property is presumed to be the owner of full beneficial title as well. This presumption may be rebutted only by clear and convincing proof. One way of overcoming the presumption is by showing that there exists an agreement or understanding between the parties evidencing an intent contrary to that which is reflected in the deed.

Facts. In 2008 Van Phan moved into a house on a three-acre ranch in California to help his mother, who was unable to care for the home. He lived at the property during 2010. During this time his mother was in the process of divorcing his father, who left the property before 2008 and did not live there at all in 2010.

As part of the divorce settlement, Van Phan's mother agreed to pay his father in exchange for his father's interest in the property, and to secure the needed funds, the mortgage loan for the property was refinanced. Because of his financial situation, Van Phan was not able to buy the property. But he did enter into an oral agreement with his mother and his siblings that he would pay the mortgage loan and the property taxes and that these payments would increase his equity interest in the home.

During 2010, the legal title to the home was held by Van Phan's mother, brother, and father, and the mortgage on the home was not held in Van Phan's name. On his 2010 return, Van Phan claimed a $35,880 deduction for home mortgage interest he had paid on the mortgage loan.

Van Phan's sister and sister-in-law refinanced the mortgage loan in 2011, and in 2013 his name was added to the legal title to the property.

In 2013, IRS issued Van Phan a notice of deficiency disallowing his claimed home mortgage interest deduction and imposing the Code Sec. 6662(a) accuracy-related penalty.

Taxpayer victory. The Tax Court found credible Van Phan's testimony that his family had granted him an interest in the property and would allow him to add his name to the title at any time if he paid the property expenses. And, in fact, his name was added to the title in 2013.

Van Phan resided at the property in 2010, consistent with his right to possess and enjoy use of the property. He also took a number of actions consistent with performing his duties, responsibilities, and obligations under the agreement with his family. He made the mortgage payments before, during, and after 2010. He testified credibly that he made the property tax and insurance payments, paid the cable bill, maintained the property, and made improvements to it. As a result of these actions, Van Phan was granted the right to add his name to the legal title to the property. Van Phan also bore a substantial risk of loss because he stood to lose the funds spent to build his equitable interest.

The Tax Court concluded that Van Phan provided clear and convincing evidence that he was an equitable owner of the property in 2010. Thus he was able to take a mortgage interest deduction for the 2010 tax year. If you would like more details about these or any other aspect of the law, please do not hesitate to call.

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Procedure for employers to deal with retroactive increase in excludible transit benefits

2015-01-15T06:16:00.002-08:00

In a Notice, IRS has provided guidance on how employers should handle the retroactive 2014 increase by the Tax Increase Prevention Act of 2014 (TIPA, P.L. 113-295), in the monthly exclusion for employer-provided transit and vanpooling benefits under Code Sec. 132(f)(2)(A), from $130 to $250. IRS clarifies how the increase applies for 2014 and provides a special administrative procedure for employers to use in: (a) filing Form 941 (Employer's Quarterly Federal Tax Return) for the fourth quarter of 2014 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2014; and (b) filing Forms W-2 (Wage and Tax Statement). To read go our blog at

http://www.abataxaccounting.com/blog.php. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

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CFO Services / Interim CFO / Part Time CFO / Virtual CFO Services / AB T...

2015-01-06T19:59:00.001-08:00

Penalty for failure to file S Corporation returns is increased for inflation

2015-01-03T10:22:00.001-08:00

Any S corporation that fails to file a timely return or fails to provide the required information is liable for a monthly penalty equal to $195 times the number of persons who were shareholders in the S corporation during any part of the tax year. No penalty can be assessed if it is shown that the failure is due to reasonable cause. FTC 2d/Fin ¶V-1750; FTC 2d/Fin ¶V-1763.1; USTR ¶66,994.

New Law. Under the 2014 Achieving a Better Life Act (ABLE Act), for any return required to be filed in a calendar year beginning after 2014, the $195 dollar amount (discussed above) will be increased by the dollar amount multiplied by the cost-of-living adjustment determined under Code Sec. 1(f)(3) determined by substituting calendar year 2013 for calendar year 1992 in Code Sec. 1(f)(3)(B), and rounded down to the next multiple of $5. (Code Sec. 6699(e) as amended by 2014 ABLE Act §208(e)DivB)

If you would like more details about this decision or any other aspect of the S corporation law, please do not hesitate to contact.

Amare Berhie, Senior Tax Accountant

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Foreign Account Tax Compliance Act (FATCA) simplified

2015-01-03T04:52:00.002-08:00

International Taxes –After June 30, 2014, in addition to the withholding obligations under chapter 3, U.S. withholding agents must generally withhold 30% on U.S. source fixed or determinable annual or periodic income (FDAP), such as dividends and interest, paid to a foreign financial institution (FFI) or nonfinancial foreign entity (NFFE) unless the agent can reliably associate the payment with valid documentation that establishes that the payment is not subject to withholding (hereafter “FATCA withholding” or “chapter 4 withholding”).

