Every year there is some change in the tax law that makes tax season unbearable for CPAs, attorneys and tax preparers alike. In 2014, it was the implementation of the 3.8% Net Investment Income Tax. In 2015, it will be Repair Regulations, the last minute passage of the “Tax Increase Prevention Act of 2014”, The Patient Protection and Affordable Care Act mandate, and changes in New York for estate and gift tax planning. Each of these will require a superhuman effort to simply be in compliance with the changes.
The Tangible Property and MACRS Regulations
The Tangible Property and MACRS Regulations, more commonly referred to as the “Repair Regs.”, will be on every tax preparer’s mind as many business returns filed this busy season will require a Form 3115. The importance of complying with these Regulations cannot be understated.
Prior to the issuance of new regulations, deciding whether an expenditure was considered an ordinary repair or capital asset was largely determined by case law such as INDOPCO Inc. v. Commissioner and a number of Revenue Rulings. The Internal Revenue Service and Treasury Department’s collective goal in issuing the regulations was to reduce controversy and give taxpayers clear guidance. Accordingly, after a long legislative process that started in August 2006, final regulations became effective September 19, 2013.
Policies and Methods
The final regulations generally apply to taxable years beginning on or after January 1, 2014. The regulations provide the following:
- Materials and supplies with a cost less than $200 are now deductible.
- Election to capitalize materials and supplies is now limited to rotable and temporary spare parts.
- Materials and supplies are now protected by the deminimus safe harbor election.
- Safe harbor threshold is $500 for taxpayers without an applicable financial statement and $5,000 for taxpayers with an applicable financial statement.
- Requires a written accounting policy.
- Requires the same accounting treatment for both book and tax purposes.
- Definition of a unit of real or personal property including major components and substantial structural parts: A unit of property is defined in Reg 1.263(a)-3(e) and is based upon a functional interdependence standard. However, special rules are provided for buildings, plant property, network assets, leased property and improvements to property.
- The definition of improvements include: betterments, restorations, and adaptation of tangible property which require capitalization. In general, a taxpayer must capitalize improvement related to the betterment, restoration, or adaptation of a unit of property.
- Fixing a material condition or defect that existed before the acquisition of the unit of property or arose in the production of the unit of property.
- Material addition, enlargement, expansion, or extension that increases the capacity of the unit of property.
- Materially increase the productivity, efficiency, strength, quality or output of a unit of property.
- Replacement of a component of a unit of property.
- Restoration of damage to a unit of property.
- Returning a unit of property to its ordinary efficient operating condition.
- Rebuilding to like new condition.
- Replacement of a part or combination of parts that comprise a major component or substantial structural part.
- When a taxpayer adapts a unit of property to a new or different use, the taxpayer must capitalize the costs associated.
- Election to capitalize repair and maintenance costs: A taxpayer may elect to capitalize repair and maintenance costs provided the books and records reflect the same tax treatment.
- Routine maintenance safe harbor: Under the safe harbor the cost of performing certain routine maintenance activities on a unit of property, including a building structure or one of its enumerated components, are deductible as routine maintenance.
- Safe harbor for small taxpayers with buildings: Qualifying taxpayers, with gross receipts less the $10 million for the three preceding years, may elect to deduct the cost of repairs, maintenance, improvements and similar activities if the cost does not exceed the lesser of 2% of the unadjusted cost basis of the eligible property or $10,000. An eligible building must have an unadjusted basis of $1 million or less.
Form 3115, required compliance, and accounting method changes
- Proc. 2014-16 provides guidance on the final repair regulations, while Rev Proc. 2014-54 provides guidance on the MACRS regulations.
- Special rules exist for small taxpayers with gross receipts of $10 million or less for the preceding three years.
- In general, unless a method was not previously established, taxpayers will be required to file Form 3115 to be in compliance.
- The Regulations and related Sec 481(a) adjustment will generally apply to amounts paid or incurred in taxable years beginning on or after January 1, 2014, or at the taxpayer’s option, amounts paid or incurred in taxable years beginning on or after January 1, 2012.
- The due date of Form 3115 is same as the filing due date of the associated return, including extensions.
- Accounting method changes related to the above Regulations are considered an Automatic Change.
- As a significant number of returns will require a Form 3115, we suggest creating a template and adding it to your tax compliance checklists.
- Circular 230 implications: CPAs preparing a federal return without a Form 3115 and/or certain required elections could be in violation of Circular 230 unless not required by Rev. Proc. 2015-20.
Revenue Procedure 2015-20
On February 4, 2015, the IRS issued Rev. Proc. 2015-20 granting significant relief to Small Business Taxpayers (SBT). A SBT is defined as a business with total assets of less than $10 million and average annual gross receipts of $10 million or less for the prior three taxable years. Under Rev Proc. 2015-20, SBT are permitted to make certain tangible property changes in methods of accounting with an adjustment under IRS Sec 481(a) that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014 without filing a Form 3115. Effectively, SBTs making these changes in method of accounting for the first taxable year that begins on or after January 1, 2014, may elect to make the change on a cut-off basis.
