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Repair and capitalization relief!

On November 25, 2015 IRS provided small businesses and landlords with repair and capitalization relief. Please see Notice 2015-82 (PDF). The 2013 regulations provided guidance on what is a repair and what had to be capitalized. Bullet point four of this post mentions the 2013 changes.  The regulations allowed businesses to treat amounts up to $500 as supplies. Previously, taxpayers would have had to justify deducting new property costing under $500. The new notice changes the amount from $500 to $2,500.

Looks like this car requires more than $500 in work!

Kaz Andrew, 1976 Lincoln Town Coupe, under Creative Commons license, on Flickr

Some background

Tangible property is just what it sounds like. It is property you can touch. Intangible property – such as a patent – cannot be touched. The copyright document can be touched but not the actual idea. For a long time, taxpayers and IRS have argued about whether or not a piece of tangible property is a repair or subject to capitalization. The distinction matters because businesses can immediately deduct repair and maintenance costs, with some exceptions. On the other hand, something that has to be capitalized is typically depreciated over anywhere from a few years to 40 years.

Depreciation is a method of claiming part of the cost of the capitalized asset each year for several years.

  • Repair = 100% deducted in year one (there are some exceptions which are beyond the scope of this post)
  • Capitalized = deduct as little as 2.5% of the cost each year for 40 years, sometimes even less per year.

Qualifying taxpayers

Taxpayers that have an applicable financial statement got a $5,000 safe harbor in the 2013 regulations. Taxpayers without an applicable financial statement (AFS) only received the $500 safe harbor. An AFS is one that is audited or required to be filed with a regulatory agency. If the only reason for audited AFS was to get the $5,000 safe harbor then the taxpayer was still stuck with the $500 safe harbor.

An example

XYZ Company built a $2,500 storage shed. Prior to the 2013 regulations, IRS would have wanted the taxpayer to deduct an average of $65 a year for the next 39 years. Assume XYZ Company has an AFS. If the shed was constructed in 2014 or after, then XYZ could claim the entire $2,500 as a supply deduction in the year built.

Assume ABC Company does not have an applicable financial statement and it builds the $2,500 shed in 2014.  Under the 2013 regulations, ABC was stuck with claiming an average of $65 a year for 39 years. Notice 2015-82 changes this for 2016 (and for many also for 2015). If ABC builds a new shed in 2016 for $2,500, it can claim a supply deduction in 2016 of $2,500. A much better deduction than $65 a year for 39 years.

Repair and capitalization relief for 2015?

The notice states it “is effective for costs incurred during taxable years beginning on or after January 1, 2016.” This seems to say no businesses qualify for the $2,500 safe harbor under the notice until 2016. However, the notice goes on to say

AUDIT PROTECTION

For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an [applicable financial statement] can utilize the de minimis safe harbor … for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements ….

IRS is saying that if a taxpayer uses the $2,500 safe harbor in 2015, then IRS will not deny the supply deduction as long as it is less than or equal to $2,500. The taxpayer still has to meet all the other requirements that existed when the amount was $500.

How is this for some repair and capitalization relief? Audit protection, nice.

 

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Corporation return due date is March 16, 2015

2014 Form 1120-S

The calendar year corporation return due date is March 16, 2015 because the 15th falls on Sunday this year. The date applies to S and C corporations. Failing to meet the deadline results in penalties calculated as a percentage of the tax.

While S corporations do not generally pay income tax, Congress decided to charge $195 per schedule K-1 per month or partial month. So a ten owner S corporation that files one month and three days late owes $195 x 10 owners x two months or $3,900.

The corporation can get a federal extension by filing Form 7004 (downloads as a PDF) on or before March 16, 2015. The company should also file extensions with all applicable states. The NC corporate extension form is CD-419. Interestingly, the deadline for a calendar year NC corporate return is April 15, 2015 for 2014.