Generally, a payment to an FFI is not subject to FATCA withholding if the FFI (i) enters into an agreement with IRS under which it assumes specific due diligence, reporting and withholding obligations (a participating FFI), (ii) is treated as a deemed-compliant FFI, or (iii) is subject to, and complies with, an intergovernmental agreement. For these purposes, an FFI includes a foreign bank, mutual fund, insurance company, investment company, pension fund, broker dealer and private equity firm.

An NFFE (other than an excepted NFFE) is not subject to FATCA withholding if the NFFE is the beneficial owner of the payment and either doesn't have any substantial (10%) U.S. owners or identifies its substantial U.S. owners to the withholding agent. Excepted NFFEs include publicly traded corporations and their affiliates, and active corporations with less than 50% passive income or assets. The regulations provide additional exceptions and exclusions from the withholding requirements.

Thus, a U.S. withholding agent, or participating FFI that agrees to act as a withholding agent, needs to have a process in place to collect information about FFIs and NFFEs with whom it does business. The agent needs enough information to identify the payee and to determine the payee's FATCA status (e.g., FFI, participating FFI, NFFE, excepted NFFE) in order to determine whether or not it is required to withhold on payments. In order to determine the payee's FATCA status, the withholding agent must rely on certifications, statements and documentation. Presumptions apply in the absence of documentation, and under certain circumstances, the withholding agent is treated as having reason to know information is incorrect.

A withholding agent (including a participating FFI) that is required to withhold with respect to a payment but fails either to withhold, or to deposit any tax withheld, is liable for the amount of tax not withheld and deposited. In addition, every withholding agent must file an income tax return on Form 1042 showing the aggregate amount of payments that are FATCA reportable amounts and must report the tax withheld for the preceding calendar year by the withholding agent. The withholding agent must also file an information return on Form 1042-S to report FATCA reportable amounts paid to a recipient during the preceding calendar year. In addition, financial institutions and withholding agents will be required to report U.S. financial accounts, financial accounts held by passive non-financial foreign entities (NFFEs) with substantial (10%) U.S. owners and financial accounts held by owner-documented FFIs with specified U.S. owners on Form 8966.

Payments on certain obligations outstanding on July 1, 2014 (grandfathered obligations) are exempt from FATCA withholding tax altogether. Payments on certain preexisting obligations held by individuals outstanding on June 30, 2014, or held by entities and issued, opened or executed on or after July 1, 2014 and before Jan. 1, 2015, are exempt from FATCA withholding before Jan 1, 2016. After Jan. 1, 2017, FATCA withholding will apply to gross proceeds (i.e., proceeds from the sale or other disposition of any property of a type that can produce U.S. source FDAP) and foreign passthru payments (definition reserved).

Furthermore, if you have members in your expanded affiliated group that are FFIs or NFFEs, each of these entities must take steps to comply with the FATCA requirements.

The above is a very cursory explanation of extensive and extremely complicated rules. In order to comply with these rules your company will need to develop processes for collecting and analyzing information. Please contact us so that we can help you prepare for the upcoming deadlines.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Change to EU VAT laws affect sellers of digital services starting Jan. 1, 2015.

2014-12-31T14:05:00.000-08:00

Starting on Jan. 1, 2015, all telecommunications, broadcasting and electronic services providers will be subject to value added tax (VAT) by the European Union (EU) member state where the customer belongs, rather than the place where the service provider is located. If the customer is a business, it belongs to the country where it is registered or the country where it has fixed premises receiving the service. On the other hand, if the customer is a consumer, he/she belongs to the country where he/she is registered or has his/her permanent address.

If you would like more details about this or any other aspect of international tax law, please do not hesitate to contact, Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Penalty for failure to file partnership returns is increased for inflation

2014-12-31T12:14:00.002-08:00

Any partnership that fails to file a timely return or fails to provide the information required by Code Sec. 6031 is liable for a monthly penalty equal to $195 times the number of persons who were partners during any part of the tax year, for each month or fraction of a month for which the failure continues. No penalty can be assessed if it is shown that the failure is due to reasonable cause.