The Tax Increase Prevention Act of 2014
A large number of tax provisions that expired as of the beginning of 2014 have been given a retroactive one-year extension by Congress. Not all of the expired provisions were extended, but the ones that were will continue to provide relief to both individual and business taxpayers.
The House of Representatives passed The Tax Increase Prevention Act of 2014 (commonly referred to as the “tax extenders”) in early December 2014. The Senate approved the bill on December 16th and the President signed the bill on December 19th.
Some highlights of key provisions and extensions
- Section 179: the amount of qualifying property eligible for expense remains at $500,000 and the cap on total investment in eligible assets remains at $2,000,000.
- 50% bonus depreciation: for certain qualifying assets (MACRS property of 20 years or less or qualified leasehold improvement property) an additional 50% first year bonus depreciation is permitted.
- 15-year straight-line cost recovery life for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
- Discharge of indebtedness on principal residence continues to be excluded from the borrower’s taxable income.
Due to the late passage of the tax extenders, it may be prudent for tax advisors to revisit research and advice given to clients during the year. As these provisions were a one-year extension, effective December 31, 2014, they have already expired. Accordingly, in 2015, Congress will return to the negotiating table to address the recently expired tax provisions and extensions.
On a positive note, the IRS has announced that the 2014 filing season will not be delayed by tax extenders legislation. The IRS has started accepting returns electronically and began processing paper returns on January 20, 2015.
The Patient Protection and Affordable Care Act (PPACA)
Health care reform was enacted in 2010 to expand the provisions of health insurance to more Americans. Two important provisions took effect in 2014: the individual mandate and the premium tax credit. The employer mandate was scheduled to take effect in 2014, but the IRS delayed it until 2015.
Shared Responsibility for Individuals
Beginning in 2014, PPACA requires individuals to:
- Be covered by a health plan that provides minimum essential coverage,
- Qualify for an exemption from the coverage requirement; or
- Pay a shared responsibility payment (the individual mandate).
Minimum Essential Coverage
An individual who is covered by health insurance that provides MEC will not be required for the Shared Responsibility payment. MEC includes the following:
- Health care coverage provided by the taxpayer’s employer or purchased by a self-employed individual.
- Health insurance coverage purchased through the Health Insurance Exchange.
- Most government sponsored health coverage including Medicare, Medicaid, and others.
- Certain types of coverage purchased directly from an insurance company.
The statute exempts nine categories of individuals from the requirement to carry MEC or make a payment. These include the following:
- Short coverage gap–individuals who are uninsured for 3 consecutive months or less during the year.
- Unaffordable coverage–the lowest-priced coverage available would cost more than 8% of the individual’s household income.
- No filing requirement–individuals who do not have to file a tax return because their income is too low and below the filing threshold.
- Indian tribes–members of a federally recognized tribe are eligible for services through an Indian Health Services provider.
- Members of a recognized health care sharing ministry.
- Religious conscience–members of a recognized religious sect with religious objections to insurance.
- Incarceration–individuals either detained or jailed, and not being held pending disposition of charges.
- Not lawfully present in the United States–the individual is not a U.S. citizen or a resident alien; or the individual is a U.S. citizen who spent at least 330 full days outside of the U.S. during a 12-month period or was a bona fide resident of a foreign country (or countries) for a full tax year.
- Hardship–a health insurance marketplace certifies that the individual suffered a hardship and cannot obtain coverage or would have to pay an excessive amount for coverage.
Calculating and Reporting the Shared Responsibility Payment/”Penalty”
The required payment is determined on a monthly basis. It equals the lesser of (1) the monthly penalty amounts for each individual in the family (up to three individuals); or (2) the monthly national average bronze plan premiums for the family as offered through the exchanges.
The monthly penalty amounts are the greater of: (1) the flat dollar amount, or (2) the excess income amount. The flat dollar amounts are $95 in 2014, $325 in 2015, or $695 in 2016, per person up to three individuals for a family. The amounts after 2016 will be indexed for inflation. For individuals 18 and under, these amounts are reduced by half. The excess income amounts are the excess of the taxpayer’s household income over the taxpayer’s filing threshold, multiplied by a percentage:
- 0 percent for 2014;
- 0 percent for 2015; and
- 5 percent for years after 2015
Taxpayers will be expected to report their liability on Line 61 of Form 1040 for the 2014 tax year. The payment is payable upon notice and demand from the IRS. It should be noted, however, that the IRS cannot seek any criminal penalties or place a lien or levy on the taxpayer’s property for nonpayment. Accordingly, the IRS expects to collect these payments primarily through deduction from refunds.
