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The IRS has finally codified into regulations the various findings of courts throughout the country to provide guidance as to the treatment of capitalization of expenditures for acquiring, maintaining and improving tangible property, including real estate, as well as rules for material and supplies.
This article will provide an overview of the new regulations and the revenue procedures issued to comply with the new rules. The final regs refine and simplify the ones issued temporarily and add new safe harbor provisions that will help to deal with expense deductions.
The regulations must be followed for all tax years beginning January 1, 2014.
The taxpayer must identify the “unit of property” to determine if an expenditure is an improvement. A “unit of property” is defined as all components that are functionally interdependent.
For a building, the whole building is a unit of property but to apply the new standards the structure and the building systems (HVAC, plumbing, electrical, etc.) are treated as separate units of property
Capitalization or Deduction – The regulations set forth the general rule that amounts paid to improve a unit of property must be capitalized. An improvement is defined as an expenditure that:
• Restores a unit of property - returns the unit of property to its ordinarily efficient operating condition, results in the rebuilding of the unit of property to a like-new condition or is for the replacement of parts that comprise a major component or a substantial structural part of the unit of property.
• Adapts the unit of property to a new or different use not consistent with the ordinary use at the time the property was placed in service.
• Betters the unit of property – corrects a material condition or defect that existed before the taxpayer acquired the unit of property, is a material addition, expansion, and enlargement or is, expected to materially increase the productivity, efficiency of the unit of property.
Any expenditure that is not required to be capitalized as a restoration, adaptation or betterment is deductible as repairs and maintenance. Repairs and maintenance are defined in a negative way – they are deductible if not otherwise required to be capitalized
Materials and Supplies – A deduction is allowed for amounts paid to produce and/or acquire materials and supplies that are used during the year. There are specific categories of property defined in the regulations as supplies.
Certain inexpensive items qualify as material and supplies and are therefore currently deductible. An item costing less than $200 is deemed a material and/or supply cost.
De Minimus Safe Harbor – The regulations allow a taxpayer to deduct certain limited amounts paid for tangible property that are expensed on the taxpayer’s books. The safe harbor amount if the taxpayer does not have certified audited financial statements is $500 per item. Any item of tangible property costing $500 or less may be deducted currently and not capitalized.
The taxpayer must have a policy in place that treats such items as expenses on their books and records.
For taxpayers with certified audited financial statements, the safe harbor amount is $5,000 per item.
Guidance on Changes – A change to conform to the new regulations is considered a change in accounting method for which an accounting adjustment is needed. In general, these accounting method changes will have the IRS’s automatic consent.
In some cases, it may be necessary to file Form 3115, Application for Change in Accounting Method, to comply with the IRS regulations. Specifically, if you are adopting the new definition of materials and supplies or adopting the new “unit of property’ definitions, you may need to file the 3115 by October 15, 2015 if you are an individual or by September 15, 2015 for business returns.
There may also be cases where changing to the new definitions will result in larger deductions for expenditures in prior years and an adjustment can be made on a 2014 tax returns for these deductions.
Please contact us to discuss or review your tax returns in light of the new regulations
Don't Make These Five Common IRA Mistakes
About 40 percent of U.S. households - nearly 50 million - own individual retirement accounts (IRAs), which provide tax-advantaged options for saving for your retirement years. The New Jersey Society of Certified Public Accountants (NJSCPA) offers the following tips on how to avoid some common mistakes people make when managing IRAs:
Mistake 1: Fail to Focus on Beneficiaries
Naming a beneficiary makes it easier for your loved ones to access your account in case of your death. It can also help preserve tax benefits for your heirs and guarantee that your money goes to the right people. Review and update your beneficiaries as necessary, especially after a marriage, birth of a child, divorce or the death of a beneficiary. It's also a good idea to talk to your CPA about the
implications for those who might inherit your IRA.
