Tax Extenders – PATH Act of 2015

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On December 16, Finance Committee Chairman Orrin Hatch (R-UT), House Ways and Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Ranking Member Ron Wyden (D-OR) announced that an agreement had been reached on extenders and other tax provisions in the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” The bipartisan, bicameral deal makes permanent many of the extenders—i.e., the 50 or so temporary tax provisions that are routinely extended by Congress on a one- or two-year basis and that have been expired since the end of 2014. A number of other extender provisions are extended through 2019, while others are extended for two years through 2016.  The agreement is expected to be quickly passed by Congress and signed into law by the President.

PATH Act provisions include the following:

Extension of tax-free distributions from individual retirement plans for charitable purposes. The provision permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs). The exclusion may not exceed $100,000 per taxpayer in any tax year.

Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. The provision permanently extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.

Extension and modification of increased expensing limitations and treatment of certain real property as section 179 property. The provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts currently are $25,000 and $200,000, respectively. The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) also are permanently extended. The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.

Enhanced child tax credit made permanent. The child tax credit (CTC) is a $1,000 credit. To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the “earned income” formula). Until 2009, the threshold dollar amount was $10,000 indexed for inflation from 2001 (which would be roughly $14,000 in 2015). Since 2009, however, this threshold amount has been set at an unindexed $3,000 and is scheduled to expire at the end of 2017, returning to the $10,000 (indexed for inflation) amount. The provision permanently sets the threshold amount at an unindexed $3,000.

Enhanced American opportunity tax credit made permanent. The Hope Scholarship Credit is a credit of $1,800 (indexed for inflation) for various tuition and related expenses for the first two years of post-secondary education. It phases out for AGI starting at $48,000 (if single) and $96,000 (if married filing jointly) – these amounts are also indexed for inflation. The American Opportunity Tax Credit (AOTC) takes those permanent provisions of the Hope Scholarship Credit and increases the credit to $2,500 for four years of post-secondary education, and increases the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly) for 2009 to 2017. The provision makes the AOTC permanent.

Extension and modification of deduction for certain expenses of elementary and secondary school teachers. The provision permanently extends the above-the-line deduction (capped at $250) for the eligible expenses of elementary and secondary school teachers. Beginning in 2016, the provision also modifies the deduction to index the $250 cap to inflation and include professional development expenses.

Extension of deduction of State and local general sales taxes. The provision permanently extends the option to claim an itemized deduction for State and local general sales taxes in lieu of an itemized deduction for State and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or alternatively, deduct an amount prescribed by the Internal Revenue Service (IRS).

Extension and modification of research credit. The provision permanently extends the research and development (R&D) tax credit. Additionally, beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.

Extension of exclusion of 100 percent of gain on certain small business stock. The provision extends the temporary exclusion of 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years. This provision also permanently extends the rule that eliminates such gain as an AMT preference item.

Extension of reduction in S-corporation recognition period for built-in gains tax. The provision permanently extends the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

Extension and modification of exclusion from gross income of discharge of qualified principal residence indebtedness. The provision extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a written agreement entered into in 2016.

Extension of mortgage insurance premiums treated as qualified residence interest. The provision extends through 2016 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out ratably for a taxpayer with AGI of $100,000 to $110,000.

Extension of above-the-line deduction for qualified tuition and related expenses. The provision extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).

Improvements to section 529 accounts. The provision expands the definition of qualified higher education expenses for which tax-preferred distributions from 529 accounts are eligible to include computer equipment and technology. The provision modifies 529-account rules to treat any distribution from a 529 account as coming only from that account, even if the individual making the distribution operates more than one account. The provision treats a refund of tuition paid with amounts distributed from a 529 account as a qualified expense if such amounts are re-contributed to a 529 account within 60 days. The provision is effective for distributions made or refunds after 2014, or in the case of refunds after 2014 and before the date of enactment, for refunds re-contributed not later than 60 days after date of enactment.

Rollovers permitted from other retirement plans into simple retirement accounts. The provision allows a taxpayer to roll over amounts from an employer-sponsored retirement plan (e.g., 401(k) plan) to a SIMPLE IRA, provided the plan has existed for at least two years. The provision applies to contributions made after the date of enactment.

Other provisions include:

Enhanced earned income tax credit made permanent.

Extension of parity for exclusion from income for employer-provided mass transit and parking benefits.

Extension and modification of special rule for contributions of capital gain real property made for conservation purposes.

Extension and modification of charitable deduction for contributions of food inventory.

Extension of modification of tax treatment of certain payments to controlling exempt organizations.

Extension of basis adjustment to stock of S corporations making charitable contributions of property.

Extension and modification of employer wage credit for employees who are active duty members of the uniformed services.

Extension of treatment of certain dividends of regulated investment companies.

