IMA Tax UpdateJanuary 7, 2016

Joe KristanRoth & Company, P.C.

www.taxupdateblog.comTwitter: @joebwanAlso on Facebook!

PL 113-113

Protecting Americans From Tax Hikes Act of 2015

“PATH”

PATH

• Makes some of the perpetually-expiring provisions permanent

• Makes some provisions safe thorough 2019

• Extends the rest for two years

• All extensions retroactive to beginning of 2015

Key Permanent Business Extenders

• $500,000 Section 179 limit

• Research Credit

• 5-year S corporation built-in gain “recognition period.”

• Gain exclusion for 5-year original issue C corp shares

•15-year depreciation for certain building costs

•Contributions of food held as inventory

•S corporation basis adjustments- property gifts

•Work Opportunity Credit for veterans

Key Permanent Individual Breaks

• IRA charitable distributions

• Alternative deduction for state & local sales tax

• Conservation easement deductions

• Enhanced child credit

• Enhanced earned income credit

• Teacher expenses

• Mass transit and parking benefits

• Optional alternative sales tax deduction

• American Opportunity Tax Credit

Extended through 2019

• Bonus Depreciation

• New Markets Tax Credit

• Work Opportunity Tax Credit

The Two-Year Extenders

• Exclusion for mortgage debt forgiveness

• Credit for “2-wheeled plug-in electric vehicles

• Biodiesel & renewable diesel incentives

• Energy efficient new home credit

• Work Opportunity Tax Credit

• A bunch of others

Permanent Sec. 179

•Sec. 179 limit $500,000 for 2015

•Phases out as qualifying property placed in service exceeds $2 million

•Limits adjusted for inflation starting in 2016

•Ability to retroactively revoke or elect 179 permanently extended

5-year S Corporation Built-in Gain “Recognition Period”

• 35% “Built-in Gains” tax applies to income accrued as a C corporation but recognized during the “recognition period” following an S corporation election.

• Recognition period originally enacted as a 10-year period in 1986.

Gain Exclusion for 5-year Original Issue C Corp Shares

• Exclusion applies to gain on shares of “qualified small business stock held for five years by non-corporate owners.

• C corporation shares acquired in original issue after 9/27/2010

• Corporation must meet size limits

• Excludible gain limited to $10 million lifetime or $10x basis.

15-year Life for Certain Buildings

Qualified Leasehold Improvements: made pursuant to a lease more than 3 years after building placed in service

Can’t be a related-party lease

Must be interior space; can’t be enlargement, elevator, escalator, or structural component.

15-year Life for Certain Buildings

Qualified Retail Property: Improvements of a building portion that is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and placed in service more than three years after the date the building was first placed in service.

Similar limitations to qualified leasehold property

15-year Life for Certain Buildings

Qualified Restaurant Property: a building or building improvement if more than 50% of square footage is for prep and seating for on-premises meals.

Charitable Contributions by IRAs

IRAs may contribute up to $100,000 annually to charities (other than private foundations) if the IRA owner is 70 ½.

These can be made to satisfy RMD requirements

Why are IRA contributions better?

Child Credit made Permanent

“Enhanced” $1,000 per-child refundable credit made permanent. Refundable to extent of greater of:

15% of the amount of earned income over $3,000

or

If taxpayer has 3 or more qualifying children, excess of Social Security tax over EIC for the year

Earned Income Credit Changes

• 45% rate for taxpayers with three or more qualifying children made permanent

• Reduction in earned income credit marriage penalty made permanent

Bonus Depreciation

• 50% rate extended retroactively from 1/1/15 through 2017

• 40% bonus for property placed in service in calendar year 2018

• 30% for property placed in service in calendar year 2019

Bonus Depreciation

• All interior improvements to buildings other than structural work, enlargement, and elevators and escalators will be eligible for bonus depreciation, starting in 2016.

• Available for improvements eligible for 15-year lives.

