Tax Alerts. IRS Raises Tangible Property Expensing Threshold to $2,500. December 2015

Transcription

1 Tax Alerts December 2015 IRS Raises Tangible Property Expensing Threshold to $2,500 On September 17, 2013, the Treasury Department and the IRS issued final regulations to provide guidance on the amounts paid to acquire, produce, or improve tangible property ( final tangible property regulations ). The final tangible property regulations are applicable to taxable years beginning on or after January 1, In addition to clarifying the requirements under Internal Revenue Code ("IRC") Sections 162(a) and 263(a), the tangible property regulations also include several simplifying provisions that are elective and prospective in application, and are intended to ease taxpayers' compliance with the regulations and reduce administrative burden. For example, Regulation ("Reg.") Section 1.263(a)-1(f) provides a de minimis safe harbor election that permits a taxpayer to not capitalize certain amounts paid for tangible property that it acquires or produces during the taxable year, provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations. A taxpayer without an applicable financial statement ("AFS), as defined in Reg. Section 1.263(a)-1(f)(4), may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property subject to the de minimis safe harbor does not exceed $500 per invoice (or per item as substantiated by the invoice). In contrast, a taxpayer with an AFS may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property does not exceed $5,000 and the taxpayer treats the amount paid as an expense on its AFS in accordance with its written accounting procedures. A larger safe harbor limitation is reasonable for a taxpayer with an AFS because an AFS provides independent assurance that the taxpayer's de minimis policies are consistent with the requirements of generally accepted accounting principles ( GAAP ) and do not materially distort the taxpayer's financial statement income. After the final tangible property regulations were issued, the Treasury Department and the IRS received more than 150 comment letters suggesting an increase in the amount of the de minimis safe harbor limit for taxpayers without an AFS. Generally, commenters wrote that the $500 limitation was too low to effectively reduce the administrative burden of complying with the capitalization requirement for small business taxpayers that frequently purchase tangible property in their trades and businesses. Commenters noted that the cost of many commonly expensed items (for example, tablet-style personal computers, smart phones, and machinery and equipment parts) typically surpass the current $500 per item or invoice threshold. Commenters also stated that the $500 threshold does not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial. Commenters noted that without an increase in the de minimis safe harbor limit for taxpayers without an AFS, a capitalization threshold in excess of $500 can only be substantiated by establishing that 1

2 IRS Raises Tangible Property Expensing Threshold to $2,500 continued) a taxpayer's policy results in the clear reflection of income for federal income tax purposes, resulting in additional burden and uncertainty for taxpayers. Finally, many commenters expressed concern regarding the disparate treatment of taxpayers with an AFS compared to those without an AFS under the safe harbor requirements, stating that obtaining an AFS is cost prohibitive for many small businesses and does not adequately justify the substantially lower de minimis ceiling for these taxpayers. Having considered taxpayers' comments, the goal of the final tangible property regulations to reduce administrative burden, and the concern that taxpayers' methods of accounting clearly reflect income, the IRS issued Notice to increase the de minimis safe harbor limitation for a taxpayer without an AFS from $500 to $2,500. This notice is effective for costs incurred during taxable years beginning on or after January 1, For taxable years beginning before January 1, 2016, the IRS will not raise the issue, upon examination, of whether a taxpayer without an AFS can utilize the de minimis safe harbor provided in Reg. Section 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements. Moreover, if the taxpayer's use of the de minimis safe harbor is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount (or amounts) that does not exceed $2,500 per invoice (or per item as substantiated by invoice), and the taxpayer otherwise satisfies the requirements of the regulations, then the IRS will not pursue the issue further. 2