New Law. Under the 2014 Achieving a Better Life Act (ABLE Act), for any return required to be filed in a calendar year beginning after 2014, the $195 dollar amount will be increased by the dollar amount multiplied by the cost-of-living adjustment determined under Code Sec. 1(f)(3) determined by substituting calendar year 2013 for calendar year 1992 in Code Sec. 1(f)(3)(B), and rounded down to the next multiple of $5. (Code Sec. 6698(e) as amended by 2014 ABLE Act §208(d)DivB) To view our YouTube video click here http://youtu.be/KfO0_kmz7qc

If you would like more details about this decision or any other aspect of the S corporation law, please do not hesitate to contact.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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IRS targets U.S. tax cheats by summoning records from shipping and financial service providers

2014-12-31T06:55:00.000-08:00

International Taxes – A U.S. District Court has authorized IRS to serve “John Doe” summonses to eight entities in the shipping or financial services industry in order to identify the U.S. tax cheats that used an off-shore service provider (Sovereign Management & Legal Ltd., or simply, Sovereign) to establish, maintain, and/or conceal foreign accounts, assets, and entities. In particular, Federal Express Corporation, FedEx Ground Package System, DHL Express (DHL), and United Parcel Service Inc. (UPS) would be asked to disclose the correspondence records of Sovereign and its U.S. clients. Similarly, Western Union Financial Services Inc., the Federal Reserve Bank of New York (FRBNY), Clearing House Payments Company LLC (Clearing House), and HSBC Bank USA National Association (HSBC USA) would be asked to furnish banking information and/or fund transfer records of Sovereign and its U.S. clients.

Background on the IRS investigation. As a result of a Drug Enforcement Administration (DEA) investigation of online narcotics trafficking, IRS learned that Sovereign was involved in assisting U.S. clients evade their taxes.

According to the DOJ press release, Sovereign offers a variety of services to its clients, including, for example, the formation and administration of anonymous corporations and foundations in Panama and offshore entities, the maintenance and operation of offshore structures, mail forwarding, the availability of virtual offices, re-invoicing, and the provision of professional managers, who appoint themselves directors of the client's entity while the client retains ultimate control over the assets.

During the IRS investigation, one taxpayer made a voluntary disclosure of tax non-compliance to avoid prosecution and disclosed that Sovereign helped the taxpayer form an anonymous corporation in Panama to allow the taxpayer to control certain assets without appearing to own them. As part of the investigation, IRS further determined that Sovereign:

(1) Used Federal Express, UPS and DHL to correspond with its U.S. clients;

(2) Used Western Union to transmit funds to and from clients in the U.S.;

(3) Used wire services operated by the FRBNY and Clearing House for financial transactions between Sovereign and its clients in the U.S.; and

(4) Maintained correspondent bank accounts in Panama and Hong Kong through HSBC USA for financial transactions between Sovereign and its clients in the U.S.

The John Doe summonses. As background, IRS uses “John Doe” summonses to target individuals suspected of tax fraud, but whose identifies are not readily available and thus not specifically identified.

The John Doe summonses direct the eight entities to produce records that will assist the IRS in identifying U.S. taxpayers who, from 2005 through 2013, used Sovereign's services to establish, maintain, operate or control:

(1) Any foreign financial account or other assets;

(2) Any foreign corporation, company, trust, foundation or other legal entity; or

(3) Any foreign or domestic financial account in the name of such foreign entity.

Through this process, IRS expects to identify Sovereign's U.S. clients who may be avoiding or evading taxes.

U.S. continues to target undeclared foreign assets. In a DOJ press release, Deputy Assistant Attorney General Hubbert stated that “[t]his summons action is but the latest step in the Department of Justice's efforts to identify and hold fully accountable U.S. taxpayers who have sidestepped their tax obligations by hiding money overseas.” “The world is getting smaller for tax cheats, and we will work with our partners at the IRS to vigorously enforce the nation's tax laws against those who seek to avoid paying their fair share.”

“This action demonstrates our Office's commitment to pursuing tax evaders who use offshore service providers to avoid their U.S. tax obligations,” said U.S. Attorney Bharara. “By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who conceal their foreign assets in order to dodge their legal responsibility to pay taxes.”

“The IRS remains committed to continuing our priority efforts to stop offshore tax evasion wherever it is found,” said Commissioner Koskinen. “We have made tremendous progress in this area, working cooperatively with other agencies. The John Doe summons remains an important tool in our efforts to find international tax evaders and those who help them.”

“The DEA has a longstanding commitment to sharing information with our federal, state, and local partners,” said Special Agent in Charge Anthony D. Williams. “Issuance of these summonses exemplifies how outstanding investigative results can be derived from a culture of interagency cooperation.”

The case is being handled by the U.S. Attorney's Office for the Southern District of New York Tax and Bankruptcy Unit.

We're here to help! For no obligation free consultation contact us today!

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Computer software costs

2014-12-24T12:17:00.000-08:00

Do you buy or lease computer software for use in your business? Do you develop computer software for use in your business, or for sale or lease to others? Then you should be aware of the complex rules that apply to determine the tax treatment of the expenses of buying, leasing or developing computer software.

