What is GILTI?

U.S. shareholders of Controlled Foreign Corporations (CFC’s) are required to include in income their Global Intangible Low-Taxed Income (GILTI), as a result of the addition of IRC §951A by the Tax Cuts and Jobs Act. The rules apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of the U.S. shareholders in which or with which such tax years of foreign corporations end.

How is it calculated?:

Intangible income is determined according to a formulaic approach that assigns a 10-percent return to tangible assets (Qualified Business Asset Investment (QBAI)) and each dollar above the return is treated as an intangible asset.

What are the Proposed GILTI Regulations?:

Proposed regulations have been issued that provide the best guidance on the computation of the GILTI inclusion. The proposed regulations provide some new rules, including rules for consolidated groups, domestic partnerships, and partners, and required basis adjustments. The proposed regulations also contain a number of anti-abuse rules to be aware of and impose new reporting requirements.

How do I handle GILTI compliance?:

The rules for GILTI are complex and the guidance issued to provide additional rules for computing the correct GILTI inclusion. To ensure that the inclusion is correctly computed, it is recommended to work with international tax experts like the team at Azran Financial. Contact us to find out more information and if GILTI or FDII implications affect you and your business.

The IRS has finally released regulations for the IRC §199A deduction for qualified business income, also known as “pass-through deduction.”

What is Section 199A and Who Does it Apply To?

Section 199A allows business owners to deduct up to 20% of their Qualified Business Income (QBI) from sole proprietorships, partnerships, trusts and S corporations. Individuals, estates and trusts can also deduct 20% of their qualified REIT dividends and Qualified Income from a Publicly Traded Partnership (PTP). The deduction was one of the most high-profile pieces of the Tax Cuts and Jobs Act.

What’s included?

The Good:

  • Individuals can aggregate businesses and treat them as a single business, which can effectively increase the wage limits and capital limits on the deduction
  • A qualified business can get up to 10% of its gross receipts from services
  • A qualified business can include a related rental activity

The Bad:

  • Broadens the “service-business” category to include some non-service businesses that are incidental or related to a service business. This can limit the effectiveness of “crack and pack” strategies that try to create a qualified business by spinning off part of a service business

Mixed:

  • A rebuttable presumption that a former employee who continues to perform the same services for the employer is still an employee. I.e. the worker’s compensation is not qualified business income.

Neutral:

  • Defines terms such as:
    • Trade or Business
    • Unadjusted basis immediately after acquisition
  • Explains how to calculate the deduction
  • Detailed rules for determining the wage limits and capital limits
  • More clearly illustrates the three components of the deduction:
    • Qualified Business Income
    • REIT dividends
    • PTP income
  • Better explanations of:
    • Service business categories
    • Reporting requirements for pass-through entities (S corps and partnerships)
    • How an estate or trust can qualify for the deduction.

These changes and clarifications open up great opportunities for tax planning. Please contact us to discuss these new regulations will apply to your specific situation. Our team can review your current tax structure to ensure that you are receiving the maximum benefit of these new rules.

Summary:

Businesses can enhance their cash flow by optimizing their tax accounting methods.

The Tax Cuts and Jobs Act expanded the number of small business taxpayers eligible to use the cash method of accounting by raising the cap on gross receipts to $25 million averaged over the prior three years.

A change in accounting method can benefit any company, of any size, in any industry.

Before changing an accounting method, the IRS requires that a taxpayer obtain the IRS’s consent.

Businesses can enhance their cash flow by optimizing their tax accounting methods. This is especially important in times of tight money and inadequate revenues. More and more companies are putting their taxes under a microscope and taking a hard look at whether they can improve their cash flow by changing the accounting methods that they have elected either on past returns or during the current year. A taxpayer who is not on the optimal accounting method is effectively prepaying taxes, an undesirable and unnecessary result.

Every business must adopt a method of accounting to determine when it recognizes items of income and deduction. An accounting method determines timing (when an item is taken into account for taxes), not whether the item is taken into account. The choice of an appropriate method (or methods) is crucial because it determines the timing of overall income or loss.

