3/22/2017. The Iowa 2016 Uncoupling. How We Got Here?

Transcription

1 The Iowa 2016 Uncoupling March 22, 2017 How We Got Here? Governor s 2015 limited uncoupling proposal Legislature coupled for one year only Governor proposes limited uncoupling for 2016 Legislature decides to massively uncouple There lies the issue we now face - Oops 2 3 1

2 Is There any Chance They Will Couple for 2016? Maybe one in a million 4 Iowa s Listing of all Affected Provisions: 5 The Easy, the Obscure, and the Ugly 6 2

3 The Easy Uncoupled Items $250 above-the-line educator expense deduction Qualified tuition deduction Optional sales tax deduction Deduction for mortgage insurance premiums as qualified residence interest Discharge of indebtedness on sale of principal residence Energy-efficient commercial property deduction Charitable contributions of food inventory 7 The Obscure Uncoupled Items Subpart F exception for active financing income Restrictions on tax-free REIT spinoffs Special allowance for second generation biofuel plant property 8 The Ugly Uncoupled Items Bonus depreciation 15-year depreciation for qualified leasehold property, restaurant property and retail improvement property Five-year S corporation built-in gain recognition period Determination of basis of S corporations making charitable contributions Differences in qualified conservation easement treatment Differences in parking and mass-transit benefit treatment IRA Charitable Contributions Sec. 179 $500,000 limit uncoupling 9 3

4 Bonus Depreciation Nothing new here 50% bonus depreciation is unavailable on Iowa returns 10 Qualified Leasehold, Qualified Retail Improvement and Qualified Restaurant property Federal law allows a 15-year life for these items 179 allowed Iowa requires a 39-year life, with no Five Year S Corporation Built-in Gain Recognition Period Both federal and Iowa rules require S corporations to pay a corporate tax on "built-in gains Recognized as taxable income during the "recognition period" after an S corporation election or Carryover-basis acquisition of property from another S corporation 12 4

5 Five Year S Corporation Built-in Gain Recognition Period The federal recognition period had been reduced to five years as an expiring provision for a number of years The 2015 extenders bill made the five-year recognition period permanent Iowa still observes the 10-year recognition period 13 Five Year S Corporation Built-in Gain Recognition Period Example. Farm corporation made an S corporation election effective January 1, 2011, when it held 1,000 acres with a basis of $100 and a value of $8,100 It sells the land in 2016 for $8,100 per acre 14 Difference in Application Iowa s federal five-year recognition period expired at the of 2015 Iowa will tax the $8 million gain at the corporation level at the 12% top Iowa corporation rate The $960,000 Iowa tax will reduce the federal and Iowa gain passed through to the shareholders on their K-1s 15 5

6 S Corporation Basis Following Charitable Contributions of Appreciated Property Under the federal extenders legislation, S corporation shareholders only reduce their stock basis by their share of the basis of appreciated property contributed to charity in 2016 Iowans reduce their basis by the entire fair market value deduction 16 Qualified Conservation Easements For charitable donations of qualified conservation easements, federal law has a 50% of AGI cap Iowa's cap for 2016 is 30% of federal AGI 17 Parking and Mass Transit Benefits The maximum federal benefit for parking and mass transit is $255 per month in 2016 It is $130 per-month for Iowa 18 6

7 IRA Charitable Contributions Iowa says: For tax year 2016, Iowa taxpayers must include these distributions in their Iowa income, and they may then take the deduction that would be allowed for the contribution 170 if the distribution had been included in federal income, subject to any Iowa adjustments Essentially, a 70-1/2 year old making such a charitable distribution will be entitled to the same Iowa tax treatment as a 69 year old making the same contribution to the same organization 19 IRA Charitable Contributions Federal law allows taxpayers who have reached age 70 1/2 to have their IRAs contribute up to $100,000 annually to charity 20 IRA Charitable Contributions Notice , issued shortly after the federal exclusion was enacted provides that if an IRA contribution fails to meet the requirements for tax exemption, it is included in AGI, and a Schedule A charitable contribution may be taken for the amount 21 7