3 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage Reporting Requirement The Affordable Care Act (ACA), commonly known as Obamacare, requires certain employers to offer health insurance coverage to full-time employees and their dependents. Further, those certain employers must provide Form 1095-C to all employees eligible for coverage describing the insurance made available to them and also to transmit the form to the Internal Revenue Service (IRS) with Form 1094-C. All employees eligible for coverage should get a 1095-C regardless of whether they participate in the employer group health plan. The IRS uses information from Form 1095-C to enforce the ACA. These certain employers are defined by health care law and referred to as Applicable Large Employers (ALEs). A company or organization is an ALE if it has at least 50 full-time workers or full-time equivalent (FTE) workers. A full-time worker is someone who works at least 30 hours per week. A full-time equivalent is two or more part-time employees whose hours add up to a full-time equivalent. Only ALEs are required to file Form 1095-C, optional for other than ALE. Form 1095-C identifies the following information; it basically describes what coverage was made available to an employee: The employee and the employer; Which months during the year the employee was eligible for coverage; The cost of the lowest cost monthly premium the employee could have paid under the plan; and Indicates if the employer does not offer insurance. An ALE that does not offer coverage may be subject to penalties. Since an employer that is self-insured or self-funded (an employer that assumes the financial risk of providing health care benefits to its employees) is also the insurance provider, it will also complete part III of Form 1095-C; only self-insureds complete Part III. Self-insureds will also prepare Form 1095-B, in addition to Form 1095-C. Form 1095-B (Health Coverage) provides details about an employee s actual insurance coverage, including who in the worker s family was covered. This form is sent out by the insurance provider and not by the employer. Self-insured employers can send the Forms 1095-C and 1095-B on a single combined form. Filing Form 1095-C became mandatory for the 2015 tax year. Employees should receive them by the end of January 2016, and the IRS by the end of February 2016 or by the end of March 2016 if filing electronically. Forms must be furnished to employees on paper by mail or hand-delivered, unless the employee consents to receiving in an electronic format. Employers with 250 or more forms must file them electronically. Those with fewer than 250 have the option of filing paper forms or filing electronically. The IRS has developed an entirely new electronic filing system called the Affordable Care Act Information Return System (AIR) just for ACA Information Returns. 3

4 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage Reporting...(continued) On September 16, 2015, the IRS issued the following final forms and instructions for 2015 Forms 1094-C and 1095-C: Form 1094-C Form 1095-C Instructions Penalties may apply for incorrect employee names and/or Social Security numbers (SSNs). The Trade Preferences Extension Act increased the penalty amounts applicable to information returns, including for Forms 1094-C and 1095-C. Penalties may apply for non-filing, late filing, or missing or incorrect information. Some of the penalties include the following: The penalty for failure to file correct information returns is now $250 per return (previously $100), up to a maximum of $3 million per year. The penalty for failure to furnish a correct payee statement is $250 per statement (previously $100), up to a maximum of $3 million per year. Both penalties may apply in the event that an ALE fails to both file and furnish. The maximum penalty for both the failure to file and the failure to furnish required information returns (including Form 1095-C) has now doubled to $6 million per year. Employers should take action now to ensure compliance with the new information reporting requirements, including reviewing instructions for Forms 1094-C and 1095-C and Publication 5196; and the FAQ using the following: Also contact health plan insurers and payroll vendors to determine who will be responsible for data collection and form preparation and filing. For more information about this article, please contact our tax professionals at taxalerts@windes.com or 4

5 Important Tax Information on Federal Payments (EFTPS) The following information is provided regarding paying federal payroll taxes for employers who outsource their payroll. While it is not necessary for employers who outsource their payroll to enroll in the federal tax payment and filing system known as EFTPS, the following statement from the IRS recommends that you do so: Please be aware that you are responsible for the timely filing of employment tax returns and the timely payment of employment taxes for your employees, even if you have authorized a service provider to file the returns and make the payments. Therefore, the IRS recommends that you enroll in the U.S. Treasury Department's Electronic Federal Tax Payment System (EFTPS) to monitor your account and ensure that timely tax payments are being made for you. You may enroll in the EFTPS online at or call (800) for an enrollment form. State tax authorities generally offer similar means to verify tax payments. Contact the appropriate state offices directly for details. Safe Harbor for Retail and Restaurant Businesses on Remodeling Costs In a Revenue Procedure , the IRS has provided a safe harbor method that taxpayers engaged in the trade or business of operating a retail establishment or a restaurant may use to determine whether costs paid or incurred to refresh or remodel a qualified building are deductible, must be capitalized as improvements, or must be capitalized as property produced for use in the taxpayer's trade or business. Procedures for obtaining the IRS's automatic consent to change to the safe harbor method of accounting are provided. To stay competitive, taxpayers in the retail and restaurant industries regularly incur expenditures to remodel or refresh buildings used in the trade or business of selling tangible personal property or services to the general public. A project to remodel or refresh a retail establishment or a restaurant is generally referred to as a "remodel" or a "refresh," depending on the extent of work performed. Typically, taxpayers also perform routine repairs and maintenance during a remodel-refresh project. Under the safe harbor method, it minimizes the need to perform a detailed factual analysis to determine whether each remodel-refresh cost incurred during a remodel-refresh project is for repair and maintenance or for an improvement. Because the safe harbor method is applied to the entire building unit of property, the safe harbor method also eliminates the need to apply these rules separately to each building 5