Purchased software. Generally, the way to account for the cost of purchased software is to amortize (ratably deduct) the cost over the three-year period beginning with the month in which you placed the software in service.

However, software that (1) is readily available for purchase by the public, (2) is subject to a nonexclusive license and (3) hasn't been substantially modified (non-customized software), and (4) is placed in service in tax years beginning before 2014 qualifies as “section 179 property,” and is thus eligible for the Code Sec. 179 elective expensing deduction that is generally available only for machinery and equipment. For tax years that begin in 2012 or 2013, the deduction is limited to $500,000. The limit is reduced by the cost of other section 179 property for which the election is made. Also, the election is phased out for taxpayers placing more than $2,000,000 of section 179 property into service during tax years beginning in 2012 or 2013. Non-customized software that is acquired and placed in service before Jan. 1, 2014 is also eligible for a 50%-of-cost depreciation deduction in the year that the software was placed in service (bonus depreciation). The bonus depreciation for an item of software is reduced to take into account any portion of the item's cost for which a Code Sec. 179 election is made, and regular depreciation deductions are reduced to take into account both the bonus depreciation and any Code Sec. 179 election.

There are two other exceptions to the three-year amortization rule. One exception requires that, if you buy the software as part of a hardware purchase in which the price of the software isn't separately stated, you must treat the cost of the software as part of the cost of the hardware. Thus, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. The other exception requires that if you buy the software as part of your purchase of all or a substantial part of a business, the software must be amortized over 15 years (unless the software is non-customized software).

Leased software. You must deduct the amounts you pay to rent leased software in the tax year in which paid, if you are a cash-method taxpayer, or the tax year for which the rentals are accrued, if you are an accrual-method taxpayer. Generally, however, deductions aren't permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

Software you develop. Costs for developing computer software may be accounted for using any of the following methods:

(1) amortizing the costs over a three-year period beginning with the month that the software was placed in service;

(2) deducting the costs in the tax year in which the costs are paid (if you are a cash-method taxpayer) or in the tax year in which the costs are accrued (if you are an accrual-method taxpayer), but only if all of your costs of developing the software are deducted this way;

(3) amortizing the costs over a five-year period beginning with the completion of the development, but only if all of your costs of developing software are amortized this way;

(4) amortizing the costs over a period longer than five years, but only if the costs are Code Sec. 174 “research or experimental expenditures.”

You should also be aware that if following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change by following prescribed procedures.

Please give us a call if you have any questions. We would be pleased to assist you in applying the tax rules for treating computer software costs in the way that is most advantageous for you.

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Year-end gifts to family members

2014-12-24T07:52:00.002-08:00

The first $14,000 of gifts ($28,000 for married couples who split gifts) made by a donor to each donee in calendar year 2014 is excluded from the amount of the donor's taxable gifts. (The exclusion remains at $14,000 for calendar year 2015.) These exclusions can save both transfer tax for the donor and family income taxes. A gift that qualifies for the exclusion is free of gift tax. Estate tax can be saved because both the value of the gift on the date of transfer and post-transfer appreciation (if any) in the value of the gift won't be included in the donor's estate. Family income tax savings can be realized where income-earning property is given to family members in lower income tax brackets.

Planners should remind individual clients that they have to act no later than Dec. 31 to take complete advantage of their 2014 annual exclusions. Unused annual exclusions can't be carried over and are forever lost.

A gift to a noncharitable donee that is made by check is complete on the earlier of:

... the date on which the donor has so parted with “dominion and control” under local law as to leave in the donor no power to change its disposition, or

... the date on which the donee deposits the check (or cashes the check against available funds of the donee) or presents the check for payment, if it is established that:

(1) the check was paid by the drawee bank when first presented to the drawee bank for payment;

(2) the donor was alive when the check was paid by the drawee bank;

(3) the donor intended to make a gift;

(4) delivery of the check by the donor was unconditional; and

(5) the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.

AB Tax Accounting Recommendation: If a gift is made by check near the end of 2014 and the donor wants to take advantage of the exclusion this year, the donee should be urged to deposit the check before year-end, so that there's no doubt as to when the gift was made

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don't miss out on any resuscitated tax saving opportunities.

We're here to help! For no obligation free consultation contact us today!

AB Tax Accounting

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Minnesota Supreme Court Upholds Tax on Sale of Partially Customized Software

2014-12-23T09:34:00.000-08:00

Sales tax generally applies to the sale of “prewritten” or “canned” software. However, the majority of states that tax prewritten software do not tax the customization of prewritten software. Application of this distinction between prewritten and customized software can create considerable difficulties for taxpayers and taxing authorities (such as determining the degree of alteration required to be considered customized software), and it continues to be subject to controversy.