The two most common overall accounting methods are the cash method, in which income and deductions are taken into account when payments are received or made, and the accrual method, in which income and deductions are taken into account when amounts are earned and expenses are incurred. Other accounting methods can apply to specific “material” items, such as the valuation of inventory or the treatment of an installment sale. For many businesses, there are scores of these “other accounting methods” to consider.

The Tax Cuts and Jobs Act expanded the number of small business taxpayers including startups eligible to use the cash method of accounting by raising the cap on gross receipts to $25 million averaged over the prior three years. Taxpayers who meet this revenue test are also eligible to use several simplified methods of accounting that exempt them from the requirements to capitalize costs in many situations, including the cash method of accounting and certain exceptions that may apply to accounting for capitalized costs, inventory, and long-term contracts. The IRS recently announced that it would automatically consent to these changes for taxpayers who meet specific eligibility requirements.

A change in accounting method can benefit any company—of any size, in any industry. Before changing an accounting method, the IRS requires that a taxpayer obtain the IRS’s consent. For some changes, the taxpayer must apply to the IRS for advance consent and pay a user fee. The application procedures are spelled out in IRS Revenue Procedure 2015-13. For these changes, the taxpayer cannot switch methods until the IRS agrees.

For other methods, the IRS has streamlined the process and will approve changes automatically. For these changes, the taxpayer can switch to another method by merely filing the proper information with the IRS, without having to wait for the IRS to grant its consent. “Automatic consent” significantly lowers the compliance costs needs to switch to a more advantageous method, enabling many more businesses to realize net savings by identifying yet unclaimed opportunities.

If you would like to know whether a change of accounting method can benefit your business and increase your cash flow, please contact us. If you have already filed a request to make one of these changes using non-automatic consent procedures, you may be able to have the user fee for that request returned if you act quickly.

Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

  1. If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
  2. Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  3. If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.
  4. If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  5. The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
  • The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated and the standard deduction will be increased. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies. Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that I’ve described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call us at (310) 691-5040.

Any change in Presidential Administration brings the possibility, indeed the likelihood, of tax law changes and the election of Donald Trump as the 45th President of the United States is no exception. During the campaign, President-elect Trump outlined a number of tax proposals for individuals and businesses. This letter highlights some of the President-elect’s tax proposals. Keep in mind that a candidate’s proposals can, and often do, change over the course of a campaign and also after taking office. This letter is based on general tax proposals made by the President-elect during the campaign and is intended to give a broad-brush snapshot of those proposals.

At the same time, the end of the year may bring some tax law changes before President Obama leaves office. This letter also highlights some of those possible changes with an eye on how late tax legislation could impact your year-end tax planning.

Campaign proposals

During the campaign, President-elect Trump called for reducing the number of individual income tax rates, lowering the individual income tax rates for most taxpayers, lowering the corporate tax rate, creating new tax incentives, and repealing the Affordable Care Act (ACA) (including presumably the ACA’s tax-related provisions). The President-elect, in his campaign materials, highlighted several goals of tax reform:

  • Tax relief for middle class Americans
  • Simplify the Tax Code
  • Grow the American economy
  • Do not add to the debt or deficit

President-elect Trump also identified during the campaign a number of tax-related proposals that he intends to pursue during his first 100 days in office:

  • The Middle Class Tax Relief and Simplification Act: According to Trump, the legislation would provide middle class families with two children a 35 percent tax cut and lower the “business tax rate” from 35 percent to 15 percent.
  • Affordable Childcare and Eldercare Act: A proposal described by Trump during the campaign that would allow individuals to deduct childcare and elder care from their taxes, incentivize employers to provide on-site childcare and create tax-free savings accounts for children and elderly dependents.
  • Repeal and Replace Obamacare Act: A proposal made by Trump during the campaign to fully repeal the ACA.
  • American Energy & Infrastructure Act: A proposal described by Trump during the campaign that “leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.”

Individual income taxes

The last change to the individual income tax rates was in the American Taxpayer Relief Act of 2012 (ATRA), which raised the top individual income tax rate. Under ATRA, the current individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. During the campaign, President-elect Trump proposed a new rate structure of 12, 25 and 33 percent:

  • Current rates of 10% and 15% = 12% under new rate structure.
  • Current rates of 25% and 28% = 25% under new rate structure.
  • Current rates of 33%, 35% and 39.6% = 33% under new rate structure.