6 Safe Harbor for Retail and Restaurant Businesses on Remodeling Costs (continued) structure and each building system designated under Treasury Regulation ("Reg.") Section 263(a)-3(e). The safe harbor also eases the factual inquiry into whether costs incurred during a remodel-refresh project adapt property to a new or different use, requiring qualified taxpayers to exclude from the safe harbor only amounts that adapt more than 20% of the total square footage of the building to a new or different use. Further, the safe harbor removes the qualified taxpayer's requirement to complete a separate analysis and its regulations to determine whether any remodel-refresh costs, including interest, must be capitalized as direct and allocable indirect costs of producing property used in its trade or business. Under the safe harbor, a qualified taxpayer must treat 75% of its qualified costs paid during the tax year as amounts deductible and must treat the remaining 25% of its qualified costs paid during the tax year as costs for improvements to a qualified building and as costs for the production of property for use in the qualified taxpayer's trade or business ("the capital expenditure portion"). The safe harbor does not apply: a) To excluded remodel-refresh costs, i.e., amounts paid during a remodel-refresh project for: Section 1245 property; an intangible asset, including the creation or maintenance of computer software; land; the initial acquisition, production, or lease of a qualified building, including purchase price, construction costs, transaction costs, and the costs of work performed prior to the date that the qualified building is initially placed in service by the qualified taxpayer; the initial build-out of a leased qualified building, or a portion thereof, for a new lessee; activities to rebrand a qualified building performed within two tax years following the closing date of certain acquisitions of a lease or interest in a qualified building; activities performed to ameliorate a material condition or defect that existed prior to the qualified taxpayer's acquisition or lease of the qualified building or that arose during the production of the qualified building (generally, an unusual event in the retail or restaurant business), regardless of whether the qualified taxpayer was aware of the condition or defect at the time of acquisition or production; material additions to a qualified building, including the building systems; restoration caused by damage to the qualified building for which the qualified taxpayer is required to take a basis adjustment as a result of a casualty loss, or relating to a casualty event; adapting more than 20% of the total square footage of a qualified building to new or different use or uses, as part of a remodel-refresh project; remodel-refresh costs incurred during a temporary closing (i.e., for more than 21 consecutive calendar days); and the cost of any property for which the qualified taxpayer has claimed a deduction under Internal Revenue Code (IRC) Section 179, 179D or

7 Safe Harbor for Retail and Restaurant Businesses on Remodeling Costs (continued) b) To de minimis costs; c) To remodel-refresh costs that, if capitalized, are not depreciated by the qualified taxpayer; d) To expenditures treated as qualified lessee construction allowances under IRC Section 110 and its regulations; e) If the qualified taxpayer made a partial disposition election for any portion of a qualified building; f) If the qualified taxpayer recognized a gain or loss upon the disposition of a component of a qualified building and has not changed its tax year and taken adjustments into account as specified; or g) To any direct or allocable indirect costs of acquiring property for resale (and so subject to capitalization). A remodel-refresh project also does not include a planned undertaking solely to repaint or to clean the interior or exterior of an existing qualified building. In addition, this Revenue Procedure only applies to taxpayers with an Applicable Financial Statement as defined under Reg. Section 1.263(a)-1(f)(4). IRS Promises More Identity Theft Protections in 2016 Filing Season After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft-related filings. The agency is also working to prevent criminals from accessing tax-time financial products. Identity theft Combatting identity theft is on ongoing process as criminals continue to create new ways of stealing personal information and using it for their gain. Tax-related identity theft typically peaks early in the filing season. Criminals file bogus returns early so taxpayers remain unaware you have been victimized until they try to file a return and learn one already has been filed. Between 2011 and 2015, the IRS identified 19 million suspicious returns and prevented the issuance of some $60 billion in fraudulent refunds. During the 2015 filing season, the IRS detected and stopped more than 3.8 million suspicious returns. However, criminals continue to probe for weaknesses. In May, the IRS discovered that criminals had breached its Get Transcript app. Return information of as many as 300,000 taxpayers may have been compromised, the IRS reported. New protections In March, the IRS began working with the return preparation community and the tax software industry to 7

