Congress Approves 2015 Tax Extenders!

On December 15, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 into law. Below please find a summary of some of the key tax extenders:

Made Permanent:

Child tax credit: The child tax credit is a $1,000 credit available for each “qualifying child” (for U.S. family members under age 17 who live with the taxpayer, are claimed as dependent children, and who do not provide more than half of their own support) in the household. It phases out as modified AGI exceeds $110,000 (for married couples, $75,000 for individuals). For lower-income individuals, who do not have a $1,000 tax liability, the child tax credit becomes a refundable credit for 15% of earned income over a threshold amount. In the past, the threshold amount was $10,000, indexed for inflation. However, since 2009 the threshold amount was reduced to $3,000. The new tax extenders have permanently set this $3,000 threshold for calculating the additional refundable portion of the child tax credit.

American Opportunity Tax Credit: The American Opportunity Tax Credit is made permanent. It allows for a credit of $2,500/year (40% refundable; 60% nonrefundable) for up to four years of post-secondary education, with Adjusted Gross Income (AGI) phase outs of $160,000 for married couples (and $80,000 for individuals).

Qualified Charitable Distributions (QCD) From IRA to Charity: Taxpayers who are over age 70 ½ may make a “Qualified Charitable Distribution” of up to $100,000 directly from an IRA to a charity. The contribution to the charity is not claimed as a tax deduction, but the distribution from the IRA is not taxed in income either, making it a “perfect” pre-tax charitable contribution. And the QCD counts towards the taxpayer’s Required Minimum Distribution (RMD) obligations, which would apply given that he/she must already be over the age of 70 ½.

State and Local Sales Tax Deduction: Each year, taxpayers may claim an itemized deduction for either the payment of state income taxes, or the payment of state sales tax. The state sales tax deduction is usually only claimed by those who live in states without an income tax. The new tax extenders legislation makes the state and local sales tax deduction permanent. This change will primarily benefit those who itemize their deductions, and live in one of the states that have no income tax.

School Teacher Expense Deduction: Elementary and secondary school teachers are eligible for an above-the-line deduction for schoolteacher expenses, up to $250/year. In addition, the legislation also indexes the $250 cap for inflation beginning in 2016 and also beginning in 2016 expands the eligible schoolteacher expenses to include professional development expenses in addition to in-classroom school teacher supplies.

Section 179 Deduction: The favorable Section 179 deduction limits, including the $500,000 maximum deduction amount and the $2,000,000 threshold is made permanent.

Extenders Set to Expire At the End of 2014 are Now Extended Through 2016:

Exclusion of Discharged Mortgage Debt on Short Sale: The Mortgage Debt Relief Act of 2007 stipulated that up to $2,000,000 of cancelled debt associated with the mortgage of a primary residence could be discharged without tax consequences. Tax extenders legislation provides relief for anyone who had a short sale of their home in the 2015 year.

Deductibility of Mortgage Insurance Premiums As Qualified Residence Interest: For those who pay mortgage insurance, current law permits individuals to deduct the mortgage insurance as though it was interest on mortgage debt, as long as the mortgage was taken out after 2006 and was acquisition debt for the primary residence. This mortgage insurance premiums deduction began to phase out once Adjusted Gross Income exceeded $100,000 (and was fully phased out at $110,000). Tax extenders allow the mortgage insurance premiums deduction for qualifying mortgage insurance premiums through the end of 2016, with the same AGI phase-outs in place.

Above-The-Line Education Deduction For Qualified Tuition And Fees: For those with children in college, an alternative to claiming the American Opportunity Tax Credit or the Lifetime Learning Credit is to claim the “above-the-line education deduction” instead. This rule permits the deduction of up to $4,000 of tuition and related fees for an eligible student. This $4,000 tuition-and-fees deduction is reduced to only $2,000 for married couples with AGI in excess of $130,000 (or individuals over $65,000), and is fully eliminated once AGI exceeds $160,000 for joint filers (or $80,000 for individuals).

50% Bonus Depreciation: Bonus depreciation provides a deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service. The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019. Bonus depreciation will end after 2019.

Other Notable Provisions:

Improvements To Section 529 Accounts: Under new rules, qualified higher education expenses will now include computer equipment and related expenses (including computer software and even internet access), permitting distributions for such expenditures from a Section 529 plan to still qualify for tax-free treatment. Furthermore, in situations where a 529 plan distribution is used to pay college tuition that is subsequently refunded and thus not actually used for college (which would render the distribution ineligible for tax-free treatment after the fact!), the new rules will permit such amounts to be re-contributed (i.e., “roll over”) back to the 529 account within 60 days.