This rate structure mirrors one proposed by House Republicans earlier this year. During the campaign, President-elect Trump did not detail the precise income levels within which each bracket percentage would fall, instead generally estimating for joint returns a 12% rate on income up to $75,000; a 25% rate for income between $75,000 and $225,000; and 33% on income more than $225,000 (brackets for single filers will be half those dollar amounts) and “low-income Americans” would have a 0% rate. As further details emerge, our office will keep you posted.

Closely-related to the individual income tax rates are the capital gains and dividend tax rates. The current capital gains rate structure, imposed based upon income tax brackets, would presumably be re-aligned to fit within President-elect Trump’s proposed percent income tax bracket levels.

AMT and more

President-elect Trump proposed during the campaign to repeal the alternative minimum tax (AMT). The last time that Congress visited the AMT lawmakers voted to retain the tax but to provide for inflation-adjusted exemption amounts

During the campaign, Trump proposed to repeal the federal estate and gift tax. The unified federal estate and gift tax currently starts for estates valued at $5.49 million for 2017 (essentially double at $10.98 million for married individuals), Trump, however, also proposed a “carryover basis” rule for inherited stock and other assets from estates of more than $10 million. This additional proposal has already been criticized by some Republican members of Congress, while some Democrats have raised repeal of the federal estate tax as a non-starter.

Other proposals made by President-elect Trump during the campaign would limit itemized deductions, eliminate the head-of-household filing status and eliminate all personal exemptions. President-elect Trump also has called for increasing the standard deduction. Under Trump’s plan, the standard deduction would increase to $15,000 for single individuals and to $30,000 for married couples filing jointly. In contrast, the 2017 standard deduction amounts under current law are $6,350 and $12,700, respectively, as adjusted for inflation

Possible new family-oriented tax breaks were discussed by President-elect Trump during the campaign. These include the creation of dependent care savings accounts, changes to earned income tax credit and enhanced deductions for child care and eldercare.

Health care

The Affordable care Act (ACA) created a number of new taxes that impact individuals and businesses. These taxes range from an excise tax on medical devices to taxes on high-dollar health insurance plans. The ACA also created the net investment income (NII) tax and the Additional Medicare Tax, both of which generally impact higher income taxpayers. The ACA also made significant changes to the medical expense deduction and other rules that affect individuals. For individuals and employers, the ACA created new mandates to carry or offer insurance, or otherwise pay a penalty.

President-elect Trump made repeal of the ACA one of the centerpieces of his campaign. During the campaign, the President-elect said he would call a special session of Congress to repeal the ACA. At this time, how repeal may move through Congress remains to be seen. Lawmakers could vote to repeal the entire ACA or just parts. Our office will keep you posted of developments as they unfold.

Business tax proposals

On the business front, President-elect Trump highlighted small businesses, the corporate tax rate, and some international proposals during his campaign. Along with simplification, and the reduction, of taxes for small business.

Particularly for small businesses, Trump has proposed a doubling of the Code Sec. 179 small business expensing election to $1 million. Trump has also proposed the immediate deduction of all new investments in a business, which has also been endorsed by Congressional tax reform/simplification advocates.

The current corporate tax rate is 35 percent. President-elect Trump called during the campaign for a reduction in the corporate tax rate to 15 percent. He also proposed sharing that rate with owners of “pass through” entities (sole proprietorships, partnerships and S corporations), but only for profits that are put back into the business.

Based on campaign materials, a one-time reduced rate would also be available to encourage companies to repatriate earnings of foreign subsidiaries that are held offshore. Many more details about these corporate and international tax proposals are expected.

Year-end 2016

More immediately, the calendar is quickly turning to 2017. Congress will meet for a “lame duck” session and is expected to take up tax legislation. Exactly what tax legislation Congress will consider before year-end remains to be seen. Every lawmaker has his or her “key” legislation to advance before the year-end. They include:

  • Legislation to renew some expiring tax extenders, especially energy extenders.
  • Legislation to fund the federal government, including the IRS, through the end of the 2017 fiscal year.
  • Legislation to enhance retirement savings for individuals.
  • Legislation to help citrus farmers, small businesses and more.

