Monthly Archives: November 2014

Which Taxpayer Friendly Laws May Expire this Year?

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Many taxpayer friendly tax rules expired on December 31, 2013. Some of these rules have been in effect for years.  When favorable provisions expire, Congress will usually act to extend the provisions.  Even though 2014 is coming to a close, it is still uncertain whether these tax rules will be extended into 2014 and beyond by Congress and the President.

Many of the provisions below were originally set to expire in 2011, but were extended through 2013 by the 2012 Taxpayer Relief Act. This Act was passed in early 2013, and because of its retroactive effect, the 2013 tax season was off to a late start because tax forms had to be updated, and the IRS had to program its computer systems to handle the changes in the law.

Many business groups have spoken out about how extension of these tax provisions into 2014 and later is “critically important to U.S. jobs and the broader economy.” IRS Commissioner John Koskinen has also stated that late enactment of a law extending these tax provisions will lead to a late start in the upcoming tax filing season, and it could cause many taxpayers to file amended returns if they happen to file their tax returns before Congress extends these tax provisions.

The expired provisions for individuals include:

  • the deduction for state and local sales taxes
  • above-the-line deduction for qualified tuition and related expenses
  • deduction for mortgage insurance premiums treated as qualified interest
  • exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income
  • $250 above-the-line deduction for certain expenses of teachers
  • parity for exclusion for employer-provided mass transit and parking benefits and
  • credit for certain health insurance costs.

The expired business provisions include:

  • increase in expensing to $500,000 and in investment based phaseout amount to $2,000,000 and expanded definition of Section 179 property
  • 50% bonus depreciation
  • research and experimentation credit
  • work opportunity tax credit
  • exceptions under Subpart F for active financing income
  • look-through treatment of payments between controlled foreign corporations
  • special treatment of certain dividends of regulated investment companies (RICs)
  • employer wage credit for activated military reservists
  • special expensing rules for film and television production
  • special 100% gain exclusion for qualified small business stock
  • reduction in S corporation recognition period for built-in gains tax
  • election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation
  • low-income housing 9% credit rate freeze (extended for allocations made before Jan. 1, 2016)
  • treatment of military basic housing allowances under low-income housing credit
  • 15-year straight line cost recovery for qualified leasehold property, qualified restaurant property, and qualified retail improvements
  • deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
  • modification of tax treatment of certain payments to controlling exempt organizations
  • accelerated depreciation for business property on Indian reservations and
  • Indian employment credit

The expired charitable provisions include:

  • enhanced charitable deduction for contributions of food inventory
  • tax-free distributions for charitable purposes from individual retirement account (IRA) accounts of taxpayers age 70 1/2 or older
  • basis adjustment to stock of S corporations making charitable contributions of property; and
  • special rules for contributions of capital gain real property for conservation purposes

The expired energy provisions include:

  • credit for construction of energy efficient new homes
  • energy efficient commercial building deduction
  • construction date for eligible facilities to claim the production tax credit or wind credit
  • credit for energy efficient appliances
  • credit for nonbusiness energy property
  • alternative fuel vehicle refueling property
  • incentives for alternative fuel and alternative fuel mixtures
  • incentives for biodiesel and renewable diesel
  • placed-in-service date for partial expensing of certain refinery property
  • credit for electric drive motorcycles and three-wheeled vehicles

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

New Rules for Deducting Local Lodging Expenses

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When a taxpayer pays lodging expenses for local travel, the expenses are generally not deductible because they are considered personal expenses.

Fortunately, the IRS recently finalized guidance that allows local lodging expenses to be deductible under certain circumstances.  Local lodging expenses may be deductible as ordinary and necessary expenses incurred in connection with carrying on a trade or business, including a trade or business as an employee.  Whether the expenses are incurred in a trade or business is determined under all the facts and circumstances.