Extension of subpart F exception for active financing income.

Extension of temporary minimum low-income housing tax credit rates for non-Federally subsidized buildings.

Extension of military housing allowance exclusion for determining whether a tenant in certain counties is low-income.

Extension of RIC qualified investment entity treatment under FIRPTA.

Extension of new markets tax credit.

Extension and modification of work opportunity tax credit.

Extension and modification of bonus depreciation.

Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules.

Extension of Indian employment tax credit.

Extension and modification of railroad track maintenance credit.

Extension of mine rescue team training credit.

Extension of qualified zone academy bonds.

Extension of classification of certain race horses as 3-year property.

Extension of 7-year recovery period for motorsports entertainment complexes.

Extension and modification of accelerated depreciation for business property on an Indian reservation.

Extension of election to expense mine safety equipment.

Extension of special expensing rules for certain film and television productions

Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.

Extension and modification of empowerment zone tax incentives.

Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.

Extension of American Samoa economic development credit.

Moratorium on medical device excise tax.

 

Please contact our office if you would like a complete list of the PATH Act of 2015 provisions.   Have a safe Holiday Season!

ARM CPA

Tax Identity Theft Victims Can Request Copies of Fraudulent Returns

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If you were a victim of tax identity theft, you likely had to mail a signed paper copy of your tax return for the year(s) affected along with Form 14039 (Identity Theft Affidavit).  You may also have reported your identity theft to the Federal Trade Commission and placed a fraud alert with the three major credit bureaus.  While you were able to take measures to detect and prevent future fraud using your identity, you were never allowed to see a copy of the fraudulent tax return that was filed using your identity to determine exactly what information was compromised, until now.  The IRS has begun allowing victims of identity theft to request redacted copies of the fraudulent tax returns that were filed at the request of U.S. Senator Kelly Ayotte.  In a letter dated 5/17/2015 to IRS Commissioner Koskinen, Senator Ayotte wrote that it was “deeply troubling that the IRS does not help victims by providing them with copies of the fraudulent returns so they can determine what information was stolen.”  As a result, the IRS posted detailed instructions on their website on how you can request copies of fraudulent tax returns.

Lease Accounting Overhaul Makes Headway

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What started as a convergence project to assimilate lease accounting between U.S. GAAP and IFRS became a reality on November 11, 2015 as FASB Board Members voted 6-1 to send the standard for final drafting.  Those impacted the most will be companies that work with leases as a key part of their business, however, the new accounting rules will affect any U.S. company that deals with leases.  The lease overhaul will be the most significant since FAS No. 13 was released in 1976 and is expected to add trillions to balance sheets across the U.S.

Under the existing accounting model, leases are treated as either capital or operating.  Capital leases are required to be capitalized and amortized while operating leases are not.  Critics of the current model claim that operating leases result in “off-the-books” accounting as balance sheets do not reflect these lease obligations, which in some instances can be over many years and for billions of dollars.  For example, at December 31, 2014, Chipotle Mexican Grill, Inc. (CMG) had operating lease obligations of $3.044 Billion whereas their balance sheet showed a mere $534 Million in total liabilities.  The effect of adding Chipotle’s operating lease obligations to their balance sheet would increase its liabilities nearly sevenfold.  Furthermore, the new operating lease requirements would significantly alter many key ratios including return on assets and debt to equity.  It also could trigger violations of debt covenants with banks and other lenders.

Even though the accounting changes will be significant, they will not create any new obligations for companies; they merely change the way these lease obligations are reported.  FASB Board Members are currently drafting the new standard, which is expected to affect public and private companies for fiscal years beginning after December 15, 2018 and 2019, respectively.  Early adoption will be permitted and there is not expected to be any alternative recognition or measurement.

Chris Soderberg, CPA

 

Tax Identity Theft

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Background

The Federal Trade Commission (FTC) estimates as many as nine million Americans have their identities stolen each year.  According to a 1/26/15, FTC press release, tax-related identity theft was the most common form of reported identity theft in 2014.  The FTC received 109,063 complaints about tax identity theft, which accounted for almost one-third of the 332,646 total identity theft complaints.  In fact, 2014 marked the fifth consecutive year that tax-related identity theft topped the list of complaints.

IRS Timeline of Responding to a Tax Identity Theft Case

Taxpayers usually are unaware of an identity theft until they receive a notice from the IRS indicating that multiple returns have been filed or they received wages from an unknown employer.  The situation typically takes many months to correct, and some identity theft victims have experienced a year or more wait before receiving their refund.  In an audit report dated 3/20/15, the Treasury Inspector for General Tax Administration (TIGTA) concluded, based on a statistically valid sample of 100 taxpayer identity theft accounts, that on average the IRS took 278 days to resolve identity theft cases.

