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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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Mileage rates released for 2016

IRS and Congress were both busy in December. I will start the new year with the new 2016 mileage rates released on December 17, 2015 by IRS. The official release is Notice 2016-01 (PDF).

2013 Ford Taurus SHO by That Hartford Guy, on Flickr, under Creative Commons license, on Flickr

The mileage rates are:

2016:

  1. Business    54 cents per mile
  2. Charitable    14 cents per mile
  3. Medical     19 cents per mile

2015:

  1. Business    57.5 cents per mile
  2. Charitable    14 cents per mile
  3. Medical     23 cents per mile

Congress sets charitable mileage rate

Notice that the rate for using a vehicle to provide charitable services did not change. We can thank Congress for that as the amount is included in the actual law and IRS has no authority to change it based upon market conditions. Considering the drop in gas prices in 2015 compared to 2014, the declines should not be a surprise.

Mileage record keeping rules

You can read about the record keeping rules in this post – Business mileage deduction vs. commuting. You can learn about an app to track mileage from this post – Mileage logs stink – try an app. Keeping the required records can be a pain but failure to do so means you lose the deduction. Without the records, IRS is required by law to disallow the deduction.

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IRS relief for SC flood victims

Sometimes the IRS does something right. Hope nobody fainted. On October 7, 2015 the IRS provided people living in Bamberg, Berkeley, Calhoun, Charleston, Clarendon, Colleton, Darlington, Dorchester, Florence, Georgetown, Greenwood, Horry, Kershaw, Lee, Lexington, Orangeburg, Richland, Sumter and Williamsburg Counties in SC with more time to meet their filing requirements. More counties may be added once FEMA continues their damage assessments.

Taxpayers with income tax extensions who live in the affected counties will get until February 16, 2016 to file returns they extended to October 15, 2015. Other tax filings with payments or deadlines starting October 1 will also get the extension to February 16, 2016.

The IRS release is available here.

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Mileage logs stink – try an app

2013 Ford Taurus SHO by That Hartford Guy, under Creative Commons license, on Flickr

Keeping mileage logs is an aggravating requirement in order to claim vehicle expenses for most small business owners. There are some exceptions to a log – hearses, ambulances and 18 wheel trucks come to mind – but most people have to keep a written contemporaneous record or there is no vehicle deduction. Written contemporaneous record is IRS code for a mileage log. You can read more about the requirements in this post.

This post is about a way to make keeping a log a bit less taxing (sorry, pun intended).

Smartphone Apps substitute for mileage logs

Here is one that is popular with accountants – MileIQ. It works on Android smartphones and iPhones. Sorry, BlackBerry and Windows users you need to look elsewhere. Since I have a Windows Phone, I do not have personal experience with this app so please try before you buy. The application eases mileage tracking by:

  • Logs every trip automatically
  • Calculating the mileage automatically
  • Syncs with the cloud so you have a backup in case you lose your phone. IRS does not forgive you for losing your paper log.
  • Swipe to tell the app whether the trip is business or personal
  • Saves location names for those frequent destinations
  • Space to enter the extra information IRS wants – e.g. purpose of trip
  • It adds up total business miles so no manually totaling hundreds of entries

Currently, the monthly fee is $5.99 or annually you pay $59.99. If you have 40 or fewer a month, MileIQ is free.

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IRS taxpayer service declines

The Taxpayer Advocate released their mid-year report on how the tax season went. “Likening the 2015 filing season to ‘A Tale of Two Cities,’ however, the report says:  ‘For the majority of taxpayers who filed their returns and did not require IRS assistance, the filing season was generally successful.  For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory.’” This is even worse than last year’s report detailed in this post – IRS doing more with less?

Highlights

  • IRS processed 126.1 million individual returns versus 125.6 million the prior year.
  • The average refund was up slightly to $2,711 from $2,686 the prior year but about 3 million taxpayers received a refund this year.
  • Hold times for taxpayers were 23 minutes versus 14 minutes the prior year.
  • Sadly, only 37% of taxpayer calls were answered versus 71% the prior year. Answered means the taxpayer talked to a human and does not mean the taxpayer was actually helped.
  • Supposedly the IRS Taxpayer Advocate is a taxpayer’s last hope at IRS. With hold times of 19 minutes and only 39% of calls answered taxpayers seem to have little hope.
  • Tax practitioners have their own hotline to speed up service to them. Apparently 45 minutes on hold is faster than the 23 minutes non-tax practitioners received. Must be the newer “new math.” The IRS did answer 45% of tax practitioners calls which is better than for individuals but that may be because they held longer.
  • IRS is trying to introduce a new term to the average American – “courtesy disconnect.” It means the IRS hung up on us. What a polite way to say “we do not care.” About 8.8 million of use were shown this “courtesy” this year versus only 544,000 last year. If you get hung up on by the IRS you can no longer even consider yourself special.

Incentivizing taxpayers to cheat?