8 IRA Charitable Contributions - Example Taxpayer is single, with AGI of exactly $259,400, with non-charitable itemized deductions of $51,000, excluding IRA distributions Taxpayer has his IRA make a $56,000 charitable IRA contribution Taxpayer has no other Iowa pension income Taxpayer has to add $56,000 to Iowa gross income Taxpayer takes a $6,000 Iowa pension exclusion Taxpayer adds the $50,000 difference to line 7 of the Iowa 104 worksheet and therefore reduces Iowa itemized deductions by $1,500 ($50,000 x 3%) Federal 2016 limit is $500,000 deduction The ability to take 179 phases out dollar-fordollar as fixed asset acquisitions exceed $2,010,000 Iowa 2016 limit is $25,000 The dollar-for-dollar phase out starts at $200,000 of fixed assets placed in service 24 8

9 179 When you take the federal 179, you are required to take Iowa 179 up to the limit To the extent the taxpayer placing the assets in service exceeds the limits, Iowa allows the taxpayer to compute MACRS for the disallowed portion of assets placed in service See Iowa 179 FAQ, Q&A 4, Example D If some or all of the 179 deduction comes through on a K-1, you are subject to the $25,000 overall limit If you have personal or entity-level 179 and you also have a K-1 reporting 179, your $200,000 phase out for your own assets is not affected by asset acquisitions of the K-1 entity Unused 179 deductions apparently carry forward, though Iowa hasn't designed its forms to help track that If you exceed the $25,000 limit because of K-1s from entities that don't file in Iowa And therefore don't report additional Iowa MACRS depreciation for those assets You don't get to compute your own Iowa depreciation, but you do reduce your Iowa basis in your pass-through by the whole disallowed amount Yes, you have to track federal and Iowa basis separately However, if you sell the entity before you use the excess 179, you can add the unused deduction back to your basis in computing your Iowa gain or loss under Reg (h) 27 9

10 179 Example: Excess 179 from Own Assets Taxpayer places a $30,000 piece of equipment into service in 2016 Taxpayer claims a 179 deduction of $30,000 for the full cost of the equipment on the 2016 federal return Taxpayer has no other additions Taxpayer is required to claim a 179 deduction of $25,000 on the 2016 Iowa Return The remaining $5,000 cost of the equipment can ordinarily be depreciated for Iowa purposes using MACRS If taxpayer is a pass-through, the Iowa K-1 reflects the Iowa MACRS depreciation 28 Source: Iowa Sec. 179 FAQ, Q&A 4, Example B. 179 Example: Iowa Phase-Out, Directly-Owned Assets Taxpayer places $300,000 of assets into service in 2016 and claims federal 179 Taxpayer exceeds Iowa phase-out and gets no 179 Taxpayer claims Iowa MACRS on the whole $300,000 If taxpayer is a pass-through, the additional depreciation is reflected on the Iowa K Example: Directly-Owned Assets The taxpayer has an Iowa S-Corporation that purchased $ 25,000 of eligible 7 year property and elected to take the full 179 deduction on the 2016 Iowa Tax Return Taxpayer also files an individual Schedule F and placed in service $25,000 of farm tile (15 year property) Can taxpayer choose to take 179 on the farm tile first? No. Under federal ordering rules ( (b)(3)), the pass-through counts first against the limit 30 10

11 Iowa 179 Example: K-1 from Taxpayer with no Iowa Filing Requirement. Non-Iowa S Corporation places $200,000 in assets in service, claiming $200,000 Federal 179 It has a 50% Iowa owner who receives a federal $100, amount on his K-1 The company has no Iowa nexus and files no Iowa 1120-S The Iowa taxpayer has no other 179 assets The Iowa owner is only allowed $25,000 Iowa deduction There is no Iowa depreciation adjustment for the remaining $75,000, which becomes a carryover item The taxpayer must reduce his S Corporation basis by the entire $100,000, which may create basis limits for pass through losses Example: K-1 from Taxpayer with no Iowa Filing Requirement, Sells Interest in Entity The taxpayer in the previous example sells the S corporation stock while still having a $75,000 Iowa 179 carryforward The taxpayer adds the $75,000 back to basis for computing gain or loss on the S corporation shares 32 Iowa Identity Theft Issues If your clients social security number has been stolen and used to file a fraudulent tax return they will probably hear about it from the IRS first Contact IDR immediately The best way to report the theft to them is through their website at:

12 Iowa Matching Federal Refunds CALT has requested a statement from the IDR concerning the matching of Federal refunds and the notices being issued concerning the matching of fraudulent refunds and how Iowa taxpayers should contact IDR of they receive a notice Once we have an official statement we will send an to all 34 Iowa Refund Delays 35 Processing of Iowa Income Tax Refunds May Take Longer This Year You may have noticed that this year is quite different relative to last filing season The issue is Identity Theft One result of this effort is that the review of returns will take longer, slowing down the processing of refunds If IDR has a question about your return or needs additional information, the Department will reach out via paper correspondence When the refund payment is approved, the message will update with a payment amount and a payment issue date 36 12

13 The Scoop Upcoming Dates April 5 April 19 May 3 May 17 May 31 June 7 June 21 July 5 Held at 8:00 am and 12:00 pm Central time 37 Upcoming Seminars Mark Your Calendar Final Dates May 11-12, 2017 Back to the Basics: A Foundational Income Tax Return Preparation Course Live and Webinar September 21, 2017 Ag Law Seminar, Live and Webinar September 22, 2017 Farm and Estate Tax Review, Live and Webinar S Corporation and Entity Review July 20-21, 2017, Live and Webinar Retirement and Social Security Issues(Webinar) = October 10-11, Back to the Basics: A Foundational Income Tax Return Preparation Course Live and Webinar May Live and Online As new income tax return preparers enter the profession, they must quickly build a solid foundation of basic skills Some experienced tax preparers driven by a need to continually produce may also wonder if they have some holes in this allimportant foundation In response to this need, CALT is offering a new two-day introductory course focused on teaching the basics of federal income tax return preparation Our Back to the Basics: A Foundational Income Tax Preparation Course will teach basic tax return preparation skills all tax return preparers must know 39 13

14 Back to the Basics: A Foundational Income Tax Return Preparation Course Live and Webinar Attendees will receive two days of federal individual income tax return preparation training, as well as the opportunity to complete a comprehensive return from beginning to end Whether you re new to the profession or simply looking for a comprehensive refresher, we think this course will be of value. You ll experience personal interaction with knowledgeable instructors excited about the material and willing to field all types of questions This is a great program for new employees needing training in first and second-year tax law and procedures It should also serve as an excellent comprehensive refresher for others 40 Back to the Basics: A Foundational Income Tax Return Preparation Course Live and Webinar The interview process and tips for conducting an interview Determination of filing status, including a review of advantages and disadvantages of each Taxable and nontaxable income - where to report Adjustments to Income Standard Deduction vs. Itemized Deduction Various Tax Credits including Child Tax Credit, Earned Income Tax Credit and the American Opportunity Tax Credit, along with associated forms. Who must file Exemptions/Dependents rules and changes Form 1040, line by line Domestic Production Activity Deduction Itemized Deductions Due Diligence Requirements for Credits Child and Dependent Care Credit Schedule C Schedule E Schedule F Premium Tax Credit Overview Depreciation Business Expenses Standard Mileage vs. Actual Expenses Bonus Depreciation Form 4562 Sale of Business Assets and Form 4797 Casualty Loss Capital Gains and Losses, including Schedule D and Form 8949 Comprehensive Hands-On Problem 41 The Schedule is Finalized for the 44th Annual Federal Income Tax Schools November 2-3, 2017 Maquoketa, Iowa Centerstone Inn and Suites November 6-7, 2017 Le Mars, Iowa Le Mars Convention Center November 8-9, 2017 Atlantic, Iowa Cass County Community Center November 9-10, 2017 Mason City, Iowa North Iowa Area Community College November 16-17, 2017 Ottumwa, Iowa Indian Hills Community College November 20-21, 2017 Waterloo, Iowa Hawkeye Community College December 11-12, 2017 Ames, Iowa and Live Webinar Quality Inn and Suites 14

15 The CALT Staff John D. Lawrence Interim Director Associate Dean, College of Agriculture & Life Sciences Extension Programs and Outreach Director, Agriculture & Natural Resources Extension 132 Curtiss Hall Iowa State University Ames, Iowa Kristine A. Tidgren Assistant Director Phone: (515) Fax: (515) The CALT Staff Kristy S. Maitre Tax Specialist Phone: (515) Fax: (515) Tiffany L. Kayser Program Administrator Phone: (515) Fax: (515)