Identity Protection Personal Identification Number (IP PIN)

In an effort to help victims, the IRS issued approximately 1.5 million Identity Protection PINs (IP PINs).  The IP PIN is a unique, six-digit number that is assigned annually to victims of identity theft with resolved cases for use when filing their federal tax return.  An IP PIN helps the IRS verify a taxpayer’s identity and accept their electronic or paper tax return.  When a taxpayer has an IP PIN, it prevents someone else from filing a tax return with their SSN as the primary or secondary taxpayer (spouse).

The IRS sends a new IP PIN each December by mail.  When a taxpayer receives a Notice CP01A, the IP PIN is located in the left column, last paragraph, which states: “Your assigned 20XX IP PIN is: _____.”  Taxpayers who lose their IP PIN or don’t receive a new one can log into www.irs.gov through “Get an IP PIN” or visit “Lost or Misplaced IP PINs” for further information on how to retrieve it.

Taxpayers, who were assigned an IP PIN, must use it to confirm their identity on the current year federal tax return and any delinquent returns filed during the calendar year.  A return e-filed with the taxpayer’s correct SSN, but an incorrect or missing IP PIN will be rejected until the taxpayer submits it with the correct IP PIN or files a paper tax return.  If the same conditions occur on a paper filed return, the IRS will delay its processing and hold the refund until the rightful payee is determined.

Taxpayers are eligible for an IP PIN if they—

  1. received a Notice CP01A from the IRS containing the IP PIN;
  2. received a Notice CP01F from the IRS inviting them to apply for an IP PIN;
  3. filed last year’s federal tax return as a resident of Florida, Georgia, or the District of Columbia;
  4. reported identity theft to the IRS and received a Notice CP01 indicating that an identity theft indicator has been placed on their account; or
  5. were identified as a possible victim of identity theft by the IRS.

Conclusion

The IRS does not contact taxpayers by telephone, text message, or email to request personal or financial information.  Some identity thieves use a stick—angry or threatening demands for immediate payment, while others use a carrot—a payment or refund will be mailed if the requested information is provided.  Furthermore, first contact from the IRS will not be a phone call or email from out of the blue, but rather it will be through official correspondence sent via U.S. mail.

Suspicious online or emailed phishing scams can be reported to the IRS at phishing@irs.gov.  For phishing scams by phone, fax, or mail, call 800-366-4484.  IRS impersonation scams, which appear to be increasing, can be reported to the TIGTA at 800-366-4484.

Check Before You’re Charitable: IRS Releases Warning on SC Flood Relief Scams

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The Internal Revenue Service has issued an official warning about charity scams in relation to the recent South Carolina flooding. “When making donations to assist flood victims in South Carolina and elsewhere, taxpayers should take steps to ensure their hard-earned money goes to legitimate and currently eligible charities,” said IRS Commissioner John Koskinen. “IRS.gov has the tools taxpayers need to check out the status of charitable organizations.” Unfortunately, this is not the first time that we’ve seen these type of scams occur during tragedies.  We’ve seen them occur after the Haitian earthquake, Hurricane Isaac, and Super Storm Sandy.

The IRS is sharing tips for people who wish to help the flood victims through charitable contributions.

  • Beware of charities with names that are similar to nationally known organizations. These phony charities usually have names that mimic legitimate charities.
  • Before donating, use the IRS.gov search engine, Exempt Organizations Select Check, to ensure that the charity that you are contributing to is a reputable and qualified charity.
  • If you have received emails soliciting disaster related contributions which you believe to be fraud, be sure to visit IRS.gov and follow the Report Phishing link to report the possible fraud.
  • Do not give out personal information such as your social security number, credit card numbers, and bank account numbers.
  • Do not donate cash. It’s hard to track cash for tax purposes and more difficult to confirm that you’re giving to a legitimate organization if you’re just handing over cash to solicitor on your doorstep.

New Version of the CPA Exam Scheduled for Launch in 2017

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As most things eventually do, the CPA exam is in need of an update. The American Institute of CPA’s has decided that it’s time to revamp the licensing exam for accountants. This new version is expected to launch sometime in 2017. The AICPA’s goal is to make sure that the content and structure of the exam continue to measure the skills and knowledge of aspiring CPAs.

While the exam content is not expected to change much, the method in which it will be presented will be changing. Surveys have shown demand for more “critical thinking” questions, so they are considering increasing the weight of the task-based simulations section, and also adding more problem solving questions in general. Anyone who has taken the CPA exam most likely noticed how outdated the interface of the exam is and that it’s not the easiest thing to navigate. The AICPA is discussing the institution of a new Excel based program. Since most accountants frequently do their day-to-day work in Excel, this could be a big help to test takers. There is also talk of allowing candidates to re-test a failed section within the same testing window, reducing or even eliminating blackout times, and extending the period that the exam must be completed from 18 months to 24 months.