Mistake 2: Wreck Your Rollover
If you want to move your IRA investment from one account to another, remember that you have only 60 days to make that rollover once you withdraw money from the original account. If you don't make the switch in time you deposit the money into a regular savings or other non-qualified retirement account, the penalties can steep. Not only will the amount of your withdrawal be included in your taxable income for the year, you can face a 10-percent penalty if you're under age 59.
Mistake 3: Overlook the Roth IRA
A Roth IRA may or may not suit your needs, but it's worth finding out what it has to offer. The income you have from a Roth IRA is not taxable to you in retirement (or to your beneficiaries if they receive it as part of your and you are not required to take a minimum distribution after age 70~ as you would with a traditional lRA a traditional IRA, your contributions to a Roth IRA are not tax deductible. You can contribute as much as to a Roth IRA ($6,500 if you're age 50 or older by the end of the year) as long as your income falls below levels. However, you can convert a traditional IRA to a Roth IRA no matter what your income. There may be consequences from that conversion, though, so consult your CPA about the right steps for you.
Mistake 4: Don't Take the Right Distribution
While it's a generally bad idea to tap into your IRA too early, you can't leave the money in a traditional IRA forever. By the time you're no older than age 70~, you must begin to take required minimum distribution year. If you don't, you could face a 50-percent tax on the amount not taken as required. The required minimum distribution varies based on your total account balance and other factors, so consult your CPA if you have questions. You can also withdraw more than the minimum required distribution, but be sure to portion out withdrawals appropriately if you need them to last a lifetime. Distributions from a traditional IRA are included in your taxable income and your CPA can help you determine how that income will affect your annual tax bracket.
Mistake 5: Do Nothing
When you fail to set up or contribute to a retirement account - whether it's a plan offered by your employer IRA - you lose out in two ways. First, the amount you could have saved won't be there when you're ready for retirement. Second, you also miss out on all the interest or dividends that might have grown tax free in your account over the years.
Year-end planning will be challenging again this year. Unless Congress acts, a number of popular deductions and credits that expired at the end of 2014 won’t be available for 2015. Deductions not available this year include, for example, the election to deduct state and local sales taxes instead of state and local income taxes and the above-the-line deductions for tuition and educator expenses, generous bonus depreciation and expensing allowances for business property and qualified charitable distributions that allow taxpayers over age 701/2 to make tax-free transfers from their IRAs directly to charities. Of course, Congress could revive some or all of the favorable tax rules that have expired like they have done in the past. However, which actions Congress will take and when they will be taken remains to be seen.
What we’ve listed below are a few money-saving ideas that you may want to put in action before the end of 2015:
For 2015, the standard deduction is $12,600 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,300. Currently, it looks like these amounts will be about the same for 2016. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You can claim actual expenses in the year they are bunched and take the standard deduction in the intervening years. For instance, you might consider moving charitable donations you normally would make in early 2016 to the end of 2015.
If you have appreciated stock (or mutual fund shares) that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value, and no capital loss will be available.
If it looks like you are going to owe income taxes for 2015, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year.
Between now and year-end, review your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separate) net capital loss that’s deductible each year.
Make sure you have adequate health insurance coverage (referred to as minimum essential coverage). If you don’t, you may be subject to a penalty. Medical insurance provided by your employer or through an individual plan purchased through a state insurance marketplace generally qualifies for adequate coverage. The penalty amount varies based on the number of uninsured members of your household and your household income. If you have three or more uninsured household members, the penalty may be $975 or more for 2015 ($2,085 more for 2016), depending on your household income.
If you own an interest in a partnership or S corporation that you expect to generate a loss this year, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end to ensure you have sufficient basis to claim a full deduction.
And finally, watch out for the Alternative Minimum Tax (AMT) in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem.
Again, these are just a few suggestions to get you thinking. If you’d like to know more about them or want to discuss other ideas, please feel free to call us.