8 IRS Promises More Identity Theft Protections in 2016 Filing Season (continued) develop a coordinated response to tax-related identity theft. The stakeholders, the IRS reported, have focused on a number of areas including improved validation of the authenticity of taxpayers and information on returns, increased information-sharing to improve refund fraud detection and expand prevention, as well as more sophisticated threat assessment and strategy development to prevent risks and threats. One outgrowth of the process is the creation of new data elements that can be shared at the time of filing with the IRS to help authenticate a taxpayer's identity. The IRS explained that there are more than 20 new data components. They will be submitted with electronic return transmissions during the 2016 filing season. Some of the data elements are: Reviewing the transmission of the tax return, including the improper and/or repetitive use of internet addresses from which the return is originating; Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected. Capturing metadata in the computer transaction that will allow review for identity-theftrelated fraud. "We are taking new steps upfront to protect taxpayers at the time they file and beyond," IRS Commissioner John Koskinen said at a news conference in Washington, D.C. "Thanks to the cooperative efforts taking place between the industry, the states and the IRS, we will have new tools in place this January to protect taxpayers during the 2016 filing season." Financial products Previously, the IRS announced that it would limit the number of direct deposit refunds to a single financial account or pre-paid debit card to three. Fourth and subsequent valid refunds will convert to paper checks and be mailed to the taxpayer. The IRS emphasized that it will continue to bolster its efforts to curb taxtime financial product fraud. 8

9 Shift Taxable Income into 2016 Techniques for deferring income include: Hold appreciated assets; As the calendar approaches the end of 2015, it is helpful to think about ways to shift income and deductions into the following year. For example, spikes in income from selling investments or other property may push a taxpayer into a higher income tax bracket for 2015, including a top bracket of 39.6 percent for ordinary income and short-term capital gains, and a top bracket of 20 percent for dividends and long-term capital gains. Adjusted gross incomes that exceed the threshold for the net investment income (NII) tax can also trigger increased tax liability. Accordingly, traditional year-end techniques to defer income or to accelerate deductions can be useful. Consider a tax-fee like-kind exchange of property if disposing of appreciated assets used for investment or in a business; Sell depreciated capital assets, especially if capital gains have been realized; Hold U.S. savings bonds; Sell property on the installment basis; Defer bonuses earned in 2015 until 2016; Make salary-reduction contributions into employer-sponsored plans, such as 401(k) plans, 403(b) plans, and 457 plans, and into flexible spending accounts; Minimize retirement distributions; Defer billings and collections; Recharacterize a Roth IRA as a traditional IRA if the traditional IRA was converted to a Roth IRA in 2015, and the assets in the Roth IRA have subsequently declined in value. It is important to monitor the progress of tax legislation. Congress has not yet renewed individual and business tax extender provisions that expired at the end of 2014, but historically Congress does renew these provisions. Extenders for individuals include the state and local sales tax deduction (in lieu of the state and local income tax deduction), the higher education tuition and fees deduction, the teacher's classroom expense deduction, and the residential energy property credit. Techniques for accelerating deductions into 2015 include: Bunch itemized deductions into 2015 by paying medical expenses, making charitable contributions, and paying miscellaneous expenses such as employment-related items (don't delay bill payments until 2016); Accelerate payments of state and local taxes by increasing withholding or making the final state estimated tax payment installment in 2015; Make payments/contributions by credit card (timing is based on payment by credit card, not on payment of the credit card bill); Use Code Sec. 179 for business expensing and bonus depreciation to write off the costs of newly acquired equipment. 9