Some of these bills, if passed and signed into law, could impact year-end tax planning. The expiring extenders include the popular higher tuition and fees deduction along with some targeted business incentives. If these extenders are renewed, or made permanent, our office can assist you in maximizing their potential value in year-end tax planning.

Another facet of year-end tax planning is looking ahead. President-elect Trump has proposed some significant changes to the Tax Code for individuals and businesses. If these proposals become law, especially any reduction in income tax rates, and are made retroactive to January 1, 2017, your tax planning definitely needs to be reviewed. Our office will work with you to maximize any potential tax savings.

Working with Congress

When the 115th Congress convenes in January 2017, it will find the GOP in control of both the House and Senate, therefore allowing Trump to move forward on his proposals more easily. It remains to be seen, however, what compromises will be necessary between Congress and the Trump Administration to find common ground. In particular, too, compromise will likely be needed to bring onboard both GOP fiscal conservatives who will want revenue offsets to pay for tax reduction, and Senate Democrats who have the filibuster rule to prevent passage of tax bills with fewer than 60 votes. Beyond considering tax proposals one tax bill at a time, it remains to be seen whether proposals can be packaged within a broader mandate for “tax reform” and “tax simplification.”

The information generally available now about President-elect Trump’s tax proposals is based largely on statements by him during the campaign and campaign materials. President-elect Trump will take office January 20, 2017. Between now and then, more details about his tax proposals may be available.

 

As the year draws to a close, it is a good time to take stock of your tax situation and identify possible opportunities to minimize your tax liability. Many of the provisions associated with the American Taxpayer Relief Act of 2012 (ATRA) became effective in 2013, which means they will have an impact on this year’s tax return.

The ATRA extended numerous benefits for middle-income taxpayers that can help minimize your tax bite if you qualify. Tax benefits include many credits and benefits for families, some deductions for state and local taxes and tax credits for making energy-saving improvements to your home. If you are a higher income taxpayer, the ATRA increased your need to plan to lower the impact of higher rates.

We encourage you to contact us at your earliest convenience to discuss how these laws affect your tax situation and develop a strategy that makes sense for you. Among the issues you should be considering:

Health Care Reform

The Affordable Care Act (ACA) has generated a great deal of confusion and concern. Although no tax considerations for individuals are involved, taxpayers who don’t have health care coverage may be subject to a penalty.

Even if you already have coverage, you may want to consider alternatives available in the newly created Health Insurance Marketplace. We can help you assess what reform means to you and offer the advice you need to make the best choices.

New Tax Laws in Effect

  • High-income individuals will likely pay more in taxes under the new law and should consider options for minimizing their burden. The highest individual income tax rate rose to 39.6% in 2013 and taxpayers at this income level also saw the dividend and long-term capital gains tax rates rise from 15% to 20%.
  • In addition, the new 3.8% net investment income tax applies to single taxpayers with adjusted gross income of $200,000 and joint filers earning $250,000. This new tax may affect the effective after-tax return on the sale of your investments, but proper planning may serve to minimize the impact.
  • Although the alternative minimum tax (AMT) originally was aimed at high-income taxpayers, it increasingly has affected more and more middle-income taxpayers over the years. The law indexed the AMT for inflation but the use of certain tax breaks could still subject you to the tax.
  • Phase-outs of personal exemptions and the limitation on itemized deductions have been reinstated. As a result, joint filers with adjusted gross income greater than $300,000 and single taxpayers whose adjusted gross income exceeds $250,000 may see a decrease in both of these deductions.
  • After several years of uncertainty in the estate tax area, the ATRA finally created some permanency. The amount that an heir can inherit without owing estate tax is now set at $5 million and will be indexed for inflation in future years. In addition, the estate tax was raised to 40%. Under the ATRA, taxpayers age 70½ and older can once again make up to $100,000 of tax-free distributions from an IRA directly to qualified charities.

For those who are paying college tuition, there is some good news. Several education-related benefits were extended by the ATRA, including the American Opportunity Tax Credit, which allows eligible taxpayers to claim a tax credit for some higher education expenses. Given skyrocketing tuition costs, families should not overlook these credits and deductions as they plan for college.