Bonus Depreciation

• First-year Sec. 280F cap for autos is increased by $8,000 for bonus-eligible vehicles (to $11,160 for 2015)

• $8,000 amount reduced to $6,400 in 2018 and $4,800 for 2019

Research Credit Modifications

• Credits generated by businesses with gross receipts under $50 million can offset AMT, for credits generated after 2015

• Qualified small businesses (gross receipts under $5 million) can offset payroll taxes with research credits after 2015

Work Opportunity Credit Modifications

Extended through 2019

Expended to cover “qualified long-termunemployment recipient”• Certified by job service as being unemployed at least

27 weeks• New class applies starting in 2016

College Spiffs• American Opportunity Credit made permanent (100% of

qualified tuition and related expenses up to $2,500; up to $1,000 refundable

• Above-the-line qualified tuition deduction extended through 2016

• $250 teacher expense deduction made permanent, expanded, indexed

• Computer equipment, software qualify for Sec. 529 plans retroactive for 2015

Items Extended through 2016 Include

•Nonbusiness energy property credit

•New energy-efficient home credit for contractors

•Biodiesel and renewable diesel credits

Other

• FIRPTA withholding rate increased to 15% (from 10%) starting 2/17/16

• “Cadillac Tax” deferred to 2020

• Renewable credit for qualified wind facilities

2016 Iowa Issues

Sales Tax on Manufacturing Supplies

Effective July 1, 2016…Broader exemption for “consumable manufacturing supplies” (machinery and equipment used in the manufacturing process)

Implications of Comptroller v. Wynne

Facts:• Maryland statutes imposing a tax on income Maryland residents

earned outside Maryland violated the dormant Commerce Clause• Must offer Maryland residents a full credit against the income

taxes paid to other states

IDOR announcement:• Will discontinue practice of allowing the out-of-state tax credit to

apply only to state income tax liability rather than also to local tax (surtax) liability

• Impacted taxpayers can amend their returns to claim a refund for tax years 2012-2014

• New forms for 2015 will reflect the Court’s ruling

Short-Term Home Rentals

IDOR Policy Letter No. 15510049 (Oct. 21, 2015)

Short-term home rentals are subject to Iowa’s 5% hotel/motel tax

Other changes this year

New Audit Rules

• The partnership would be permitted to issue adjusted Schedules K-1 to the partners of the reviewed year.

• The recomputed tax for the reviewed year would be paid in the adjustment year. If so, the partners would take the adjustment into account on their individual returns in the adjustment year (not the reviewed year).

• I.R.C. §6226(b)(1).

New Audit Rules

• In addition, rather than amending the partnership tax return, partnerships will have the option of initiating an adjustment for a reviewed year.

• The adjustment could be taken into account at the partnership level or the partnership could issue adjusted information return to each partner of the reviewed year.

Individual Mandate Penalty Up

For 2015, it’s the greater of …

• $325/adult, plus $162.50/child under age 18 with a maximum of $975

or• 2% of household income above the tax filing

threshold

Large employer ACA reporting

• All employers that are applicable large employers are subject to the Employer Shared Responsibility provisions, including for-profit, non-profit, and government entity employers

• Employer’s with fewer than 50 employees are not mandated to provide insurance, but may still must comply with the information reporting requirements.

Two Provisions

Two provisions of the Affordable Care Act apply to applicable large employers (ALEs):• The employer shared responsibility provisions;

and• The employer information reporting provisions for

offers of minimum essential coverage and minimum value

In addition, self-insured ALEs – that is, employers who sponsor self-insured group health plans – have additional provider information reporting requirements

Applicable Large Employer

New forms that ALEs will use to complete this reporting

• Form 1095-C, Employer-Provided Health Insurance Offer and Coverage• Form 1095-C is used to report information about each full-

time employee, and is the form that is furnished to full-time employees

• Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns• Form 1094-C is used to report to the IRS summary information

and to transmit Forms 1095-C to the IRS

Applicable Large Employer

ALE Status is determined on a controlled group basis!

Applicable Large Employer

Notice 2016-4 Extends Deadlines for 1095-B and 1095-C reporting.