The Minnesota Supreme Court recently wrestled with some of these issues in LumiData, Inc. v. Commissioner of Revenue, No. A14-0254 (Sept. 14, 2014). Minnesota law provides that customized portions of prewritten computer software are exempt only if the taxpayer separately states its customization charges in customer invoices. LumiData significantly customized its software for each of its customers; however, it failed to separately state customization charges in customer invoices. Accordingly, the court held that the taxpayer could not qualify for the exemption.

The court also rejected LumiData's argument that the sales should have been treated “in substance” as a sale of customized software, because the company failed to produce sufficient credible evidence to support its position. The court added that after the company's initial customization for a customer, the altered software then became incorporated into subsequent versions of the software, making each subsequent version more like prewritten software than customized software.

This case not only illustrates some of the difficulties inherent in applying the distinction between prewritten and customized software, but it also reiterates the importance of providing thorough and credible documentary evidence in support of any claim for a tax exemption.

Background.

LumiData provides software that organizes and analyzes sales information at retailers' cash registers. For instance, the software can help determine the effectiveness of a particular sales promotion or track the volume of sales during certain time periods.

LumiData significantly customizes the software for each customer's particular needs. However, each new version of the software incorporates the functionality of all prior versions of the software.

Between 2005 and 2008, LumiData did not pay Minnesota sales tax on its software revenue. The Minnesota Commissioner of Revenue audited the company and concluded that its software sales were subject to sales tax as prewritten computer software under Minn. Stat. § 297A.61(17) because the company did not separately state customization charges on customer invoices.

The tax court proceedings.

On appeal to the tax court, LumiData argued that it only sold customized software and presented testimony that many of its customers refused to purchase the software without customization. The company also submitted a history of changes to the software and a checklist of customization requirements for its customers. LumiData also argued that its software should be treated as customized software in a “substance-over-form” argument because the cost of enhancement to the software often exceeded the price it actually charged for the software. Finally, the company asserted that it had reasonable cause for failing to pay sales tax because it allegedly relied on advice from its accountant that the software sales were tax exempt.

The tax court rejected all of the company's arguments and found that the software was taxable prewritten computer software because the software was a “substantial preexisting platform,” rather than software “designed and developed to the specifications of each customer.”

The tax court also rejected the company's substance-over-form argument, reasoning that its sales were structured as “license agreements” rather than “customization agreements.” The tax court also disregarded testimony that the cost of customization would exceed the amount the taxpayer charged its customers because the testimony in this regard was not sufficiently detailed and the company had not submitted any documentation to support the testimony.

Finally, the tax court rejected the taxpayer's argument that it had reasonable cause for failing to file returns because the taxpayer “never formally sought its accountant's opinion” as to whether the software sales were taxable, and the accountant “never reviewed the licensing agreements.” The taxpayer appealed.

The Supreme Court focuses on failure to separately state charges.

The Minnesota Supreme Court began its legal analysis by pointing out that all “gross receipts are presumed subject to tax, and the burden of proving that a sale is not subject to tax is on the seller.” The court noted that sales of prewritten software are subject to sales tax under Minnesota law (Minn. Stat. § 297.61(3)(f)), but that portions of prewritten software are only exempt from sales tax based on customization of the software if there is a “reasonable, separately stated charge for such modification or enhancement.” Minn. Stat. § 297A.61(17).

Applying the statute to LumiData's sales, the court held that the sales were sales of partially prewritten and partially customized software. The court emphasized that although the software was initially customized significantly for each purchaser, new versions of the software incorporated those customizations. Although not entirely clear, the court apparently concluded that by incorporating customizations into subsequent software versions, the company effectively converted those customizations into prewritten software.

The court provided no legal support for its reasoning on this point. This ruling seems problematic. If applied broadly, it would allow exemptions only for initial software customizations, and would then effectively convert that customized portion of the software into prewritten software.

Nonetheless, the court held that LumiData could not qualify for the exemption in any event because it failed to separately state customization charges in customer invoices. The Supreme Court emphasized the tax court's finding that “none of the licenses in the record contained a separate charge for customization,” and concluded that the failure to separately state customization charges meant that the sales were taxable sales of prewritten software.

The Supreme Court also rejected the customization checklists as evidence regarding the scope of customization because there was “no documentary evidence whatsoever to verify the magnitude of its alleged custom programming costs,” such as “time records for development work” or the “hourly rate for software development or customization work.”

The Court's decision also reiterates the axiom that where there is any doubt, exemptions are construed against the taxpayer and in favor of the taxing authorities. As in this case, a taxpayer's failure to produce strong documentary evidence in support of its claim will almost certainly result in a rejection of its exemption claim on appeal.