We can help you understand your tax situation and determine the best steps to address your tax challenges and any other financial concerns. We are also available after tax season to advise you on the financial strategies and planning decisions that will help you meet your goals. Please don’t hesitate to contact us today to schedule an appointment to begin discussing your options.

article written by: Valley Tax Law

IRS shutdown

On October 1, IRS offices across the country emptied as most of the agency’s employees were furloughed following a lapse in appropriations. Nearly 90 percent of the IRS’s 90,000 employees were furloughed on October 1 after Congress failed to pass legislation to keep the IRS and other federal agencies operating after the end of the government’s fiscal year (FY) 2013. The IRS explained that some functions would continue during the government shutdown, including the processing of tax payments, criminal investigations and some litigation. The IRS reminded taxpayers that the underlying tax law remains in effect, as do their tax obligations during the shutdown.

Employer mandate

In July, the White House announced a one-year delay in the employer shared responsibility payment and employer/insurer reporting under the Patient Protection and Affordable Care Act (Affordable Care Act). The Affordable Care Act generally requires applicable large employers to pay an assessable payment if, among other circumstances, the employer fails to offer full-time employers and their dependents the opportunity to enroll in minimum essential coverage. The Affordable Care Act also requires large employers and many insurers to file annual returns reporting minimum essential coverage. After the White House’s announcement, the IRS issued transition relief and proposed regulations. The IRS reported that it is exploring simplification of employer/insurer reporting.

Individual mandate

The IRS issued final regulations on the Affordable Care Act’s individual shared responsibility requirements in August. The individual mandate generally requires individuals to carry minimum essential health coverage after 2013 unless they qualify for an exemption. An individual who does not carry minimum essential coverage and does not qualify for an exception must pay a penalty.

Repair regulations

In September, the IRS issued long-awaited final regulations on the treatment of costs to acquire, produce or improve tangible property. The final regulations impact any industry that uses tangible property, real or personal, the IRS explained. In the final regulations, the IRS added many taxpayer-friendly provisions, including a revised de minimis safe harbor, a routine maintenance safe harbor for buildings and new safe harbors for small taxpayers. Taxpayers will apply the final regulations to determine whether they can deduct costs as repairs or if they must capitalize the costs and recover them over a period of years.

Same-sex marriage/domestic partners

Following the U.S. Supreme Court’s decision to strike down Section 3 of the Defense of Marriage Act (DOMA) ( E.S. Windsor, June 28, 2013), the IRS issued guidance for taxpayers and tax professionals in August. The IRS announced a general rule recognizing same-sex marriage nationwide. Same-sex married couples are treated as married for all federal tax purposes, including income and estate taxes, the IRS explained.

However, the IRS’s treatment of married same-sex couples does not extend to domestic partners. The IRS explained that domestic partners are not considered married for federal tax purposes because they are not married under state law.

Net investment income tax

The Affordable Care Act imposes a 3.8 percent surtax on qualified net investment income under new Code Sec. 1411, generally effective for tax years beginning after December 31, 2012. In August, the IRS released a draft version of Form 8960, Net Investment Income Tax. The IRS is expected to finalize Form 8960 before the start of the 2014 filing season. The IRS is also expected to issue final regulations about the net investment income surtax before year-end to clarify many questions about the scope of the surtax.

Tax reform

The leaders of the House and Senate tax writing committee launched a nationwide tax reform tour during the summer of 2013. Rep. Dave Camp, R-Mich. and Sen. Max Baucus, D-Mont., visited several cities to promote comprehensive tax reform. At the same time, President Obama proposed to eliminate some business tax preferences in exchange for a reduction in the corporate tax rate. President Obama also proposed to tax carried interest as ordinary income.

Tax extenders

After 2013, many popular but temporary tax incentives (known as extenders) are scheduled to expire. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, the research tax credit, transit benefits parity, and many more. Some lawmakers in Congress have proposed to include the extenders in year-end comprehensive tax reform legislation, but leaders in the House and Senate have been cool to this idea. More likely, these incentives will be extended for one or two years in a year-end stand-alone bill or linked to other legislation. Our office will keep you posted of developments on the fate of these valuable tax incentives.