WASHINGTON -- The Internal Revenue Service today reminded individuals and businesses making year-end gifts to charity that several important tax law provisions have taken effect in recent years.
Some of the changes taxpayers should keep in mind include:
Rules for Charitable Contributions of CLothing and Household Items
Household items include furniture, furnishings, electronics, appliances and linens. Clothing and household items donated to charity generally must be in good used condition or better to be tax-deductible. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
Donors must get a written acknowledgement from the charityfor all gifts worth $250 or more. It must include, among other things, a description of the items contributed.
Guidelines for Monetary Donations
A taxpayer must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of amount. The record must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
The IRS offers the following additional reminders to help taxpayers plan their holiday and year-end gifts to charity:
Qualified charities. Check that the charity is eligible. Only donations to eligible organizations are tax-deductible. Select Check, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations. That is true even if they are not listed in the tool's database.
Year-end gifts. Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2015 count for 2015, even if the credit card bill isn't paid until 2016. Also, checks count for 2015 as long as they are mailed in 2015.
Itemize deductions. For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction. This includes anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2015 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
Record donations. For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity's unattended drop site, keep a written record of the donation that includes his information, as well as the fair market value of the property at the time of the donation and the method used to determine the value. Additional rules apply for a contribution of $250 or more.
Special Rules. The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to donor's tax return.
If the amount of a taxpayer's deduction for all noncash contributions os over $500, a property-completed Form 8283 must be submitted with the tax return.
IRS.gov has additional information on charitable giving, including:
Charities and Non Profits
Publication 526, Charitable Contributions
Online mini-course, Can I Deduct My Charitable Contributions?
Beginning with the 2016 tax year, the due dates of certain tax returns have changed.
Here is what you need to know:
RETURNS NOW DUE MARCH 15
Form 1120S – US Income Tax Return for an S Corporation.
Form 1065 – US Return of Partnership Income for partnerships and LLCs. Changed from April 15
RETURNS NOW DUE APRIL 15
Form 1040 – US Individual Income Tax Return
Form 1041 – US Income Tax Return for Estates and Trusts
Form 1120 – US Corporation Income Tax Return. Changed from March 15
FinCEN Form 114 – Report of Foreign Bank and Financial Accounts (FBAR). Changed from June 30
In general, pass-thru entities now have a March 15 due date to help speed up the receipt of Schedules K-1 for partners, LLC members and S corporation shareholders. This will hopefully result in fewer extensions of individual income tax filings and the entity returns are due a month earlier than the individual filings.
As the end of 2017 approaches, it is a good time to think of planning moves that will help to lower your tax bill for this year and maybe next year, too.
We have compiled a checklist of actions based on current tax rules that may help save tax dollars if you act before year-end. Not all of these actions will apply to you, but you may benefit from some of them.
We can meet with you to tailor a year-end strategy to take advantage of the items that will help to lower your individual income tax bill.
Postpone income until 2018 and accelerate deductions into 2017. This may be especially valuable if Congress succeeds in lowering tax rates next year and eliminates some deductions.
Realize losses on stock while preserving your investment positions.
Consider using a credit card to pay deductible expenses before year-end. This way you can increase your 2017 deductions even if you don’t pay the credit card bill until after the new year.
Higher income earners must be aware of the 3.8% surtax on net investment income.
The additional 0.9% Medicare tax may also require high-income taxpayers to take action.
You may want to ask your employer to defer your year-end bonus to 2018.
If you expect you will owe state income taxes when you file your return next year, consider asking your employer to increase your state income tax withholding for the rest of 2017 and thereby make those state taxes deductible this year. But this strategy will not be effective if you are subject to AMT.
Take your required minimum distributions from your IRA or employer sponsored plan if you are over the age of 70.
Be sure you have fully funded your Health Savings Account if you are eligible for one.
Consider bunching other itemized deductions, such as medical expenses and miscellaneous itemized deductions into 2017 as these are subject to an income threshold and may be eliminated next year.