Substance-over-form argument rejected on lack of credible evidence.

The Minnesota Supreme Court also upheld the tax court's rejection of the company's “substance-over-form” argument. Although it acknowledged that, under “proper circumstances,” the court would “disregard a transaction's form in favor of its economic substance,” it declined to apply the principle here due to lack of documentary evidence presented to the tax court.

LumiData argued that its software sales should be treated in substance as sales of customized software based on oral testimony from its employees that “the cost of customizing [the software] exceeded the software's sales price.” However, the tax court found that the evidence was “entitled to little if any weight,” and the Minnesota Supreme Court upheld that finding because the employee testimony was “general, conclusory, and not corroborated by documentary evidence.” The court deferred to the tax court on this point because the tax court “is in the best position to evaluate the credibility of witnesses.”

Near the end of its substance-over-form analysis, the court seemed to cast doubt on its willingness to apply a substance-over-form analysis in statutory interpretation cases. The court refused to look beyond the statutory requirement to separately state customization charges, stating: “We will not ignore the plain language of the law under the guise of pursuing its spirit.”

This suggests that the court may not be willing in reality to apply a substance-over-form analysis in statutory interpretation cases, except perhaps in very rare circumstances. The court did not attempt to reconcile this statement with its earlier statement that it would apply the substance-over-form doctrine in appropriate circumstances. Nor did the court indicate when it would be appropriate to apply such an analysis.

Court finds there can be no reliance on advice neither sought nor obtained.

Finally, the court also deferred to the tax court's findings of fact regarding whether LumiData had “reasonable cause” to believe that it was not required to file tax returns or to believe that no tax was due. If the company had been able to establish reasonable cause, no penalty would have been due. Minn. Stat. § 270C.34(1).

LumiData argued that it had reasonably relied on its accountant's advice that the sales of its software were not subject to sales tax. However, the tax court found “no evidence” that the company actually sought an opinion from its accountant. In fact, the accountant specifically testified that, “had she known that [the company] was not filing tax returns, she would have advised it to do so.”

If you would like more details about this decision or any other aspect of the new law, please do not hesitate to call.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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AB Tax Accounting Special Analysis: Individual Tax Breaks Retroactively Extended by the Tax Increase Prevention Act of 2014

2014-12-19T13:04:00.000-08:00

Virtual CFO Services - The Act extends a host of individual tax provisions, including the above-the-line deductions for higher education expenses and educators' expenses, deductions for state and local sales tax and mortgage insurance premiums, the exclusion for discharged home mortgage debt, parity in excludible transportation benefits, and the allowance of tax-free charitable transfers from a taxpayer's IRA.

Above-the-Line Deduction for Educator Expenses Extended

Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom.

Under pre-Act law, the educator expense deduction didn't apply for expenses paid or incurred in tax years after 2013.

New law. TIPA retroactively extends the educator expense deduction one year so that it applies to expenses paid or incurred in tax years through 2014

Exclusion for Discharged Home Mortgage Debt Extended

Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income.

Under pre-Act law, this exclusion didn't apply to any debt discharged after Dec. 31, 2013.

New law. TIPA extends this exclusion for one year so that it applies to home mortgage debt discharged before Jan. 1, 2015.

Increase in Excludible Employer-Provided Mass Transit and Parking Benefits Extended

Under pre-Act law, for 2014, an employee may exclude from gross income up to: (1) $250 per month for qualified parking, and (2) $130 a month for transit passes and commuter transportation in a commuter highway vehicle (including van pools). However, notwithstanding the applicable statutory limits on the exclusion of qualified transportation fringes (as adjusted for inflation), for any month beginning before Jan. 1, 2014, a parity provision required that the monthly dollar limitation for transit passes and transportation in a commuter highway vehicle had to be applied as if it were the same as the dollar limitation for that month for employer-provided parking ($245 for 2013).

New law. TIPA extends for one year the parity provision, through 2014. Thus, for 2014, it increases the monthly exclusion for employer-provided transit and vanpool benefits to $250—the same as for the exclusion for employer-provided parking benefits.

Mortgage Insurance Premiums as Deductible Qualified Residence Interest Extended

Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI). The amount allowable as a deduction is phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeds $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction isn't allowed if the taxpayer's AGI exceeds $110,000 ($55,000 in the case of married individual filing a separate return).

Under pre-Act law, this provision only applied to premiums paid or accrued before Jan. 1, 2014 (and not properly allocable to any period after that date).

New law. TIPA retroactively extends this provision for one year so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2015 (and not properly allocable to any period after 2014.

State and Local Sales Tax Deduction Extended

Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes.

Under pre-Act law, this choice was unavailable for tax years beginning after Dec. 31, 2013.