S corps

In August, the IRS announced exclusive simplified methods for taxpayers to request late S corporation elections. The IRS consolidated and expanded earlier guidance for taxpayers requesting late S corporation elections, late Electing Small Business Trust elections, late Qualified Subchapter S Trust Elections, Qualified Subchapter S Subsidiary elections, and certain late corporate classification elections.

Small employer health insurance tax credit

Qualified small employers may be eligible for the Code Sec. 45R tax credit that is designed to help offset the cost of providing health insurance to their employees. In August, the IRS issued proposed reliance regulations on the credit. In tax years beginning after 2013, a qualified small employer must participate in the Small Business Health Options Program (SHOP) to take advantage of the credit. In September, the White House announced a delay in the start of SHOP.

Per diem rates

The IRS announced in September that the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during travel after September 30, 2013. The high-cost area per diem increases from $242 to $251 and the low-cost area increases from $163 to $170. In 2012, the IRS did not increase the per diem rates, reflecting a directive from the White House to federal agencies to curb rising travel costs.

Innocent spouse

The IRS updated its equitable innocent spouse relief procedures in September. The IRS explained that the updated procedures are intended to give greater deference to the presence of abuse in a relationship. Some of the factors that the IRS uses to weigh a request for equitable innocent spouse relief were also made more taxpayer-friendly.

Worker classification

The Tax Court held in August that it lacks jurisdiction to review an IRS determination of worker status. The case arose from a request for the IRS to determine a worker’s status. The Tax Court found there was no audit or examination as the IRS was simply responding to the taxpayer’s request.

Collection due process cases

Taxpayers subject to IRS levy are generally entitled to a pre-levy hearing (a collection due process (CDP) hearing or an equivalent hearing). The Treasury Inspector General for Tax Administration (TIGTA) reported in September that it had discovered some concerns about the handling of CDP cases by the IRS. TIGTA discovered delays in the initial processing of requests for CDP hearings.

LILO/SILO transactions

In a case of first impression, the Tax Court applied the substance-over-form doctrine and found that an insurance company’s lease-in, lease-out (LILO) and sale-in, sale-out (SILO) transactions were not leases ( John Hancock Life Insurance Co. (USA), 141 TC No. 1). The Tax Court held that the taxpayer could not deduct depreciation, rental expenses, interest expenses, and transactional costs connected with the transactions.

Domestic production activities deduction

Code Sec. 199 provides a deduction for qualified domestic production activities. In August, the IRS determined that a taxpayer could claim the Code Sec. 199 deduction for in-store photo production activities. However, the taxpayer could not claim the deduction where it only transferred a customer’s photos onto DVDs because those activities were a service and not the manufacturing of a product.

IRS administration

President Obama has proposed John Koskinen to serve as the next Commissioner of Internal Revenue. If confirmed by the Senate, Koskinen would replace IRS Principal Deputy Commissioner Daniel Werfel. Koskinen previously served in leadership roles with the Federal Home Loan Mortgage Corporation (Fannie Mae).

If you have any questions about these or other federal tax developments that may impact you or your business, please contact our office.

As you may know, the health care law – the Patient Protection and Affordable Care Act (PPACA) – requires most individuals (including children and other dependents) to carry health insurance, beginning January 1, 2014. The law also requires the establishment of a health insurance exchange in all states by October 1, 2013. The goal is that exchanges, working with private insurers, will act as a marketplace and provide “one-stop shopping” for individuals and families who may need health insurance or who seek less expensive coverage. A companion program – the Small Business Health Options Program or SHOP Exchange – will assist small businesses that want to offer insurance to their employees.

PPACA amended the Fair Labor Standards Act (FLSA) to require that employers provide each employee with notice about the exchanges. The notice requirement applies to employers that employ one or more employees who are engaged in, or produce goods for, interstate commerce. An employer must have at least $500,000 in business annually. The notice requirement also applies to hospitals, schools, and government agencies.