Employer Health Reimbursement Plans

Health Reimbursement Arrangements (HRAs):Authorized by §§105, 106, HRAs are employer-funded plans used to reimburse (tax-free) employee medical expenses, including health insurance premiums.

Medical Expense Reimbursement Plans (MERPS): Also allowed under §105, MERPs reimburse employee medical expenses, but unused amounts are not carried over to following years.

Other Employer Reimbursement Plans

• Healthcare Flexible Spending Accounts (FSAs) (§125): Employers and employees (limited to $2,550) may contribute pre-tax dollars to this plan through cafeteria plan, which will reimburse employee for medical expenses.

• Employer Payment Plans (§106): Employers reimburse employees for substantiated premiums, and payments are excluded from income.

IRS Notice 2013-54 Market “Reforms”

• Employer health reimbursement plans are generally considered group health plans.

Group health plan is defined as “a plan of, or contributed to by, …an employer…to provide health care (directly or otherwise) to the employees or their families.” IRC §5000(b)(1)

• Group health plans (unless exempt) are subject to ACA market reforms, in particular:• No annual dollar limits on essential health benefits.• No cost-sharing for preventive health services

IRS Notice 2013-54

Bottom Line: Because most standalone (not integrated with another group plan) employer health reimbursement plans impose limits on what they reimburse and because they do not ensure preventive services at no cost, they violate the market reforms (if not exempt).

Offering such plans subjects employers to stiff penalties (up to $100 per day per violation per employee ($36,500/year).

Excepted from Market Reforms

• The following types of reimbursement plans are specifically excepted from ACA market reforms and are therefore still allowed:• Plans with fewer than two persons who are current

employees.• Plans that provide only excepted benefits, including:• Accident-only coverage• Disability income• Certain Long-term care• Certain limited scope dental and vision benefits• Employee Assistance Program benefits

HRA Integration

Beginning January 1, 2014, an HRA must provide only excepted benefits or be integrated with an ACA-compliant employer sponsored group health plan.

HRA’s may not be integrated with a plan purchased on the Marketplace. They may, however, be integrated with an employer group plan purchased via SHOP.

New Guidance on Reimbursement Arrangements

DOL ACA FAQ XXII, Q&A3“A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage. Is this permissible?

“No. The Departments have been informed that some vendors are marketing such products. However, these arrangements are problematic for several reasons.”

What About 2% Shareholders?

• Can you reimburse S corp. 2 percent shareholder-employees’ individual premiums or is that also subject to the market reforms?

• No excise tax through 2015 (so, no Form 8928)• But, no application to reimbursement for non- 2%

shareholders• Transitional relief through June 30, 2015 applies

• Rely on Notice 2008-1 until further guidance issued

Self-Rental Rule

Rented for use in trade or business in which the taxpayer materially participates, and

Is not property rented incidental to a development activity

Identity Theft

ID theft tips• Social security cards and other documents with a social security

number (SSN) or individual taxpayer identification number (ITIN) should not be carried in the taxpayer’s wallet or purse

• An SSN or ITIN should not be provided to a business or other party unless absolutely necessary

• Confidential financial and other personal information should be protected and access to this information should be limited by using physical locks, computer passwords, or other security measures

• Credit reports should be reviewed annually• Personal computers should be protected using firewalls, anti-spam

and anti-virus software, updated security patches, and passwords for online accounts should be regularly changed

• Personal information should only be provided by phone, fax, or Internet if it is given to a known party

Publication 4557"Safeguarding Taxpayer Data - A Guide for Your Business"

• "Safeguarding Taxpayer Data - A Guide for Your Business"

• The purpose of this publication is to provide information on legal requirements to safeguard taxpayer data

• Safeguarding taxpayer data is a top priority • It is the legal responsibility of government,

businesses, organizations and individuals that receive, maintain, share, transmit or store taxpayers’ personal information

Signs of Identity Theft• The taxpayer discovers that more than one tax return for

them was filed with the IRS• The taxpayer discovers there is :