Health Insurance Premium Assistance Tax Credit
Individuals or families who purchase insurance through the exchange and whose income is below certain levels may apply and qualify for the premium assistance tax credit. The credit is refundable to the taxpayer or, alternatively, the credit may be paid in advance directly to the insurer whereas the taxpayer would pay the difference between the premium and the credit.
The credit is computed on a sliding scale for individuals and families with household incomes between 100- and 400-percent of the federal poverty level (FPL) for the family size. The credit amount is based on the percentage of income the share of premiums represents, rising from 2% of income for taxpayers at 100% of FPL, to 9.5% of income for those at 400% of FPL.
In some cases, taxpayers may owe additional tax if they are not entitled to all or part of the advance payment of the credit. A taxpayer who chooses to have advance credit payments sent to their insurer will need to: (1) file a federal income tax return (even if otherwise not required to do so) and (2) complete Form 8962, Premium Tax Credit (PTC) to reconcile the advance credit payments with the PTC eligible to be claimed on the return. If the amount is less than the actual PTC, the difference will result in a higher refund or lower tax due. On the other hand, if the advance credit payments that were paid to the health care provider were more than the actual credit, the difference must be paid with the taxpayer’s return.
Penalty Relief Related to Repayment of Excess Advanced Payments of the PTC for 2014
Beginning with 2014 returns, similar to reconciling tax withholdings with a taxpayer’s actual tax liability to determine refunds or balances due, individuals benefiting from tax credits for Marketplace coverage will follow the same process. Normally, taxpayers may owe a penalty for late payments or underpayment of estimated tax. For this first year of the ACA, however, the IRS will waive these penalties (see Notice 2015-09) for eligible taxpayers if it is due to repayment of excess advance payments of the PTC. Penalties will not apply to underpayment of this shared responsibility payment, but interest will accrue for late payments.
This relief does not extend the April 15, 2015 due date. If an extension of time is requested, repayment of any excess advance payments would need to be paid with the taxpayer’s extension.
PPACA-related Tax Forms for 2014
- Form 1040, Line 61 – complete this line to check the box for full-year coverage, or compute the shared responsibility payment to include with the taxpayer’s federal return.
- Form 8965 (Health Coverage Exemptions) – use this form to report a coverage exemption granted by the marketplace or to claim coverage exemption on a taxpayer’s return. In addition, use Form 8965 to report the calculated shared responsibility payment for months during the year that the taxpayer or member of the taxpayer’s tax household did not have health insurance or a coverage exemption.
- Form 1095-A – Taxpayers will receive this form from the Health Insurance Exchange reporting information about the health coverage policy, including dates of coverage and total monthly premiums for the policy in which the recipient or family members enrolled. The Form 1095-A provides information the taxpayer needs to complete Form 8962.
- Form 8962 – Premium Tax Credit information required on this form will determine if the Taxpayer is entitled to the credit. If a Taxpayer received a Form 1095-A, Form 8962 must be completed.
NY Estate and Gift Planning Issues
As part of the 2014-2015 Budget, New York drastically changed its Estate and Gift tax laws. New York has enacted estate tax reform that increases the estate tax exclusion threshold, over a five year period, from $1 million to $5.25 million. After January 1, 2019, the basic exclusion will be indexed for inflation and calculated to be equal to (and in the same manner as) the federal exclusion. However, there is a catch; large estates that exceed the exclusion by 5% will lose the exclusion entirely. As a result the exemption is forfeited and the taxes on the full value of the estate are due.
|Death for dates on or after||Exclusion Amount||Phased out at|
|April 1 2014 – April 1 2015||$2,062,500||$2,165,625|
|April 1 2015 – April 1 2016||$3,125,000||$3,281,250|
|April 1 2016 – April 1 2017||$4,187,500||$4,396,875|
|April 1 2017 – January 1, 2019||$5,250,000||$5,512,500|
|After January 1 , 2019||Equal to the federal exclusion||Federal exemption plus 5%|
The highest NYS Estate tax rate is 16%, which will be indexed for inflation.
Effective April 1, 2014 New York conforms with the Federal provisions related to alternate valuation, qualified domestic trust, and qualified terminable interest property elections.
Effective April 1, 2014 the New York State generation-skipping transfer tax no longer applies to distributions or terminations made after March 31, 2014.
Effective April 1, 2014. New York’s estate and gift tax law that requires all taxable gifts made by a New York resident after March 31, 2014, to be included as part of the gross estate for purposes of calculating the New York estate tax.
The new law also adds a limited 3-year look back period for gifts made between April 1, 2014 and Jan. 1, 2019. Specifically, if a NY resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent’s estate for purposes of computing the NY estate tax. The following gifts are excluded: (1) gifts made when the decedent wasn’t a NY resident; (2) gifts made by a NY resident before April 1, 2014; (3) gifts made by a NY resident on or after Jan. 1, 2019; and (4) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law.
Complying with the Repair Regs., Tax Extenders, PPACA and changes to NY Estate and Gift tax law will prove to be challenging.