Employers must provide notice to their existing employees by October 1, 2013, and must provide notice to new employees hired on or after October 1, 2013. Each employee must receive notice, regardless of the employee’s health plan enrollment status and part- or full-time employment status. Notice may be provided in writing or electronically under the Department of Labor’s electronic disclosure rules.

The notice must inform the employee:

  1. Of the existence of the exchange, the services provided by the exchange, and contact information for the exchange.
  2. That he or she may be eligible for a premium tax credit under the Internal Revenue Code if (a) the employer pays less than 60 percent of the cost of health insurance offered by the employee; and (b) the employee purchases health insurance through the exchange.
  3. That an employee who purchases health insurance through an exchange may lose the employer’s (tax-free) contribution to the cost of health insurance offered by the employer.

To satisfy this notice requirement, the Department of Labor has provided model notices on its website, at http://www.dol.gov/ebsa/healthreform/. The website provides one model for employers who offer a health plan to some or all of their employees, and another model for employers who do not offer a health plan. Employers may modify the notice, as long as it meets the content requirements described above.

If you have questions about this requirement or want help to comply with the requirement, please contact our office.

April 15 has come and gone but it’s not time to stop thinking about taxes and strategic tax planning opportunities. Since the start of 2013, there have been many new federal tax developments, which will impact tax planning for this year and beyond. As 2013 unfolds, many changes made to the Tax Code by the American Taxpayer Relief Act of 2012 (ATRA) take effect. Additionally, there are new taxes to take into account because of the health care reform package, along with enhancements to many tax credits and deductions. Now is a good time to revisit these developments and explore how they will affect your strategic tax plans. Planning today can help maximize your tax savings going forward. As always, please give our office a call or email if you have any questions.

Tax planning and ATRA

Returns just filed (or that will be filed under extension by October 15, 2013) reflect the tax laws as they existed in 2012 (with some expired provisions renewed retroactively for 2012 by ATRA). Looking ahead, your 2013 return to be filed in 2014 will reflect the many changes to the Tax Code made by ATRA. Because the new law was passed at the beginning of the year, it was overshadowed by the filing season. However, its provisions impact every taxpayer and it’s vital to take time to gauge how they will affect you. The list of changes made by ATRA is long: many generous tax incentives, such as the $1,000 child tax credit, enhanced adoption credit, and enhanced earned income credit, are made permanent. ATRA also permanently “patches” the alternative minimum tax (AMT), which definitely will impact planning for taxpayers liable for the AMT. The new law also extends permanently the Bush-era tax rate cuts for individuals except taxpayers with taxable income above $400,000 ($450,000 for married couples filing a joint return). Income above these levels is taxed at 39.6 percent effective January 1, 2013. ATRA also increased the tax rates on qualified capital gains and dividends for higher income taxpayers. All these changes and more are set in motion by ATRA.January 10, 2013.

New proposals to consider

Looking ahead, some new proposals could impact tax planning in 2013 and beyond. President Obama has proposed to reduce the value to 28 percent of certain deductions and exclusions that would otherwise reduce taxable income in the 33, 35 or 39.6 percent tax brackets. The President also re-proposed the so-called Buffett Rule, now referred to as the “Fair Share Tax” for taxpayers with incomes above $1 million (with full phase-in above $2 million). Moreover, the President has proposed to limit contributions and accruals on tax-favored retirement benefits, including IRAs, qualified plans, tax-sheltered annuities, and deferred compensation plans. The limit generally would apply when a taxpayer accumulates total retirement amounts that exceed the amount necessary to provide the maximum annuity permitted for a defined benefit plan. The President’s proposals are expected to be debated in Congress as lawmakers and the White House try to reach an agreement on tax reform and deficit deduction. President Obama has said he wants an agreement before August, which could significantly change your tax planning for 2013 and beyond. Our office will keep you posted of developments.

NII surtax takes effect

The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. The NII surtax on individuals equals 3.8 percent of the lesser of: Net investment income for the tax year, or the excess, if any of the individual’s modified adjusted gross income (MAGI) for the tax year, over the threshold amount. The threshold amount in turn is equal to $250,000 in the case of a taxpayer making a joint return or a surviving spouse, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case.