The Work Opportunity Tax Credit: This credit gives retailers a tax incentive to hire the disabled, welfare recipients and other economically challenged individuals. It has been extended through 2019.

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Affordable Care Act Compliance Guidelines

The Affordable Care Act (ACA) increases access to health insurance for both individuals and small employers. To ensure that employers provide the minimum essential coverage, the ACA enforces an employer mandate. Rather than demand that employers offer employees health insurance, the ACA imposes a penalty (the employer shared responsibility penalty) on large employers that do not offer coverage to their employees.

Employer Mandate

• Small Businesses with fewer than 50 employees: Companies with less than 50 full-time equivalent employees are not subject to the mandate.

• Employers with 50 to 99 employees: The implementation of the mandate has been delayed until 2016 for employers with 50-99 full-time equivalent employees. Starting in 2016 (to be reported in 2017) employers with 50 or more full-time equivalent (FTE) employees will need to provide coverage to “substantially all” (95%) of their full-time workforce.

 Large Employers with 100 or more employee: Applicable Large Employers were subject to the mandate in 2015, to be reported in 2016. Small businesses with more than 100 full-time equivalent employees were required to provide health coverage to at least 70% of full-time employees starting in 2015, and 95% of full-time employees starting in 2016. If they do not meet these standards, they will be required to make an employer responsibility penalty.

The ACA mandates that most individuals have health insurance coverage. All applicable individuals must ensure that they have minimum essential coverage for themselves and their dependents. The following healthcare forms must be provided to your tax preparer for preparation of your individual tax return:

Reporting Forms

• Form 1095-A: Issued by Marketplace Exchanges to individuals covered by the Exchange, and a copy filed with the IRS. The Marketplace will mail Form 1095-A to the individual and also upload Form 1095-A to individuals’ online account.

Form 1095-B: Issued by health insurance issuers and carriers. A company is responsible for filing IRS Form 1095-B only if two conditions apply: It offers health coverage to its employees, and it is “self-insured.” This means that the company itself pays its employees’ medical bills, rather than an insurance company. A company that doesn’t meet both conditions won’t have to file Form 1095-B. Its employees might still receive a 1095-B, but from their insurer, not the employer.

Form 1095-C: Issued by Applicable Large Employer Members (ALE Members), generally employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year. These large employers use Forms 1094-C and 1095-C to report the information required under sections 6055 and 6056 about offers of health coverage and enrollment in health coverage for their employees.

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Following the Repair Regulations

The final tangible property regulations were enacted in 2014. These regulations affect every taxpayer that uses tangible property in its business. The rules are all-encompassing and complex, and implementation requires careful consideration of each taxpayer’s facts and circumstances. To adhere to the repair regulations, one of the critical concepts that taxpayers need to address is the determination of the appropriate unit-of-property. The unit-of-property must be identified before determining whether an expenditure can be deducted or must be capitalized. Each building and its structural components is a separate unit-of-property. For tangible property other than buildings, the components that are functionally interdependent comprise the unit-of-property.  Below please find our suggestions to simplify adherence to these regulations:

  • Under the final regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or should be capitalized. Effective for taxable years beginning on or after January 1, 2016, the Internal Revenue Service increased the de minimis safe harbor threshold from $500 to $2500 per invoice or item:
    • For the majority of our clients, we will make the de minimis safe harbor election.
    • In 2016, we suggest that you set up an account in your general ledger to comply with the de minimis safe harbor election.
    • For costs that don’t qualify under the de minimis safe harbor, you apply the general rules for identifying and deducting repair and maintenance costs, incidental supplies, and non-incidental materials and supplies.

The IRS scrutinizes tax returns for proper classification of capitalized versus expensed items. A regulatory framework for analyzing whether expenditures are for deductible repairs or capital improvements should be put in place. Betterment, adaptation or restoration?

What is a betterment?

  • Amounts paid to fix a material condition or material defect that existed before the acquisition or arose during production of the unit of property; or
  • Amounts paid for a material addition; or
  • Amounts paid that are reasonably expected to materially increase productivity, efficiency, strength, quality, or output of the unit of property.

What adapts the unit of property to a new or different use?

  • An amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with your ordinary use of the unit of property at the time you originally placed it in service.

What are amounts to restore a unit of property?

  • Replacement of a major component or substantial structural part; or
  • Amount paid to return the unit of property to its ordinarily efficient operating condition, if the unit of property has deteriorated to a state of disrepair and is no longer functional for its intended use; or
  • Amounts paid for the rebuilding of the unit of property to a like-new condition after the end of its class life.

It is very important to maintain detailed accounting records for each unit of property regarding useful life and classification as a capitalized item or repair.

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