Drafting a new version of the CPA exam is not something that happens overnight. This process began in 2013 with discussions of the strategic direction of the exam by the Board of Examiners. In 2014, the idea was introduced to focus groups and surveys were issued. In 2015, an actual draft of the exam will be designed and then hopefully approved and finalized. The new version will be officially announced in 2016 and then launched at some point in 2017.

ARM Attends Career Fair for Ohio State Accounting Students

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ARM recently attended another recruiting event at The Ohio State University for accounting students.  While the venue changed from the Horseshoe to the Ohio Union, the quality of accounting students who participated remained incredibly high.  ARM spoke with several outstanding candidates eager to start their careers in public accounting as the firm continues to add top talent to an already impressive roster.  Any accounting students who did not have a chance to speak with ARM at either Ohio State event or students at other universities interested in an accounting career with ARM can contact Chris Soderberg to receive information regarding open positions the firm is looking to fill or to learn more about the firm.

OSU Recruiting

Fisher College of Business Event at the Shoe

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Several members of ARM attended the Master of Accounting (MAcc) Welcome Reception hosted by The Ohio State University’s Fisher College of Business at Ohio Stadium. ARM had a chance to meet several of the incoming students to the MAcc program for the second year in a row. Many of these talented students will gain employment in public accounting and are the future CPAs who will become trusted advisors for years to come.

In addition to meeting a number of students, ARM members also had the opportunity to tour the stadium and strike the O-H-I-O pose on the 50 yard line.

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Are You Keeping Adequate Records of your Charitable Contributions?

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If you are a taxpayer who itemizes deductions, you may take advantage of the deduction for non-cash contributions to a 501(c)(3) charitable organization. The IRS rules for validating deductions to charities are strict and to avoid having your deduction denied it is very important to keep detailed records. In a recent Tax Court case, a married couple had their $37,315 deduction denied due to lack of substantiation. Here is an overview of the recordkeeping requirements based on amounts contributed:

  • Gifts < $250: You should obtain and keep a receipt from the charity with a description of the items donated. For some charities, like Goodwill, that simply have an outdoor drop box where you can leave items, it is impractical and sometimes impossible to obtain a receipt. In this case, you should keep reliable written records which include the items contributed and how you arrived at the fair market value that you will use on your tax return. Many charities have a listing available with recommended fair market values for various items and conditions.
  • Gifts from $250-$499: Obtain a written receipt from the charity describing the property and whether or not you received any benefits in return for your gift. For example, you may have bought tickets for $300 to a charity event with a dinner that was worth $50. In this case, you would get a $250 charitable deduction. An acknowledgment is required for each contribution above $250 even if multiple donations are made to the same organization throughout the year.
  • Gifts from $500 to $4,999: When you contribute non-cash items with a total value over $500, you must complete Form 8283 with your tax return. On this form you must list each charity that you contributed to with its address, the date of donation, a description of the items donated, the items original cost to you, their fair market value, and which system you used to arrive at that FMV.
  • Gifts of $5,000 or more: When you contribute non-cash items with a total value over $5,000, you must complete Form 8283 and provide an independent appraisal of the donated property. When determining if your deduction is greater than $5,000, combine deductions for all similar items donated to charities during the year.

Also, be sure to obtain your written acknowledgements from the charities that you contributed to by the earlier of:

  1. The date you file your tax return
  2. The due date for the return (including extensions)

It is very important to comply with IRS substantiation requirements for charitable contributions. The best and easiest way to do this is by good recordkeeping. Please feel free to contact us at ARM with any questions on the requirements.

DOL Releases Report on Audit Quality

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In May of 2015, the Department of Labor released a report on the level and quality of audit work performed by independent public accountants with respect to audits of employee benefit plans.  The assessment involved a sample size of 400 plan audits for plan years beginning in 2011.  Since the population of plan auditors is so diverse and heavily skewed to those CPA firms that audit a small number of plans, the sample was designed to look at the relationship between auditor characteristics and audit quality.

The results were not good.  The report found that 39% of the audits had major deficiencies with respect to one or more relevant GAAS requirements which would lead to rejection of a Form 5500 filing.  It found that there was a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed.  Furthermore, CPA’s who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate.  To the contrary, firms performing the most plan audits had a deficiency rate of only 12%.

The report emphasized the need and responsibility of a plan sponsor, the fiduciary, to hire a qualified CPA firm.  Ary Roepcke Mulchaey is a PCAOB registered firm with a benefit plan audit practice that has earned a strong reputation among clients for being efficient, effective and responsive.  ARM has audited hundreds of employee benefit plans over the past 30 years and has developed a depth of expertise to deliver quality audits for all of our clients each and every year.