Entity extension form

Make sure to send the extension certified or registered mail so you have proof of timely filing. You can also file electronically but be sure to keep proof. It is not IRS’ job to prove you did not file timely, it is your job to prove you did.

Please contact us if you need assistance.

 

 

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Expiring tax provisions, will Congress finally do their job?

Grand Bargain on tax extenders? Flickr by DonkeyHotey

Yesterday, I wrote about tax provisions that expired at the end of 2013. Still little action, other than bloviating, from Congress. But wait, six more federal tax provisions expire at the end of this year and 20 more expire after 2014. Instead of listing them all you can read the report (PDF). Just the highlights:

  1. The ability to get a refundable child credit for children under 17 years of age is restricted after 2017.
  2. The higher American opportunity education credit expires after 2017. We go back to the lower credits previously in effect.
  3. The Earned Income Credit of 45% for three or more children drops after 2017 to its prior level of 30%.Several alternative fuel provisions expire in 2014
  4. Several pension funding rules expire in 2014
  5. Aviation tax rates drop and other provisions expire in 2015. The taxes go into the Aviation Trust Fund for the maintenance, construction and safety of air infrastructure. If the higher rate is not restored, expect longer delays and more dangerous skies unless Congress comes up with an alternative funding mechanism.
  6. Higher Highway Trust Fund rates expire in 2016. This fund is used to finance interstate and other roads.
  7. Several other energy credits and provisions expire after 2014.
  8. The ability to get a refundable child credit for children under 17 years of age is restricted after 2017.
  9. The higher American opportunity education credit expires after 2017. We go back to the lower credits previously in effect.
  10. The Earned Income Credit of 45% for three or more children drops after 2017 to its prior level of 30%.

At least Congress has time to take care of these before we get too far after the expiration dates. When Congress does not do its job timely, taxpayers are left wondering what they can and cannot do. For example, the Research and Experimentation (R&E and also known as R&D) credit expired at the end of last year. Do business operate as though Congress will renew it retroactively, as Congress has done in the past? Alternatively, businesses might spend less on R&E since they do not know if they will get some of the cost back in a tax credit.

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Expired tax provisions, will they return?

Courtesy of www.TaxRebate.org.uk, license under CC.

The Joint Committee on Taxation lists 55, yes 55, tax provisions that expired December 31, 2013.  Their report (PDF) also includes a list of tax provisions expiring in 2014 and future years.  Will Congress renew them all, some of them or none of them? My comments are in italics. Selected expiring provisions:

  1. Credit for certain nonbusiness energy property (Residential energy credit – e.g. for a qualifying central air and heat system.)
  2. Tax credit for research and experimentation expenses
  3. Employer wage credit for activated military reservists
  4. Work opportunity tax credit (Did the unemployed all disappear?)
  5. Deduction for certain expenses of elementary and secondary school teachers (Perhaps having the schools pay for classroom supplies would be a better choice.)
  6. Discharge of indebtedness on principal residence excluded from gross income of individuals
  7. Deduction for qualified tuition and related expenses
  8. Additional first-year depreciation for 50 percent of basis of qualified property (Failing to renew this one will raise a lot of employers’ income taxes.)
  9. Premiums for mortgage insurance deductible as interest that is qualified residence interest (An income tested deduction many did not receive. Some people argue this deduction encourages people to buy more house than they can afford, others say the exact opposite – it allows people to buy a house who would not otherwise qualify.)
  10. Deduction for State and local general sales taxes (Shouldn’t this have applied to everyone? Not just to those in a state without an income tax.)
  11. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  12. Increase in expensing to $500,000/$2,000,000 and expansion of
    definition of section 179 property (Another one that will cost employers’ a lot of income tax if not renewed.)
  13. Tax-free distributions from individual retirement plans for charitable purposes

Did we ever need these?