The IRS issued proposed regulations in 2012 intending them to be “reliance regulations.” Nonetheless, taxpayers continue to be confused over certain sections. Although final regulations are promised “within 2013” so they would be available for the 2013 tax year and 2014 filing season, current misinterpretation of the proposed regulations can impact on tax strategies now being put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII surtax liability. Our office will keep you posted of developments.

Vehicle depreciation limits increase for 2013

Tax planning for 2013 is helped by the IRS’s release of inflation-adjusted limitations on depreciation deductions for business-use of passenger automobiles, light trucks, and vans first placed in service during calendar year 2013. Some of the depreciation limits are identical to the limits for 2012; other ceilings have increased by $100. The 2013 dollar limits reflect the inflation adjustments both with the extension of bonus depreciation by ATRA and without. If bonus depreciation is allowed to lapse after 2013, as President Obama has proposed, the dollar limits for 2014 would be lower but would still be adjusted for inflation. The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed in service during the 2013 calendar year are: $11,160 for the first tax year ($3,160 if bonus depreciation does not apply); $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each succeeding tax year. The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2013 calendar year are slightly higher. Keep in mind that SUVs and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative definition.

IRS audits of business property write-offs on “stand-down”

The IRS announced in March that it had updated its 2012 directive that generally instructs employees to discontinue audits of costs to maintain, replace or improve tangible property. The updated directive tells employees not to begin examining those issues for tax years beginning on or after January 1, 2012 and before January 1, 2014. The directive retains the “stand-down” of audit activity in this area beginning in 2012. The IRS also advised that it intends to make changes to temporary regulations regarding certain de minimis rules, routine maintenance and more.

Prepare for employer and individual mandates under PPACA

The IRS issued long-awaited proposed reliance regulations on the employer mandate under the Patient Protection and Affordable Care Act (PPACA). An applicable large employer is an employer that employed an average of at least 50 full-time employees during the preceding calendar year, including full-time equivalent (FTE) employees. The statute defines a full-time employee as an employee who on average was employed for at least 30 hours of service per week.

The PPACA also generally requires individuals, unless exempt, to carry minimum essential health insurance coverage after 2013 or make a shared responsibility payment. The IRS has issued proposed regulations on the individual mandate. The proposed regulations, the IRS explained, are intended to mitigate the affordability test for related individuals.

IRS ramps up oversight of foreign accounts

The Foreign Account Tax Compliance Act (FATCA) gives the agency new tools to discover tax evasion. In January, Treasury and the IRS issued final regulations under FATCA that describe the requirements for foreign financial institutions (FFIs), nonfinancial foreign entities (NFFEs), and other taxpayers to comply with FATCA’s reporting and withholding regimes on U.S. and foreign account holders. The 544-page regulation package seeks to harmonize the United States’ regulatory requirements with the use of intergovernmental agreements (IGAs) to implement FATCA.

Simplified safe harbor for claiming home office deduction

The home office deduction is one of the most complex in the Tax Code. In response, the IRS announced a simplified safe harbor method for claiming the home office deduction for tax years beginning on or after January 1, 2013. Under the safe harbor, taxpayers determine the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage cannot exceed 300 square feet and the prescribed rate is $5.00, which provides a maximum deduction under the safe harbor of $1,500. The IRS indicated it may revisit the prescribed rate amount in the future.

To conclude “Since the start of 2013, there have been many new federal tax developments, which will impact tax planning for this year and beyond.”

If you have any questions about these or any other federal tax developments and their impact on tax planning, please contact our office at (310) 691-5040 or (818) 691-1234 or via e-mail at [email protected]

If you are a small employer with fewer than 25 full-time equivalent employees, pay an average wage of less than $50,000 a year, and pay at least half of your employee health insurance premiums then you may be eligible for the Small Business Health Care Tax Credit.

For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014. The IRS is expected to issue additional information about the enhanced version as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively.

Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save $7,500. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year.

Even if you are a small business employer who does not owe tax for the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.

This credit was provided by the Patient Protection and Affordable Care (PPAC) Act as part of a design to reform the United States health care system and encourage employer’s shared responsibility. If you have any questions regarding this credit or any other provision of PPAC Act, please call our office at (310) 691-5040 or (818) 691-1234 or e-mail us at [email protected]