800-207-1111
The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.
These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.
The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.
Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.
The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.
The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.
Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.
To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.
The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.
Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.
The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.
Payroll tax cut
The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.
Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.
Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.
House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.
One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.
Extenders
The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.
President Obama’s FY 2013 proposals
President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.
Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.
On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.
If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.
The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
Previous disclosure programs
The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.
Reopened program
The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.
The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.
In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.
The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).
The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.
Quiet disclosures
One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.
Critics
The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.
If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Dependency Exemption
In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.
Child Tax Credit
Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.
Child and Dependent Care Credit
If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.
Adoption Credit
Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.
Higher Education Credits
There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.
Extended Health Care Coverage
Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.
Child Care Assistance Credit (for businesses)
Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.
If you have any questions about these provisions and how they may benefit you, please contact our office.
The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.
Offset
If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.
A taxpayer’s refund may be reduced by FMS and offset to pay:
FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.
Form 8379
If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.
The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.
The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.
February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.
February 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.
February 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.
February 10
Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.
February 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.
Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.
February 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.
February 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.
February 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.
February 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.
March 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.
March 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.
On December 17, 2010 President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). This sweeping new tax law includes a two-year extension of the Bush-era tax cuts, including extension of the current, lower individual tax rates and capital gains/dividend tax rates. The new tax law - the largest in over ten years - also includes a temporary estate tax compromise, as well as the extension of many popular individual and business tax incentives, an alternative minimum tax (AMT) "patch" for 2010 and 2011, 100 percent bonus depreciation for businesses, and more. The much-anticipated legislation provides tax relief to taxpayers across-the-board. Here is a review of the 2010 Tax Relief Act's major provisions:
Individuals
Income tax rates. Among the most valuable tax breaks for individuals in the new law is a two-year extension of individual income tax rate reductions. The new law retains the current 10, 15, 25, 28, 33, and 35 percent individual tax rates for two years, through December 31, 2012. If Congress had not passed this extension, the individual tax rates would have jumped significantly for all income levels.
The new law also extends the full repeal of the limitation on itemized deductions and the personal exemption phaseout for higher-income taxpayers, through December 31, 2012.
Capital gains/dividends. The new law extends reduced capital gains and dividend tax rates for two years, through December 31, 2012. For 2011 and 2012, individuals in the 10 and 15 percent rate brackets can continue to take advantage of a zero percent capital gains and dividend tax rate. Individuals in higher rate brackets will enjoy a maximum tax rate of 15 percent on capital gains and dividends, as opposed to a 20 percent rate on capital gains and ordinary income tax rates on dividends.
Marriage penalty relief. Married couples filing jointly will benefit from provisions designed to provide relief from the marriage penalty. For 2010, the standard deduction for a married couple filing a joint return is twice the single taxpayer's amount. The 2010 Tax Relief Act extends the increased standard deduction for married taxpayers for two years, through December 31, 2012. The 2010 Tax Relief Act extends the expanded 15 percent rate bracket for married couples filing a joint return for two years, through December 31, 2012.
Payroll tax cut. The new law provides a payroll tax cut for employees. Effective for calendar year 2011, the employee share of the OASDI portion of Social Security taxes is reduced from 6.2 percent to 4.2 percent, up to the taxable wage base of $106,800. Self-employed individuals will get an equivalent tax break, paying 10.4 percent on self-employment income up to the wage base (reduced from the normal 12.4 percent rate). The payroll tax cut replaces the Making Work Pay credit that has been in place for 2009 and 2010, but generally offers a much higher benefit. Unlike the Making Work Pay credit, the payroll tax cut does not exclude individuals based on their earnings. Thus the payroll tax cut can provide significantly higher benefits -- a maximum payroll tax reduction of $2,136 on wages, compared to a maximum $800 Making Work Pay credit for married couples filing jointly and $400 for unmarried individuals.
AMT patch. The new law provides an AMT "patch" for 2010 as well as 2011 at higher exemption amounts. The 2010 Tax Relief Act raises the exemption amounts for 2010 to $47,450 for individuals, $72,450 for married taxpayers filing joint returns, and $36,225 for married taxpayers filing separately. For 2011, the amounts are increased to $48,450 for individuals, $74,450 for married taxpayers filing jointly, and $37,225 for married taxpayers filing separately.
More incentives. Along with all these incentives, the new law extends many popular but temporary tax breaks. Extended for 2011 and 2012 are:
The new law also extends retroactively some other valuable tax incentives for individuals that expired at the end of 2009. These incentives are extended for 2010 and 2011 and include:
Businesses
Bonus depreciation. Businesses can use bonus depreciation to immediately write off a percentage of the cost of depreciable property. The new law provides 100 percent bonus depreciation for qualified investments made after September 8, 2010 and before January 1, 2012. It also continues bonus depreciation, albeit at 50 percent, on property placed in service after December 31, 2011 and before January 1, 2013. There are special rules for certain longer-lived and transportation property. Additionally, certain taxpayers may claim refundable credits in lieu of bonus depreciation.
Code Sec. 179 expensing. Along with bonus depreciation, the new law also provides for enhanced Code Sec. 179 expensing for 2012. Under current law, the Code Sec. 179 dollar and investment limits are $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The new law provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012 (but not after). Otherwise, those caps would have dropped to a $25,000/$200,000 level.
Research credit. Congress extended the research tax credit for two years, for 2010 and 2011.
More incentives. Other valuable business incentives in the new law include extensions of:
Energy Tax Breaks
Businesses. The new law extends some energy tax breaks for businesses. One of the most valuable energy incentives is the Code Sec. 1603 cash grant in lieu of tax credits. This incentive encourages the development of alternative energy sources, such as wind energy. Other business energy incentives extended by the new law include excise tax and other credits for alternative fuels, percentage depletion for oil and gas from marginal wells, and other targeted incentives.
Individuals. The new law also extends some popular energy tax incentives for individuals. Individuals who made energy efficiency improvements to their homes in 2009 or 2010 can benefit from the Code Sec. 25C energy tax credit, which rewards individuals who install energy efficient furnaces, add insulation, or make other similar improvements to reduce energy usage. The new law extends the credit through 2011 but reduces some of its benefits.
Education
The Tax Code includes a number of incentives to encourage individuals to save for education expenses. Many incentives are temporary and expired at the end of 2009, or were set to expire at the end of 2010. The new law extends for two years, through December 31, 2012, the following popular education tax breaks:
The higher education tuition deduction was extended through 2011.
Estate and gift taxes
Beginning in 2011, the estate tax had been scheduled to revert to its pre-2001 levels of a 55 percent tax rate and a $1 million exclusion. For 2010, estates were subject to no federal estate tax but heirs had to take inherited property under a modified carryover tax basis regime.
Estate tax. The new law revives the estate tax through 2012, but at a reduced maximum estate tax rate of 35 percent and a $5 million exclusion. The revived estate tax applies to estates of decedents dying in 2011 and 2012. However, for 2010, the new law gives estates the option to apply the estate tax at the 35 percent/$5 million level, with a stepped-up basis, or to elect no estate tax but with modified carryover basis. The new law also allows "portability" between spouses of the maximum exclusion (for a combined $10 million benefit) and extends some other taxpayer-friendly provisions originally enacted in 2001.
This far-reaching tax package affects almost every taxpayer. Please contact our office if you have any questions on how you can start maximizing your savings within this sweeping $800 billion tax law.