Tax Changes & Trends

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Tax changes & trends in the industry for 2013. This presentation was prepared for a manager at Pugh CPAs to present.

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Tax Changes & Trends

  1. 1. Presented by Sean Brewer
  2. 2. Agenda      Introduction Expiring Tax Provisions Affordable Care Act Tangible Property Regs Questions
  3. 3. Expiring Provisions Credit for certain nonbusiness energy properties 2) Alternative fuel vehicle refueling property (non-hydrogen refueling property) 3) Credit for two- or three-wheeled plug-in electric vehicles 4) Credit for health insurance costs of eligible individuals 5) Second generation biofuel producer credit (formerly cellulosic biofuel producer credit) 1)
  4. 4. Expiring Provisions 6) Incentives for biodiesel and renewable diesel: a) Income tax credits for biodiesel fuel, biodiesel used to produce a qualified mixture, and small agri-biodiesel producers b) Income tax credits for renewable diesel used to produce a qualified mixture c) Excise tax credits and outlay payments for biodiesel fuel mixtures d) Excise tax credits and outlay payments for renewable diesel fuel mixtures
  5. 5. Expiring Provisions 7) 8) 9) Tax credit for research and experimentation expenses Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit
  6. 6. Expiring Provisions 10) Credit for production of Indian coal 11) Indian employment tax credit 12) New markets tax credit 13) Credit for certain expenditures for maintaining railroad tracks 14) Credit for construction of new energy efficient homes 15) Credit for energy efficient appliances
  7. 7. Expiring Provisions 16) Mine rescue team training credit 17) Employer wage credit for activated military reservists 18) Work opportunity tax credit 19) Qualified zone academy bonds: allocation of bond limitation 20) Deduction for certain expenses of elementary education and secondary school teachers
  8. 8. Expiring Provisions 21) Discharge of indebtness on principal residence excluded from gross income of individuals 22) Parity for exclusion from income for employer-provided mass transit and parking benefits 23) Treatment of military basic housing allowances under low-income housing credit
  9. 9. Expiring Provisions 24) Premiums for mortgage insurance deductibles as interest that is qualified residence interest 25) Deduction for State and local general sales taxes 26) Three-year depreciation for race horses two years old or younger 27) 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  10. 10. Expiring Provisions 28) Seven-year recovery period for motorsports entertainment complexes 29) Accelerated depreciation for business property on an Indian reservation 30) Additional first-year depreciation for 50 percent of basis of qualified property 31) Election to accelerate AMT credits in lieu of additional first-year depreceation
  11. 11. Expiring Provisions 32) Special depreciation allowance for second generation biofuel plant property 33) Special rules for contributions of capital gain real property made for conservation purposes 34) Enhanced charitable deduction for contributions of food inventory 35) Increase in expensing to $500,000/$2,000,000 and expansion of definition of section 179 property
  12. 12. Expiring Provisions 36) Placed-in-service date for partial expensing of certain refinery property 37) Energy efficient commercial buildings deduction 38) Election to expense advanced mine safety equipment 39) Special expensing rules for certain film and television productions
  13. 13. Expiring Provisions Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico 41) Deduction for qualified tuition and related expenses 42) Tax-free distributions from individual retirement plans for charitable purposes 43) Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric restructuring 40)
  14. 14. Expiring Provisions 44) Modification of tax treatment of certain payments to controlling exempt organizations 45) Treatment of certain dividends of regulated investment companies (“RICs”) 46) RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (“FIRPTA”) 47) Exceptions under subpart F for active financing income
  15. 15. Expiring Provisions 48) Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules 49) Special rules for qualified small business stock 50) Basis adjustment to stock of S corporations making charitable contributions of property 51) Reduction in S corporation recognition period for built-in gains tax
  16. 16. Expiring Provisions 52) Empowerment zone tax incentives a) Designation of an empowerment zone and of b) c) d) e) f) additional empowerment zones Increased exclusion of gain (attributable to periods through 12/31/18) on the sale of qualified business stock of an empowerment zone business Empowerment zone tax-exempt bonds Empowerment zone employment credit Increased expensing under sec. 179 Non-recognition of gain on rollover of empowerment zone investments
  17. 17. Expiring Provisions 53) Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen) a) Excise tax credits and outlay payments for alternative fuel b) Excise tax credits for alternative fuel mixtures 54) Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands 55) American Samoa economic development credit
  18. 18. Jimmy Kimmel Video Six of One - Obamacare vs. The Affordable Care Act
  19. 19. Affordable Care Act  Net Investment Tax 3.8% beginning in 2013  Modified AGI limits ○ $250K married, $125K MFS, $250K qualifying widower, 200K others  Includes but not limited to interest, dividends, capital gains, rental & royalty income, business income  Does not include wages, unemployment, nonpassive business income, social security, alimony, taxexempt interest
  20. 20. Affordable Care Act  Example 1: Threshold not surpassed  Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.
  21. 21. Affordable Care Act  Example 2: Threshold surpassed  Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received from a passive partnership interest, which is not considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000.  Taxpayer modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000  The net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).
