A PATH To Understanding Federal Tax: A 2016 Update of Federal Tax Laws

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1 A PATH To Understanding Federal Tax: A 2016 Update of Federal Tax Laws berrydunn.com

2 PATH Act Permanent Extensions for Individuals State & Local Sales Tax Deduction Charitable Distributions from IRA s American Opportunity Tax Credit Qualified Conservation Contributions Child Tax Credit Earned Income Credit Teachers Classroom Expense Deduction Transit Benefits Parity

3 PATH Act Two-Year Extensions for Individuals Qualified Tuition/Related Expenses Deduction Mortgage Debt Exclusion Mortgage Insurance Premium Deduction

4 PATH Act Permanent Extensions for Businesses Code Sec. 179 Expensing Research Tax Credit 100% Gain Exclusion on Qualified Business Stock Reduced Recognition period for S Corp Built-in Gains Tax 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements Employer wage credit for employees who are active duty members of the uniformed services Treatment of certain dividends of regulated investment companies (RICs) The subpart F exception for active financing income Charitable deductions for the contribution of food inventory

5 PATH Act Permanent Extensions for Businesses (cont.) Tax treatment of certain payments to controlling exempt organizations Basis adjustment in stock when an S corporation makes charitable contributions of property Minimum low-income housing tax credit for nonfederally subsidized buildings RIC qualified investment entity treatment under FIRPTA Military housing allowance exclusion in determining a low-income tenant

6 PATH Act Five-Year Extensions for Businesses Bonus Depreciation Work Opportunity Tax Credit New Markets Tax Credit Look-thru Treatment for CFCs

7 Depreciation Section 179 Expensing General Rule Qualifying property can be immediately expensed Tangible personal property used or new Same for AMT Ability to revoke election now permanent HVAC may now qualify see next slide Limitations Allowable expense cannot exceed $500,000 Phase-out if total additions exceed $2,000,000 OLD LAW $25,000 deduction with phase-out at $200,000

8 Depreciation Section 179 Miscellaneous Provisions Overall limits are indexed to inflation and will increase HVAC can qualify Portable air conditioners For production purposes (server room) Human comfort This is not retroactive Off the shelf computer software did not previously qualify. Qualified leasehold improvements are 179 available

9 Fixed assets and depreciation Bonus Depreciation Bonus depreciation extended through 2019, or 2020 for specific items Deduction is 50% of cost AMT uses same method Phasedown of credit after is 40% 2019 is 30% Long production period property may qualify for an extra year. Qualifying Property Original use must be new Tangible personal property If ADS required, no bonus Timely placed in service Timely acquisition requirement

10 Depreciation Qualified Leasehold Improvements General Rule 39 year life for depreciation Straight line method AMT same as regular tax Improvement to realty Not tangible personal property such as bank teller work area Exceptions to PATH Enlargements Elevators Structural framework PATH Rule 15 year life for depreciation 150 declining balance AMT same as regular tax Bonus depr permitted Improvement made pursuant to a lease Lease not between related parties Building in service at least 3 years

11 Research Credit Used to Offset Payroll Tax R&D credit IRC Section 41(h) For tax years beginning in 2016 Can be used to offset up to $250K employer OASDI (the Social Security portion of FICA tax) Company must have less than $5M sales Election must be made by due date, including extensions, of business tax return Does not reduce deduction for payroll tax There is a line on 2017 draft Form 941 to claim this credit

12 Section 1202 Stock 100% gain exclusion Gross income does not include gain from the sale or exchange of qualified small business stock held for more than 5 years Must be stock in C corporation, generally held by original owner Exclusion amount limited to greater of $10M or 10 times basis of stock issued by such corporation and disposed of by taxpayer during the taxable year Company must be active business during period when stock was held Must have assets not exceeding $50M immediately after issuance of stock

13 Energy Credit for Solar Property (2016 Consolidated Appropriations Bill) Credit extended Was due to expire in 2016 Extended through 2021 Some phase-outs for construction that starts before 2021 and finishes before 2023 Credit Application A percentage of qualified expenses 30% Qualifying expenses are: equipment/supplies that produce solar energy plus labor Basis reduction is 50% of the credit Credit can also be used against AMT

14 2016 Form 1099 s are FATCA Compliant IRS has issued the final version of the 2016 Form 1099 s which contain a checkbox to be used if the form is being used to meet requirements of the Foreign Account Tax Compliance Act (FATCA) 1099-B 1099-DIV 1099-INT 1099-OID