New law. TIPA retroactively extends this provision for one year so that itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years beginning before Jan. 1, 2015.

Liberalized Rules for Qualified Conservation Contributions Extended

A taxpayer's aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation.

Under pre-Act law, these rules didn't apply to any contribution made in a tax year beginning after Dec. 31, 2013, and contributions made thereafter were to be subject to the otherwise applicable 30% limit for capital gain property (50% limit for qualified farmers and ranchers).

New law. TIPA retroactively extends for one year the 50% and 100% limitations on qualified conservation contributions of appreciated real property so that they apply to contributions made in tax years beginning before Jan. 1, 2015.

Above-the-Line Deduction for Higher Education Expenses Extended

Eligible individuals can deduct higher education expenses—i.e., “qualified tuition and related expenses” of the taxpayer, his spouse, or dependents—as an adjustment to gross income to arrive at adjusted gross income. The maximum deduction is $4,000 for an individual whose AGI for the tax year doesn't exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for individuals who don't meet the above AGI limit, but whose adjusted gross income doesn't exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose adjusted gross income exceeds the relevant adjusted gross income limitations, for a married individual who does not file a joint return, or for an individual for whom a personal exemption deduction may be claimed by another taxpayer for the tax year.

Under pre-Act law, this deduction wasn't available for tax years beginning after Dec. 31, 2013.

New law. TIPA retroactively extends the qualified tuition deduction for one year so that it can be claimed for tax years beginning before Jan. 1, 2015.

Nontaxable IRA Transfers to Eligible Charities Extended

Taxpayers who are age 701/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. These distributions aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return.

Under pre-Act law, these rules didn't apply to distributions made in tax years beginning after Dec. 31, 2013.

New law. TIPA retroactively extends this provision for one year so that it's available for charitable IRA transfers made in tax years beginning before Jan. 1, 2015.

AB Tax Accounting observation: Taxpayers who haven't yet taken their required minimum distribution (RMD) for 2014 still have time to make the most of this retroactively extended tax break. If any amount distributed directly from a taxpayer's IRA to an eligible charity during 2014 at least equals the amount of his RMD for the tax year, the taxpayer will not be required to take any other 2014 distribution from the IRA.

If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Capital Gain Treatment for Sale of Right to Build

2014-12-19T09:18:00.002-08:00

CFO Services-The 11th Circuit Court of Appeals, reversing the Tax Court, determined the $5.75 million profit from the sale of a position in a real estate development lawsuit was capital gain instead of ordinary income. The 11th Circuit looked to the type and nature of the underlying right or property assigned or transferred in, determining the taxpayer did not have a future right to income that he already earned, but that he sold his right to finish the project and earn income. The court noted that selling a right to earn future undetermined income, as opposed to selling a right to earned income, is a critical feature of a capital asset. However, the 11th Circuit agreed with the Tax Court's finding that legal fees, supported only with a letter from the attorney indicating that certain fees were paid, were not deductible. In addition, they upheld the Tax Court's denial of a deduction for $600,000 for what was determined to be a substituted obligation for cancelled promissory notes.

If you would like more details about this decision or any other aspect of the new law, please do not hesitate to call.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Establishment of ABLE accounts in the 2014 ABLE Act

2014-12-18T20:51:00.000-08:00

Virtual CFO Services -The tax laws have long encouraged Americans to save for college for their kids and to save for their retirement, but for families of those with disabilities there was no tax-advantaged way for them to save for those individuals. The recently enacted “Achieving a Better Life Experience (ABLE) Act of 2014” contains an important new provision which changes that. Allow me to take a few minutes to explain this exciting and long overdue change.

The new law, which applies for tax years beginning after December 31, 2014, allows for the creation of ABLE accounts, which are tax-free accounts that can be used to save for disability-related expenses.

Here are the key features of ABLE accounts:

ABLE accounts can be created by individuals to support themselves or by families to support their dependents.
There is no federal taxation on funds held in an ABLE account. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren't deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses.
No federal tax benefits are provided for those who contribute to an ABLE account.
Money in an ABLE account can be withdrawn tax free if the money is used for disability-related expenses. Expenses qualify as disability related if they are for the benefit of an individual with a disability and are related to the disability. They include education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; and other IRS-approved expenses.
Distributions used for nonqualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on that portion.
Each disabled person is limited to one ABLE account and total annual contributions by all individuals to any one ABLE account can be made up to the gift tax exclusion amount ($14,000 in 2014 and 2015, which is adjusted annually for inflation). Aggregate contributions are subject to the State limit for education-related Section 529 accounts.
ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual.
Eligible individuals must be blind or disabled, and must have become so before turning 26, and must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. An individual doesn't need to receive SSI or SSDI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs. Alternatively, an individual can become eligible if a disability certificate for the individual is filed with IRS.
ABLE accounts have no impact on Medicaid or SSI, although SSI payments are suspended while a beneficiary maintains excess resources in an ABLE account. More specifically, the first $100,000 in ABLE account balances is exempted from being counted toward the SSI program's $2,000 individual resource limit. However, account distributions for housing expenses are counted as income for SSI purposes. Assuming the individual has no other assets, if the balance of an individual's ABLE account exceeds $102,000, the individual is suspended, but not terminated, from eligibility for SSI benefits but remains eligible for Medicaid.
Upon the death of an eligible individual, any amounts remaining in the account (after Medicaid reimbursements) will go to the deceased's estate or to a designated beneficiary and will be subject to income tax on investment earnings, but not to a penalty.
Contributions to an ABLE account by a parent or grandparent of a designated beneficiary are protected in bankruptcy. In order to be protected, ABLE account contributions must be made more than 365 days prior to the bankruptcy filing.
On a related note, the new legislation also changes the rules regarding investment direction for Section 529 qualified tuition programs, permitting investment direction by an account contributor or designated beneficiary up to two times per year. Under prior law, no investment direction was allowed, although Treasury guidance allowed such direction up to once per year.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

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(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

Energy-related tax breaks extended in the 2014 Tax Increase Prevention Act

2014-12-18T14:47:00.002-08:00

Virtual CFO Services - 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 retroactively extends the tax breaks, most of which expired at the end of 2013, through 2014, allowing businesses and individuals to claim them on their 2014 returns.

The list of extended provisions includes a host of energy-related tax breaks of importance to businesses and individuals. I'm writing to give you an overview of the key tax breaks that were extended by the new law. Please read our Complete Analysis or call our office for details of how the new changes may affect you or your business.

The energy provisions which are extended through 2014 include:

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.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI

info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

IRA Year- End Reminders

2014-12-18T08:23:00.004-08:00

Tax Services - Whether you are still working or retired, you should periodically review your IRAs. Here are few things to remember.

Contribution limits

If you’re still working, review the 2014 IRA contribution and deduction limits to make sure you are taking full advantage of the opportunity to save for your retirement. You can make 2014 IRA contributions until April 15, 2015.

Excess contributions

If you exceed the 2014 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account.

Required minimum distributions

If you are age 70½ or older this year, you must take a 2014 required minimum distribution by December 31, 2014 (by April 1, 2015, if you turned 70½ in 2014). You can calculate the amount of your IRA required minimum distribution by using our Worksheets. You must calculate the required minimum distribution separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs. Remember that you face a 50% excise tax on any required minimum distribution that you fail to take on time.

AB Tax Accounting

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Individual extenders in the 2014 Tax Increase Prevention Act

2014-12-18T07:30:00.003-08:00

Income Tax Service For Individuals - Congress has once again extended the “extenders,” 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. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2013, but now, in the recently enacted Tax Increase Prevention Act of 2014, the extenders have been revived and extended once again. The package generally renews the tax breaks for one year through the end of 2014, allowing businesses and individuals to claim them on their 2014 returns. The list of extended provisions includes several important tax breaks for individuals. I'm writing to give you an overview of these key tax breaks that were extended by the new law. Please call our office for details of how the new changes may affect you.

The extended provisions include:

... 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 70½ or older.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

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info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

Year-End Tax-Planning Moves for Businesses & Business Owners

2014-12-18T06:55:00.001-08:00

Businesses should consider buying machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby securing a half-year's worth of depreciation deductions for the first ownership year.

Although the business property expensing option is greatly reduced in 2014 (unless legislation enhances this option for 2014), consider making expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.

Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit-of-property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there is no AFS, the cost of a unit of property can't exceed $500. Where the UNICAP rules aren't an issue, purchase such qualifying items before the end of 2014.

A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.

A corporation should consider deferring income until next year if doing so will preserve the corporation s qualification for the small corporation alternative minimum tax (AMT) exemption for 2014. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income.

If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.

To reduce 2014 taxable income, consider deferring a debt-cancellation event until 2015.

To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.

If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

Please give us a call if you have any questions. We would be pleased to assist you in applying the tax rules for treating computer software costs in the way that is most advantageous for you.

AB Tax Accounting

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info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

Business extenders in the 2014 Tax Increase Prevention Act

2014-12-17T21:31:00.003-08:00

Income Tax Service For Small Businesses - 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.

I'm writing to give you an overview of the key tax breaks affecting businesses that were extended by the new law. Please call our office for details of how the new changes may affect you or your business.

The extended business credits and special depreciation and expensing rules include:

... 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 bonds;

... 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;

... 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 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.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

http://youtu.be/EYJdQtbPZAI

info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396