  22. 22. Affordable Care Act  Additional Medicare Tax 0.9%  Wages (including noncash fringe benefits) & SE income ($250K married, $125K MFS, $200K others)
  23. 23. Affordable Care Act  Example 1: C, a single filer, has $130,000 in wages and $145,000 in self-employment income.  C’s wages are not in excess of the $200,000 threshold for single filers, so C is not liable for Additional Medicare Tax on these wages  Before calculating the Additional Medicare Tax on selfemployment income, the $200,000 threshold for single filers is reduced by C’s $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000  C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in selfemployment income minus the reduced threshold of $70,000).
  24. 24. Affordable Care Act  Example 2: D & E are married and file jointly. D has $150,000 in wages and E has $175,000 in self employment income.  D’s wages are not in excess of the $250,000 threshold for joint filers, so D and E are not liable for Additional Medicare Tax on D’s wages  Before calculating the Additional Medicare Tax on E’s self-employment income, the $250,000 threshold for joint filers is reduced by D’s $150,000 in wages resulting in a reduced self-employment income threshold of $100,000.  D & E are liable to pay Additional Medicare Tax on $75,000 of self-employment in come ($175,000 in selfemployment income minus the reduced threshold of $100,000
  25. 25. Affordable Care Act  Example 3: F, who is married and files separately, has $175,000 in wages and $50,000 in selfemployment income  F is liable to pay the Additional Medicare Tax on $50,000 of his wages ($175,000 minus the $125,000 threshold for married persons who file separately).  Before calculating the Additional Medicare Tax on selfemployment income, the $125,000 threshold for married persons who file separately is reduced by F’s $175,000 in wages to $0 (reduced, but not below zero)  F is liable to pay Additional Medicare Tax on $50,000 of self-employment income ($50,000 in self-employment minus the reduced threshold of $0).  In total, F is liable to pay Additional Medicare Tax on $100,000 ($50,000 of his wages and $50,000 of his selfemployment income)
  26. 26. Affordable Care Act  Employer responsibilities  Employer responsible for withholding in excess of $200,000 beginning in the pay period the employee surpasses the threshold  No employer match as with normal Medicare Tax  Form 941 will be updated for the changes  Subject to same rules for over/under withholding as with other payroll taxes
  27. 27. Affordable Care Act  Other business effects  Reporting on form W-2 for employer provided health coverage (informational)  Small business Health Care Credit (This is been in effect) ○ Encourage small business to offer health care ○ Intended for low-income workers ○ Variable premiums paid ○ Variable levels of qualifying FTES (part-timers add up to full-timers)
  28. 28. Tangible Property Regs Regulations were finalized on Friday, September 13th  Standardizes what must be capitalized or expensed  Allows for disposition of a portion of an asset  Qualitative standards in all situations based on all facts and circumstances   Meaning taxpayer “facts and circumstances” will trump other general considerations in most cases
  29. 29. Tangible Property Regs  Unit of Property – Buildings  Buildings: a boon for the cost segregation industry  The building susters (Units of Property) that make up a building are: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Building Structural Components Heating, Ventilation and air conditioning Plumbing systems Electrical systems All escalators All elevators Fire-protection and alarm systems Security systems for protection of building and inhabitants Gas distribution system Other structural components (roof, walls, partitions, floors, foundation, windows, doors, etc.)
  30. 30. Tangible Property Regs  Unit of Property – Buildings  Taxpayers will be expected to capitalize building costs based on the improvement or betterment (or increase in value) that it creates for the particular building system– this means a lot more capitalization  With more capitalization of 39 year property comes the obvious desire to write off more of the old disposed property. It has been a common argument to not capitalize a replaced building system or part (roof, HVAC) because the old one is still depreciating and the new did not materially enhance the value of the building overall. The building is no longer the yardstick for measuring an improvement or betterment.  Cost Segregation of a building becomes much more important over the long haul to be able to defend costs disposed when new costs must be capitalized. Also, it enables taxpayers to defend that a cost was not material to a building component and should be expensed by being able to demonstrate the actual total costs of the particular component  Cost segregation studies are not cheap – still will need to do a costbenefit analysis for smaller buildings (if possible, have contractor break out costs if cost-seg not an option)
  31. 31. Tangible Property Regs  Improvements  Aside from costs expended for new tangible property that must be capitalized, the Regs also focus heavily on costs to improve property already owned.  The Final regs retained the types of improvements categories that must be capitalized and provide extensive examples of how costs expended interact with each. Improvements (and thus capitalization) may result from Betterments, Adaptations, or Restorations to a unit of property.  Again, facts and circumstances appear to play a large role in making determinations as to whether a cost may be expensed
  32. 32. Tangible Property Regs  Improvements – Betterments  Betterments are defined as amounts paid that: ○ Ameliorates a material condition or defect that existed prior to acquisition or arose during production of the unit of property, whether or not the taxpayer was aware of the condition or defect at the time, ○ Is for a material addition, including physical enlargement, expansion, extension, or addition of a major component to the unit of property or material increase in capacity; OR ○ Is reasonably expected to materially increase productivity, efficiency, strength, quality, or output of the unit of property.