15 Tax Return Due Date Changes Begin with 2016 Tax Returns Old Law Calendar year taxpayers Due date of March 15 Fiscal year-end due date was the 15 th day of 3 rd month after year-end. (2 ½ months) Could be extended another 6 months to September 15 for calendar year taxpayers New Law C Corporations will be due the 15 th day of the 4 th month Calendar year will be April 15 th (same as individuals) C corps with June 30 y/e still use 15 th day of 3 rd month until yrs beginning after 12/31/2025 Extension still 6 months but until 2026 it is 5 months

16 Tax Return Due Date Changes Begin With 2016 Tax Returns Partnerships will be due on the 15 th day of the 3 rd month March 15 Partnerships will be given 6 month extensions, instead of 5 Trusts returns are due the 15 th day of 4 th month April 15. Extension will be 5 ½ months instead of 5. Extended due date will be September 30 FBAR due April 15 with maximum extension of 6 months No change for individuals and S corporations

17 Information Letter In an Information Letter, IRS explained the tax treatment of crowdfunding by looking to general principles of income inclusion. kickstarter.com gofundme.com Background. Under Code Sec. 61(a), except as otherwise provided by law, gross income includes all income from whatever source derived.

18 Information Letter Reg sets out the constructive receipt doctrine and provides that income is constructively received by a taxpayer in the tax year during which it is credited to their account, set apart for them, or otherwise made available so that they may draw upon it at any time. In the Information Letter, IRS concluded that generally, money received without an offsetting liability (such as a repayment obligation), that is neither a capital contribution to an entity in exchange for a capital interest in the entity nor a gift, is includible in income.

19 Information Letter What that means is that crowdfunding revenues generally are includible in income if they are not: loans that must be repaid; capital contributed to an entity in exchange for an equity interest in the entity; or gifts made out of detached generosity and without any "quid pro quo." However, a voluntary transfer without a "quid pro quo" isn't necessarily a gift for federal income tax purposes.

20 83(b) Elections TD 9779, dated July 25, (b) election statements no longer required to be attached to individual income tax returns in year of election Elections must still be filed with IRS not later than 30 days after the date when property is transferred to recipient Applies to property transfers beginning in 2016, but may be relied upon for transfers in 2015

21 Rev. Proc In Revenue Procedure , IRS has issued an updated list of accounting method changes to which IRS's automatic change procedures apply Background. Under Code Sec. 446(e), taxpayers must obtain IRS's consent before changing a method of accounting for federal income tax purposes Automatic consent procedures versus non-automatic consent procedures Form 3115 (Application for Change in Accounting Method)

22 TEFRA Partnerships and IRS Audit Procedures New single set of partnership audit rules for tax years beginning after 12/31/2017 IRS will assess the tax on the partnership, rather than the partners Partners will not have joint and several liability Partnership can elect out under certain circumstance If a 100 or fewer partners all of which are individuals, C corps and follows certain procedures

23 Nelly Home Care, Inc. v. U.S. 117 AFTR 2d Nelly provides non-medical homecare services to senior citizens in the Philadelphia, PA metropolitan area Employee vs. Independent Contractor classification Taxpayer sought relief under Section 530 of the Revenue Act of 1978 Court rejected Nelly s argument that it met the reasonable cause safe harbor in Section 530 but found that Nelly met the judicial safe harbor

24 Voss v. Commissioner 116 AFTR 2d Determined that $1M home acquisition and $100,000 home equity indebtedness limitation were applied on a per taxpayer basis, rather than a per residence basis Case involve unmarried domestic partners indebtedness in two properties that they co-owned as joint tenants Statute is silent regarding unmarried taxpayers, but limitations do apply to married taxpayers. Court reasoned that unmarried taxpayers were each allowed full benefit

25 Joseph D. Moon v. Comm. TC Summary Opinion Whether taxpayers were engaged in passive activities with respect to three rental properties Husband was a full time pilot; wife was a part-time ski instructor. Wife personally oversaw all rental activity and participated extensively in repairs and renovations Wife maintained credible records indicating amount of time spent on rental activities, over 750 hours per year, more than half the total time for all personal services Taxpayers rental activities were not passive

26 Gragg v. U.S. 118 AFTR 2d Whether status as real estate professional rendered rental losses nonpassive regardless of material participation Rental activity is per se passive, regardless of material participation. Per se bar does not apply to real estate professionals Real estate professionals while not subject to passive loss rules, must still show material participation. Such participation must be in the rental activity, not in other activities

27 IRC Section 2704 Proposed Regulations Proposed Regulations become effective after On the surface, they appear to apply to limited transactions only However, some professional practitioners interpret a much broad intent to significantly reduce or even eliminate valuation discounts on transfers of family owned businesses Separate legislation introduced September 15 and 21 to nullify proposed Regulations Prop. Regs ,2,3,&4