  1. Credit for certain expenditures for maintaining railroad tracks (Railroads will not maintain their tracks unless the taxpayers help? Maybe there should be a credit for getting the oil changed in my car.)
  2. Credit for energy efficient appliances (manufacturer got this credit)
  3. Mine rescue team training credit (Really? Shouldn’t this be a requirement?)
  4. Election to expense advanced mine safety equipment (Apparently, the miners have a great lobby. Safety should be part of their mission, not something taxpayers should have to pay them to do.)
  5. Three-year depreciation for race horses two years old or younger (Wonder how many “jobs” this created?)
  6. Seven-year recovery period for motorsports entertainment complexes (Really? NASCAR needs special tax breaks when it is already the largest sport in the U.S.?)
  7. Placed-in-service date for partial expensing of certain refinery property (Subsidies for refiners?)
  8. Special expensing rules for certain film and television productions (I guess producers and movie stars are not paid enough.)

Here are the rest:

  1. Credit for health insurance costs of eligible individuals (Credit mainly for people who lost their job due to a “trade adjustment” – job shipped offshore – or whose employer went bankrupt and the government has taken over the former employer’s pension obligations.)
  2. Alternative fuel vehicle refueling property (non-hydrogen refueling property)
  3. Credit for two- or three-wheeled plug-in electric vehicles
  4. Second generation biofuel producer credit (formerly cellulosic biofuel producer credit)
  5. Incentives for biodiesel and renewable diesel
  6. Determination of low-income housing credit rate for credit allocations with respect to non-federally subsidized buildings
  7. Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit
  8. Treatment of military basic housing allowances for low-income housing credit and for qualified residential rental project exempt facility bonds
  9. Credit for production of Indian coal
  10. Indian employment tax credit
  11. New markets tax credit
  12. Credit for construction of new energy efficient homes (Builder got credit.)
  13. Qualified zone academy bonds: allocation of bond limitation
  14. Parity for exclusion from income for employer-provided mass transit and parking benefits
  15. Accelerated depreciation for business property on an Indian reservation
  16. Election to accelerate AMT credits in lieu of additional first-year depreciation
  17. Special depreciation allowance for second generation biofuel plant property
  18. Special rules for contributions of capital gain real property made for conservation
    purposes
  19. Enhanced charitable deduction for contributions of food inventory
  20. Energy efficient commercial buildings deduction (This was small in comparison to the additional cost. I doubt it really incentivized many people to build energy efficient buildings but I am sure those that did liked the credit.)
  21. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
  22. Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric restructuring policy
  23. Modification of tax treatment of certain payments to controlling exempt
    organizations
  24. Treatment of certain dividends of regulated investment companies (“RICs”)
  25. RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (“FIRPTA”)
  26. Exceptions under subpart F for active financing income
  27. Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules
  28. 100-percent exclusion for qualified small business stock
  29. Basis adjustment to stock of S corporations making charitable contributions of  property
  30. Reduction in S corporation recognition period for built-in gains tax
  31. Empowerment zone tax incentives
  32. Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen)
  33. 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
  34. American Samoa economic development credit

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Calendar year corporate returns due 3/17!

Returns for entities taxed as corporations under Subchapter C or Subchapter S that have a calendar year must file by March 17, 2014 (the 15th is on Saturday) or request an extension. The extension is an extension of time to file NOT an extension of time to pay.

Penalties for “S” corporations start at $195 per owner per month or part of a month that the return is late. So if you file March 18, 2014 – one day late – then the “S” corporation owes $195 times the number of owners. Some small “S” corporations can get the penalty waived but it is best to file an extension if the “S” corporation cannot file by March 17, 2014.

Penalties for “C” corporations are 5% of the unpaid tax per month or part of a month late. The maximum penalty is 25%. “C” corporations also pay interest on tax not paid by the first due date.

Both types of corporations file Form 7004 (PDF) to request a federal extension. Most, if not all, states also require an extension form and charge penalties for late filing. For NC the extension form is CD-419 for both “S” and “C” corporations. We typically file them when we file the federal extension but the NC extensions are not due until April 15, 2014, which is the same due date for the NC corporate returns for calendar year corporate taxpayers.