• A balance due• Refund offset, or • Collection action taken against them for a year for which they did

not file a tax return

• IRS records indicate the taxpayer received more wages than actually received

• The taxpayer’s state or federal benefits were reduced or canceled because the agency received information about an income change

Foreign reporting issues

Foreign Bank Account Reporting

United States persons are required to report under FBAR rules if:

1. the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and

2. the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

Reportable Account

• Bank accounts

• Securities and Commodities Accounts

• Mutual funds

• Cash value insurance and annuity policies

Reportable Account

Foreign insurers with U.S. policies include (among others), Sun Life and Foresters.

The 2013 ACLI fact book lists 99 foreign life companies operating in the U.S. in 2012.

Reportable Account

• Retirement accounts, including Canadian Registered Retirement Savings Plans, Canadian Tax-free Savings Accounts, and Mexican AFORE accounts.

• Offshore gambling accounts

Reportable Account

• Directly-held shares in foreign companies, ownership of foreign partnerships, U.S. mutual funds holding foreign stocks, and deposits in U.S. branches of foreign banks are not foreign financial accounts.

• Note: other reporting requirements may apply to interest in foreign financial assets.

Form 8938, Foreign Financial Assets

• “Specified persons” must report interests in “Specified foreign financial assets” that exceed the thresholds specified by law.

Form 8938, Foreign Financial Assets

Foreign Financial Asset• Stock or security issued by non-U.S.

person• Interest in a foreign entity• A financial instrument with a non-

U.S. issuer or counterparty

Form 8938, Foreign Financial Assets

Unmarried taxpayers and married taxpayers filing separately: Total value of specified foreign financial assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. These thresholds are $200,000 and $300,000 for taxpayers living abroad.

Form 8938, Foreign Financial Assets

• Married taxpayers filing a joint income tax return: Total value of specified foreign financial assets exceeds $100,000 on the last day of the tax year or $150,000 at any time during the tax year. These thresholds are $400,000 and $600,000 for taxpayers living abroad.

Form 8938, Foreign Financial Assets

• Form 8938 is filed with Form 1040. Unlike the FBAR, it is part of the 1040, and it is not required for 1041s or other entity returns.

Form 3520: Foreign Gifts and Trusts

• Gifts and bequests received from outside the U.S. are tax-free, like U.S. gifts, but unlike with U.S. gifts, there is a reporting requirement for the U.S. recipient.

Form 3520-A: Foreign Grantor Trusts

Annual return for foreign grantor trustsCalendar-year filing due March 15.

• Filed by “Each U.S. person treated as an owner of the Foreign Trust.”

• Non-filer penalties: Greater of $10,000 or 5% of the value of trust assets treated as owned by the U.S. person.

Form 5471

• Information Return of U.S. Persons With Respect To Certain Foreign Corporations This applies to U.S. taxpayers who own 10% or more of the stock of a foreign corporation, or to U.S. officer or director of a corporation in which a U.S. person owns a 10% interest. Related party rules apply in determining the 10% thresholds.

Form 5472

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Attribution rules apply.

Form 8865

Return of U.S. Persons With Respect to Certain Foreign Partnerships

• Similar to Form 5471 for owners of 10%+ interests in foreign partnerships.

Form 8858Form 8858, Information return of U.S. Persons With Respect to Foreign Disregarded Entities

• This is filed for directly-owned foreign disregarded entities and those owned by controlled foreign corporations for which there is a Form 5471 filing requirement.

Form 1042Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

• Required for interest, dividends, rents, other “Fixed or determinable annual or periodic income.”

• Deposit dates similar to a payroll tax schedule, based on withheld amounts.

Form 8804

Annual Return for Partnership Withholding Tax (Section 1446)• Required for partnerships with non-U.S.

partners.• Remittances similar to estimated tax

schedule

Form 8288U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests.• Remittance required from buyer within 20 days

of close of purchase from non-U.S. person.