The Safe Harbor Rule

The IRS has provided a safe harbor rule, and local lodging expenses will be treated as ordinary and necessary business expenses if all of the following requirements are met:

  • the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function
  • the lodging is for a period that does not exceed five calendar days and does not occur more frequently than once per calendar quarter
  • if the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight
  • the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit

The above requirements are a safe harbor, local lodging expenses may still be deductible if the facts and circumstances indicate the expenses were incurred for a trade or business.

Examples

Example:  Employer conducts a four-day training session for its employees at a local hotel.  Employer requires all employees to stay at the hotel to facilitate the training.  Employer pays the costs of lodging directly to the hotel and does not treat the value of the hotel stay as compensation to the employees.

The local lodging expenses meet the safe harbor requirements so the employer can deduct the lodging expenses and the employees do not have to report the value as income.

Example:  Same facts as above, except that the training lasts seven days.  Now the safe harbor is not meet because the period lasted longer than five days.  However, the local lodging expenses will still meet the facts and circumstances test because the training is a bona fide requirement of employment and the employer has a noncompensatory business purpose for the lodging expenses.  Employer is not paying the expenses primarily to provide a personal benefit to the employees, and the lodging Employer provides is not lavish or extravagant. 

Example:  Employer requires an employee to be “on duty” each night to respond quickly to emergencies that may occur outside of normal working hours.  Employees who work daytime hours each serve a “duty shift” once per month to respond to emergencies (which occur regularly).  Employer has no sleeping facilities, so employer pays for a nearby hotel room where the duty shift employee sleeps. 

While this fact scenario does not meet the safe harbor requirements (each employee’s local lodging expenses occur more frequently than quarterly), the local lodging expenses will meet the facts and circumstances test.

The duty shift is a bona fide condition or requirement of employment and Employer has a noncompensatory purpose for paying the lodging expenses.  Employer is not providing the lodging for the employee’s personal benefit, and the lodging is not extravagant.  

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

New Rules for IRA Rollovers

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There are two ways to transfer funds from one IRA into another.  You can transfer funds from one IRA trustee DIRECTLY to another IRA trustee in what is known as a trustee-to-trustee transfer.  You can also take a distribution from an IRA and, within 60 days, transfer the distributed amount into another IRA.  The IRS allows taxpayers one IRA rollover in any one year period.

Under old law, the IRS allowed one rollover per IRA in a yearUnder this rule, each IRA could be rolled over once per year.  A Tax Court case in 2014 (Bobrow) changed this rule, and now the IRS allows one IRA rollover in a year, period.  Basically, once you rollover one IRA, you cannot rollover any of your other IRAs during a year.

Example:  Wilma has three IRAs: IRA-A, IRA-B and IRA-C.  She receives a distribution of the balance of IRA-A and deposits it into a new IRA.  Two months later, she receives a distribution of the balance of IRA-B and deposits it into a new IRA.  Under old law, each IRA could be rolled over once per year and both rollovers are therefore tax free.

Under the new rule, the rollover of IRA-A will be tax free.  However, the distribution of IRA-B and transfer into a new IRA will not be tax free because Wilma already rolled over one of her IRAs in the same year.  The distribution of IRA-B will be taxable and could be subject to a 10% penalty.  In addition, contributions into IRAs are generally limited to $5,500 per year.  The transfer into the new IRA could be an excess contribution into an IRA and be subject to an additional 6% penalty.  Not good!

The IRS Issues New Guidance

The IRS recently issued additional guidance on the new rule:

The IRS will apply the new rollover rule to distributions that occur after January 1, 2015.  As a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution.

A rollover from a traditional IRA to a Roth IRA is not subject to the one-rollover-per year limitation.  However, a rollover between an individual’s Roth IRAs would bar a separate rollover within the 1 year period between the individual’s traditional IRAs, and vice versa.

The one-rollover-per-year rule does not apply to a rollover to or from a qualified plan (such as a 401k).

Importantly, the new rule does not apply to trustee-to-trustee transfers.  IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts DIRECTLY from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.   

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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