28 IRC Sections 1014(f) and 6035 Consistent Basis Reporting Rules IRS issued proposed Regulations designed to promote consistent basis reporting for assets transferred in an estate Purpose is to reduce perceived abuse when decedent s estate reports discounted value of property on estate tax return, and recipient of property reports higher basis in later disposition Form 8971 is used to comply with new rules Executor must furnish value of property to IRS and to recipient

29 IRC Sections 1014(f) and 6035 Consistent Basis Reporting Rules Effective for federal estate tax returns filed after July 31, However, due date of statements is June 30, 2016 Exclusions from reporting: 1. Property on a federal estate tax return if no federal estate tax would be imposed due to allowable credits 2. Property which qualifies for a charitable deduction or marital deduction 3. Personal property with value of $3,000 or less

30 IRC Sections 1014(f) and 6035 Consistent Basis Reporting Rules Not required if no estate tax return is required to be filed. Statement must be furnished to each person who is a beneficiary, e.g. life tenant or holder of a contingent/remainder interest Due date is 30 days after the due date of the estate tax return Note that recipients have no means of challenging any basis reported to them Subsequent transferors in related transferee gift or likekind exchanges will have similar reporting requirements to transferee

31 Employer Mandate: Who Should Worry? Size Matters. For 2016 and beyond: Small Employer 49 OR LESS FT & FTE employees Applicable Larger Employer (ALE) MID-SIZE FT & FTE employees LARGE 50 OR MORE FT & FTE employees Controlled Group and Affiliated Service Group member Employers are Aggregated!

32 Employer Mandate: 2016 Rules Employer Play or Pay rules become effective a PENALTY FT employees only 95% Ignore minimum value & affordability Penalty of $2,160/year/FT employee less deductible [If even one FT employee receives a subsidy] AVOID AT ALL COSTS (UNLESS INTENTIONAL FAILURE) b PENALTY FT employees only Does coverage provide minimum value? Is coverage affordable? Penalty of $3,240/year/FT employee who receives a subsidy Much more room for design ideas than with a penalty

33 Affordability 2016 Employee share < 9.66% of employee household income Cost of lowest priced single coverage Three Safe Harbors available (9.66%): W-2 [reduced income issue] Rate of Pay [reduced hours issue] Poverty line [low annual rate issue]

34 HRA (employer payment plan): Affordability How do ER contributions to an HRA affect Affordability? Newly available ER contribution amounts available for use for premiums or for cost-sharing are counted towards affordability ER amounts must be required and/or determinable under arrangement

35 Cafeteria Plan Flex Contribution Treatment: Affordability How do ER flex contributions affect affordability? If the EE may not elect to receive the flex contribution as cash and the EE may use the amount to exclusively pay for medical care, then- ER flex amount counts towards affordability. Called a Health Flex Contribution these amounts may not be used for non-healthcare benefits

36 Opt-out Payments: Affordability Unconditional opt-out payments will negatively affect affordability for purposes of b penalty and Form 1095-C reporting. For now new arrangements adopted after 12/16/2015 must comply now. Existing arrangements adopted on or before 12/16/2015 will not affect affordability until final regulations. Note: EE may claim that affordability is impacted and potentially get a subsidy! Eligible opt-out arrangement - new guidance in proposed regulations!

37 Employer Penalties: How do you know? When Section 1411 Certification Right to appeal From the Marketplace Certifies that EE has qualified for a subsidy may trigger penalty IRS Initial Contact Fall 2016 for 2015 Right to respond Written communication to ER Will summarize potential penalty IRS Issues Notice & Demand for Payment

38 Employer Penalties: How do you know? Marketplace notices being issued to employers for 2016 For employees who qualified for a premium credit Sent to benefits manager 90 days to appeal How do I and why should I appeal?

39 Reporting Penalty Relief IRS reiterates that goodfaith-effort relief applies only to incorrect or incomplete Forms 1094 and 1095 Relief is not provided for late or non-filed reports! Unless reasonable cause exists

Interested In More? Contact Us. Bill Enck, CPA, CPC, APA 207-541-2300 benck@berrydunn.

40 Interested In More? Contact Us. Bill Enck, CPA, CPC, APA John Weaver, CPA Tyler Waldrupe, CPA

Far and Wide: UNDERSTANDING YOUR FEDERAL AND STATE TAX LIABILITIES. Tyler Waldrupe, CPA Jeffrey A. Ring, CPA

Far and Wide: UNDERSTANDING YOUR FEDERAL AND STATE TAX LIABILITIES Tyler Waldrupe, CPA Jeffrey A. Ring, CPA Agenda What is nexus? How is nexus determined for banks? Impact of filing versus not filing state