Interesting 2015 cases

Vanney Associates Inc. v. Comm’r

Vanney Associates, Inc.Personal service corporationCash basis

Bonus Check DeductionRobert Vanney

Architect for 39 yearsSole shareholder of Vanney Assoc.

CEO, CFO, VP of Marketing, VP of Operations, Dir. of HR

Karen VanneyCPAWorks elsewhereDoes Vanney Assoc. payroll

Bonus Check Deduction

2008 Robert received $240,000 wages and $815,000 year-end bonus Practice was to calculate company profits and

pay to Robert as a yearend bonus Net check to Robert was $464,183

Endorsed bonus check and signed back over to Vanney Assoc. Recorded as a loan that was repaid March

2009

Bonus Check Deduction 12/31/2008

Vanney Assoc. bank balance $283,033 2008 corporate return

$1.055 million claimed as officer compensation $123,191 taxes and licenses

$11,818 of that was Medicare taxes

IRS disallowed $815,000 of officer compensation and $11,818 for taxes and licenses

Issue

• Whether Vanney Assoc. can deduct officer compensation and taxes related to the year-end bonus

Analysis Vanney claimed restricted use of the check

He could NOTCash itUse it to pay a debtUse it to make a loan to anyone else

His only option was to lend it back to Vanney Assoc.

Holding

• No deduction for officer compensation allowed

William (Dave) and Caroline Evans v. Comm’r

Dave owns Dave Evans Construction, LLC (DEC) General contractor in Boise licensed only in ID

“Boise is a major center for motocross racing” “A local race can easily attract 1,000 riders.”

DEC Gross Revenues

Promotional Expense Deduction

The Evans have 5 children, all race motocross Evans paid for all motocross expenses Son Ben’s racing career took off in 2005 CPA advised supporting Ben’s racing could be

a valid promotional activityDEC became a sponsor

2007, Ben won the premier title to move to the pro circuit

Promotional Expense Deduction

Motocross-racing-related income & expenses

DEC’s other advertising expense

DEC stopped paying Ben’s racing-related expenses after he started pro circuit in 2007

Issues

Whether racing activity expenses were ordinary and necessary business expenses

Whether racing activity expenses were reasonable

Whether they can take §179 deduction for the motorhome

Analysis

DEC sponsorship…”boosted exposure and goodwill within the community.” Expenses were ordinary and necessary “…in light of the significant tangible and

intangible benefits DEC obtained…”Amounts spent were reasonable

Okay to take §179 on motorhomeUsed primarily to transport Ben and his

motorcycles

Splitting IRA Proceeds With Siblings Doesn’t Avoid Tax

• Morris v. Comr., T.C. Memo. 2015-82• Facts:

• Taxpayer was adult son that was the sole beneficiary listed on his father’s IRA which had a balance of $96,422 at the time of the father’s death

• Taxpayer took a lump-sum distribution which was reported to him on From 1099-R (in addition to the annual distribution that had previously been made to his father before death)

• Taxpayer believed his father would have been to share the IRA with his two siblings, so he sent them $37,000 total

• Taxpayer didn’t report any of the distribution as income based on advice from the law firm probating the estate• Paralegal said there would be no tax due on the IRA• She meant no federal estate tax due or state death taxes• He understood her to mean there would be no income tax to him

• IRS sends SNOD for $27,037 (including the penalty which was later dropped)• Court agrees with IRS – voluntarily sharing the proceeds does not eliminated

the tax liability

Contract Payments For (Human) Egg Production Not Excludible

• Perez v. Comr., 144 T.C. No. 4 (2015)• Facts:

• Taxpayer entered into contracts to produce unfertilized eggs for transfer to infertile couples

• Contracts characterized payments as being form petitioner’s time, effort inconvenience, pain and suffering and not in exchange for or purchase of eggs

• Taxpayer underwent numerous physical exams and self-administered painful hormonal injections, suffering bruisings and surgery to harvest the eggs