The news release says:

Olson wrote that the decline in taxpayer service imposes increased compliance burdens on taxpayers and may lead to erosion in taxpayer trust.  “For a tax system that relies on voluntary self-assessment by its taxpayers, none of this bodes well,” she wrote.  “In fact, there is a real risk that the inability of taxpayers to obtain assistance from the government, and their consequent frustration, will lead to less voluntary compliance and more enforced compliance.

I read that to mean the Taxpayer Advocate would not be surprised if people throw up their hands and do what they think is best for them instead of trying to figure out the law and the forms.

Long-term plan concerns

According to the report, IRS’ long-term plan is too heavy on enforcement and too light on customer service. Additionally, the IRS’ is pushing too much online taxpayer service and cutting back on human assistance. For a hint on a better way to search the IRS website see the Website section of this post – Get IRS help by appointment.

Identity theft protection

OK your identity has been stolen and someone is using your information to get a tax refund. From my experience, this is an extremely stressful situation for most people. So how does IRS help?

If someone else uses your Social Security Number before you file, expect to wait an average of six months for a refund. If you owe, do not worry they will promptly take your payment. If an IRS’ fraud filter incorrectly flags your return, IRS makes you wait an average of 28 minutes to speak to someone and “courtesy disconnects” 83% of callers. The good news is IRS is catching more fraudulent returns before sending refunds. The bad news is IRS’ fraud filters are flagging more legitimate returns – over 600,000 this year.

Obamacare problems

Not surprisingly, there were quite a few problems caused by the new Affordable Care Act (ACA) provisions. Interestingly, the Taxpayer Advocate attributes many of them to other parties. For example, the Center for Medicare and Medicaid Services sent out about 800,000 erroneous Forms 1095-A regarding health care acquired through the ACA exchange.

Conclusion

Considering the 17% inflation adjusted budget cut IRS has experienced since 2010, the problems with answering the phone are not surprising. I discussed the IRS budget earlier in this post. Of course, if IRS would stop shooting themselves in the foot they could do a better job with their existing budget. A bit more money to customer service and less to enforcement might actually be profitable.

 

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Get IRS help by appointment


In the past, IRS Taxpayer Assistance Centers were open on a first come first served basis to provide in person assistance with tax issues. Now the IRS is testing letting taxpayers get IRS help by appointment in-person. IRS encourages taxpayers to use the face-to-face meeting to only handle issues that cannot be taken care of over the phone or online.

You can find an IRS Taxpayer Assistance Office offering appointments here. Scroll to the bottom and click on your state or the international link. Look for a link to “By Appointment” in the Days/Hours of Service column for those offices scheduling appointments. As of this writing, the only NC IRS site taking appointments is in Wilmington. All other locations are drop-in with first come first served service. So how good are IRS’ suggested alternatives?

Website help

Is the IRS’ website a realistic option? Depends on how complex your problem is and whether it is specific to your account or not. Downloading forms and publications is pretty straight forward, assuming you know the form or publication you need. The IRS search tool is not ideal (being polite here). If I do not know where the information is on the IRS site, I usually use Google to search just the IRS website. You can do this in at least two ways – 1) use the Google Advanced Search screen and complete at least one search field and put “irs.gov” in the site or domain field or 2) type your search normally and at the end add “site:irs.gov.” Leave out the quotation (“) marks. Here is an example search for information on the child tax credit that will provide results only from the IRS site:


 

 

 

 

 

So the IRS website will only help you can find and understand the information on their site. It is no help if you need specific help with your actual account (e.g. respond to an IRS notice).

Phone help

Good luck calling IRS! You are better off searching IRS’ website than calling. The Treasury Inspector General for Tax Administration (TIGTA) has several reports on IRS phone efficiency. Need help because you have a collection notice? TIGTA reports IRS collections answers 25% fewer calls than they did in 2011 and taxpayers who do get through wait 97% longer (about 8 more minutes) than in 2011.

What about taxpayers seeking answers to help them complete their returns? TIGTA wishes them good luck (OK, not really but that is the gist of the report). TIGTA reports the level of service in 2015 through March 7th has dropped to 38.5% from 74.7% in 2014. The level of service is a measure of a taxpayers success in getting assistance (i.e. talking to an IRS employee, not necessarily getting the right answer). The average wait time more than doubled from 11.7 minutes to 24.6 minutes in the mid-season report.

On July 15, 2015 the Taxpayer Advocate gave updated numbers – IRS answered 39% of calls and hold times averaged 23 minutes compared to 71% answered the prior year with an average hold time of 19 minutes. So by the end of the tax season things got a little better or less bad.

Only the IRS could come up with a term like “courtesy disconnects” to replace “we hung up on you while you were on hold.” IRS hung up on 8.8 million callers before they got to speak to anyone. Wonder how many were hung up after starting to talk to an IRS employee but before receiving help? At least the hang ups only increased 544,000 from 2014.

In conclusion

It will be interesting to hear from people actually using the appointment system. Please add a comment letting us know if they were available at the scheduled time, were able to resolve your issue, and how difficult it was scheduling the appointment. If you prefer, you can send your comment directly to me.