  33. 33. Tangible Property Regs  Improvements – Restorations  Restorations are defined as amounts paid for: ○ Replacement of a component of a UOP for which the taxpayer ○ ○ ○ ○ ○ has properly deducted a loss for that component Replacement of a component of a UOP for which the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from sale or exchange Restoration of damage to a UOP for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165 or relating to a casualty event under section 165 (subject to limitations) Returning the UOP to an ordinary, efficient operating condition if property has deteriorated to a state of disrepair and is no longer functional for its intended use Rebuilding the UOP to like-new condition after the end of its class life, OR Replacing of a part or combination of parts that comprise a major component or a substantial structural part of the unit of property
  34. 34. Tangible Property Regs  Improvements – Adaptations  Adaptation does not come with the extensive definition that betterment and restoration have ○ In general, an amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the taxpayer's ordinary use of the unit of property at the time originally placed in service by the taxpayer.
  35. 35. Tangible Property Regs  The New & Improved De Minimis Rule  IRS received a “significant number” of comments and sought to address what taxpayers apparently thought would be overly burdensome rules.  The revised rules offer taxpayers with an AFS a simple ceiling of $5,000 per invoice, or per item as substantiated by the invoice. ○ Must treat the item as an expense on the AFS in accordance with its written procedures ○ Still applies only to audited financials, not reviews, not compilations
  36. 36. Tangible Property Regs  The New & Improved De Minimis Rule  This time around, the IRS finally recognized that taxpayers without an AFS exist also  Taxpayers without an AFS now have a de minimis rule of $500 per invoice or per item as substantiated by the invoice ○ Non-AFS taxpayers are still required to have a written capitalization policy in place at the beginning of the tax year in which they treat the costs as expenses for non-tax purposes ○ Must follow your capitalization policy (this may require some training of the front-line folks inputting transactions into your system)
  37. 37. Tangible Property Regs  The New & Improved De Minimis Rule  De minimis rules may not be used for inventory, land, or rotable/spare parts that taxpayer elects to capitalize or use the optional method for  Additional acquisition and production costs (delivery fees, installation services, etc.) are not included in the cost if not reflected on the invoice, but are included if shown on the same invoice.  Sales of items expensed are not capital assets or 1231 property (ordinary income)  Anti-abuse rule in place ○ You cannot manipulate your invoices to componentize property to expense it (purchase a vehicle engine, frame, interior, tires, trailer, etc. in separate invoices will be considered abuse) ○ If the cost of the overall UOP is larger than the de minimis (outside of peripheral costs such as delivery, installation charges), it should be capitalized (i.e. – constructing a large item like a storage building)  Election is made yearly by attaching a statement to the return (this will eat in to the 16.5 minutes the IRS says it will take you to comply but may also avoid having to file for change in accounting method)  Preamble states that examiners are not to revise their materiality thresholds based on the de minimis amounts. If taxpayer and examiner agree a higher amount is acceptable (yeah, right) it may be used. For large businesses without an AFS (low/no debt companies), this may be only option.
  38. 38. Tangible Property Regs  Example 1: De Minimis Safe Harbor – Taxpayer without AFS  In Year 1, B purchases 10 computers at $600 each for a total cost of $6,000 as indicated by the invoice ○ Assume each computer is a unit of property under § 1.263(a)- 3(e).  B does not have an Applicable Financial Statement.  B has accounting procedures in place at the beginning of Year 1 to expense amounts paid for property costing less than $1,000 and B treats these amounts paid for the computers as an expense on its books and records  The amounts paid for the printers do not meet the requirements for the de minimis safe harbor under paragraph (f)(1)(ii) of this Section because the amount paid for the property exceeds $500 per invoice (or per item as sustained by the invoice). ○ B may not apply de minimis safe harbor election to the amounts paid for the 10 computers under paragraph (f)(1) of this Section
  39. 39. Tangible Property Regs  Example 2: De Minimis Safe Harbor – Taxpayer with AFS  C is a member of a consolidated group for Federal income tax purposes. ○ C’s financial results are reported on the consolidated applicable financial statements for the affiliated group. ○ C’s affiliated group has a written accounting policy at the beginning of Year 1, which is followed by C, to expense amounts paid for property costing $5,000 or less.  In Year 1, C pays $6,250,000 to purchase 1,250 computers at $5,000 each. ○ C receives an invoice from its supplier indicating the total amount due ($6,250,000) and the price per item ($5,000). ○ Assume that each computer is a unit of property under § 1.263(a)-3(e).  The amounts paid for the computers meet the requirements for the de minimis safe harbor. ○ If C elects to apply de minimis safe harbor under this paragraph (f) for Year 1, C may not capitalize the amounts paid for the 1,250 computers or any amounts meeting the criteria for the de minimis safe harbor under paragraph (f)(1) of this Section. ○ Instead, under paragraph (f)(3)(iv), C may deduct these amounts under § 1.162-1 in the taxable year the amounts are paid provided the amounts otherwise constitute deductible ordinary and necessary expenses incurred in carrying on a trade or business.
  40. 40. Contact Information  Sean Brewer  865-769-1649  sbrewer@pughcpas.com

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