• Taxpayer received $20,000 under the contracts and received a Form 1099, but didn’t report any of it• Excluded it under I.R.C. §104(a)(2) as damage payments for pain and

suffering• IRS said “no”

Contract Payments For (Human) Egg Production Not Excludible

• The court’s analysis…• The payments were received for personal services

rendered and are not excluded under I.R.C. §104• The fact that the petitioner suffered physical pain or

injury during the performance of rendering services pursuant to the contract did not change that result• The payment was not received on account of

personal injuries or sickness, but rather for services• Court noted that the taxpayer voluntarily

contracted to be paid to produce eggs via a process that involved pain and suffering

Like-Kind Exchanges

• There is a 2-year holding period requirement in related party exchanges

• An exception applies if the IRS is satisfied that neither the exchange nor the disposition has as one of its principal purposes the avoidance of federal income tax. I.R.C. §103(f)(2)(C)• Taxpayer bears the burden of proof

• Note: If the principal purpose is to avoid state income tax, it might qualify. This could allow for an exchange of low basis property between a parent residing in a high-tax state and a child residing in a state without an income tax.

North Central Leasing (8th Cir. 2015)

• Facts:• Plaintiff was a subsidiary of a Caterpillar dealer that sold

Caterpillar equipment, and ran the dealer’s rental and leasing operations.

• Plaintiff sold used equipment to third parties who then paid the sales proceeds to a q.i.

• The q.i. forwarded the sales proceeds to the dealer who then bought new Caterpillar equipment for the plaintiff and then transferred the new equipment to the petitioner through the q.i.

• Arrangement provided favorable financing from Caterpillar and the dealer had up to 6 months from invoice date to pay Caterpillar for the petitioner’s new equipment

North Central Leasing (8th Cir. 2015)

• Outcome:• Not a tax-deferred exchange• Resulted in basis-shifting• Resulted in related party’s receiving cash that was

unfettered and unrestrained for 6 months• Resulted in a significant reduction in taxes for the related

party• Taxpayer couldn’t explain the reason for the related

party’s involvement in the exchanges or the unneeded complexity of the transactions

• 8th Circuit agreed with the 11th Cir. (Ocmulgee Fields) and 9th Cir. in Teruya Bros

Richard S. Leyh and Ellen O’Neill

Rental real estate professional requirements:• More than 750 hours in real estate

business activities• More real estate hours than all

other activities.

Richard S. Leyh and Ellen O’Neill

“Petitioner provided day-by-day explanations of the specific rental real estate activity in her log. Further, from the log it was easy to identify days when the activity took place in Austin. Finally, petitioner has shown that the travel time was not included in the original log. Petitioner's log and her revised log showing the travel time are well within the guidelines…”

Robert and Pamela Redisch

Taxpayers stopped using Florida condo and offered it for rent. They never rented it. They then sold it for a substantial loss.

“After considering all of the facts and circumstances, we find that the Porto Mar property was not converted to a rental property. “

The Ellis Case (8th Cir. 2015)

Facts:

• The taxpayer was the fiduciary of his IRA, entered into prohibited transactions under both I.R.C. § 4975(c)(1)(D) (see item (4), and I.R.C. §4975(c)(1)(E).

• The taxpayer had directed his IRA to purchase a 98% membership interest in a limited liability company (“LLC”) that he had created, and then received compensation from the LLC for services performed for the LLC.

• As the IRA's fiduciary and beneficial shareholder of more than 50% of outstanding ownership interest in LLC, the taxpayer thus engaged in the indirect transfer of plan income or assets for his own benefit, in violation of I.R.C. §4975(c)(1)(D).

• Plus, in authorizing and effecting the transfer, the taxpayer had dealt with IRA income or assets for his own account, as prohibited by I.R.C. §4975(c)(1)(E).

Result:• IRA terminated and full amount taxable, plus penalties

Taxpayer of the Year

• T.C. Summary Opinion 2015-47 (Escalante)

• 2005: teacher hours 618, rental 2,450.• Taking an hour to write a check.• Working 25 hour days.