10 Determine the "Placed-in-Service" Date for Equipment For a business to start writing off the cost of depreciable equipment and property, it is necessary that the equipment be placed in service. To write off costs in 2015, the equipment must be placed in service by December 31, The "placed-in-service" requirement applies, for example, for taking depreciation, especially first-year bonus depreciation, under Internal Revenue Code (IRC) Section 168, expensing of the cost of property under IRC Section 179, and other write-offs such as the investment tax credit under IRC Section 46. The actual date an asset is placed in service is particularly important in the case of year-end acquisitions. Therefore, determining when property is placed in service is an important concept for year-end planning. Under the current legislative regime, some tax provisions are renewed from year to year but have not been permanently extended (such as bonus depreciation and enhanced IRC Section 179 expensing). Thus, the year that the property is placed in service determines whether or not the tax benefit is available in addition to the year for which a business claims the benefit. Depreciation begins in the tax year that an asset is placed in service. An asset is placed in service (for purposes of computing depreciation or claiming the investment credit) on the date that it is in a condition or state of readiness for a specifically assigned function on a regular, ongoing basis, for use in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity. The placed-inservice date is not necessarily the date that the property is acquired. This distinction should also be kept in mind where a tax provision has requirements for the acquisition date as well as the placed-in-service date. An asset actually put to use in a trade or business is clearly placed in service. If the asset is not yet put to use, it is still considered placed in service if the taxpayer has done everything needed to put the asset to use. For example, a canal barge was placed in service in the year acquired, even though it was not used until the following year because the canal was frozen. A building that is intended to house machinery and equipment is placed in service when the building's construction is substantially complete, whether or not the machinery and equipment have been placed in service. A federal district court concluded that a building designed to be a retail store was placed in service when the building was substantially complete, even though the building was not yet open to the public. For a building (as opposed to equipment), the issuance of a certificate of occupancy is a key factor that indicates the building has been placed in service. 10

11 California Will Impose a $10,000 Penalty for Failing to File Form 8938 This article is reproduced with permission from Spidell Publishing, Inc. This new conformity item will start for 2016 returns. For taxable years beginning on or after January 1, 2016, California conforms to the Foreign Account Tax Compliance Act (FATCA) information reporting requirements for individuals with foreign financial assets, including the minimum $10,000 penalty for failure to file Form 8938, Statement of Specified Foreign Financial Assets, without reasonable cause. This requirement applies to all individuals required to file California income tax returns (not just California residents). California previously conformed to the following foreign information reporting requirements and associated penalties for failure to report: Controlling ownership in foreign business entities (Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships), with a reduced penalty of $1,000 (from $10,000); Foreign-owned U.S. corporations (Form 5472, Information Return of a 25% Foreign- Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business), including the minimum $10,000 penalty; Transfers to foreign persons (Form 8865), including the minimum $10,000 penalty; and Foreign corporations involved in U.S. business (Form 5472), including the minimum $10,000 penalty. Again, these penalties apply to all taxpayers required to file California returns, including individual residents, nonresidents, and part-year residents. In all cases, the information required to be filed with the California Franchise Tax Board (FTB) is a copy of the information filed with the IRS. This means taxpayers who are required to file California returns may be subject to penalties of $20,000 ($10,000 federal and $10,000 California) for failure to comply with these information reporting requirements. California does not offer a reasonable cause exception, but that is a difficult test to meet. How do you file? Taxpayers subject to this new filing requirement are generally those who file the federal forms listed above. For individuals, in most cases, the FTB requires a copy of the federal tax return to be attached to the California return. If the federal return is attached, that will include Form 8938, which will meet the requirement. If not, you must attach the form. For entity returns, you must attach the appropriate form if a complete federal return is not being filed. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 11

12 Tips on Deducting Charitable Contributions If you are looking for a tax deduction, giving to charity can be a win-win situation. It is good for them and good for you. Here are eight things you should know about deducting your gifts to charity: 1. You must donate to a qualified charity if you want to deduct the gift. You cannot deduct gifts to individuals, political organizations or candidates. 2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return. 3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that s more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services. 4. If you give property instead of cash, the deduction is usually that item s fair market value. Fair market value is generally the price you would get if you sold the property on the open market. 5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations. 6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year. 7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information. 8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift. 12

13 Windes is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes to deliver exceptional client service on each engagement. For more than 89 years, we have gone beyond traditional services to provide proactive solutions and the highest level of expertise and experience. The Windes team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and nonprofit organizations to privately held businesses and publicly traded companies. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and elevate your business to the next level. Headquarters 111 West Ocean Boulevard Twenty-Second Floor Long Beach, CA Orange County Office Von Karman Avenue Suite 1060 Irvine, CA Los Angeles Office 601 South Figueroa Street Suite 4950 Los Angeles, CA Windes, Inc. All rights reserved.