TAX CHANGES & TRENDSPresented by Sean Brewer

Agenda Introduction Expiring Tax

Provisions Affordable Care Act Tangible Property

Regs Questions

Expiring Provisions

Expiring Provisions1) Credit for certain nonbusiness energy

properties

2) Alternative fuel vehicle refueling property (non-hydrogen refueling property)

3) Credit for two- or three-wheeled plug-in electric vehicles

4) Credit for health insurance costs of eligible individuals

5) Second generation biofuel producer credit (formerly cellulosic biofuel producer credit)

Expiring Provisions

6) Incentives for biodiesel and renewable diesel:a) Income tax credits for biodiesel fuel, biodiesel used to

produce a qualified mixture, and small agri-biodiesel producers

b) Income tax credits for renewable diesel used to produce a qualified mixture

c) Excise tax credits and outlay payments for biodiesel fuel mixtures

d) Excise tax credits and outlay payments for renewable diesel fuel mixtures

Expiring Provisions

7) Tax credit for research and experimentation expenses

8) Determination of low-income housing credit rate for credit allocations with respect to non-federally subsidized buildings

9) Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit

Expiring Provisions

10) Credit for production of Indian coal

11) Indian employment tax credit

12) New markets tax credit

13) Credit for certain expenditures for maintaining railroad tracks

14) Credit for construction of new energy efficient homes

15) Credit for energy efficient appliances

Expiring Provisions

16) Mine rescue team training credit

17) Employer wage credit for activated military reservists

18) Work opportunity tax credit

19) Qualified zone academy bonds: allocation of bond limitation

20) Deduction for certain expenses of elementary education and secondary school teachers

Expiring Provisions

21) Discharge of indebtness on principal residence excluded from gross income of individuals

22) Parity for exclusion from income for employer-provided mass transit and parking benefits

23) Treatment of military basic housing allowances under low-income housing credit

Expiring Provisions

24) Premiums for mortgage insurance deductibles as interest that is qualified residence interest

25) Deduction for State and local general sales taxes

26) Three-year depreciation for race horses two years old or younger

27) 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

Expiring Provisions

28) Seven-year recovery period for motorsports entertainment complexes

29) Accelerated depreciation for business property on an Indian reservation

30) Additional first-year depreciation for 50 percent of basis of qualified property

31) Election to accelerate AMT credits in lieu of additional first-year depreceation

Expiring Provisions

32) Special depreciation allowance for second generation biofuel plant property

33) Special rules for contributions of capital gain real property made for conservation purposes

34) Enhanced charitable deduction for contributions of food inventory

35) Increase in expensing to $500,000/$2,000,000 and expansion of definition of section 179 property

Expiring Provisions

36) Placed-in-service date for partial expensing of certain refinery property

37) Energy efficient commercial buildings deduction

38) Election to expense advanced mine safety equipment

39) Special expensing rules for certain film and television productions

Expiring Provisions

40) Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico

41) Deduction for qualified tuition and related expenses

42) Tax-free distributions from individual retirement plans for charitable purposes

43) Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric restructuring

Expiring Provisions

44) Modification of tax treatment of certain payments to controlling exempt organizations

45) Treatment of certain dividends of regulated investment companies (“RICs”)

46) RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (“FIRPTA”)

47) Exceptions under subpart F for active financing income

Expiring Provisions

48) Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules

49) Special rules for qualified small business stock

50) Basis adjustment to stock of S corporations making charitable contributions of property

51) Reduction in S corporation recognition period for built-in gains tax

Expiring Provisions

52) Empowerment zone tax incentivesa) Designation of an empowerment zone and of

additional empowerment zones

b) Increased exclusion of gain (attributable to periods through 12/31/18) on the sale of qualified business stock of an empowerment zone business

c) Empowerment zone tax-exempt bonds

d) Empowerment zone employment credit

e) Increased expensing under sec. 179

f) Non-recognition of gain on rollover of empowerment zone investments

Expiring Provisions

53) Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen)

a) Excise tax credits and outlay payments for alternative fuel

b) Excise tax credits for alternative fuel mixtures

54) Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands

55) American Samoa economic development credit

Affordable Care Act

Jimmy Kimmel VideoSix of One - Obamacare vs. The Affordable Care Act

Affordable Care Act

Net Investment Tax 3.8% beginning in 2013Modified AGI limits

○ $250K married, $125K MFS, $250K qualifying widower, 200K others

Includes but not limited to interest, dividends, capital gains, rental & royalty income, business income

Does not include wages, unemployment, nonpassive business income, social security, alimony, tax-exempt interest

Affordable Care Act

Example 1: Threshold not surpassedTaxpayer, a single filer, has wages of $180,000

and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

Affordable Care Act Example 2: Threshold surpassed

Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received from a passive partnership interest, which is not considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000.

Taxpayer modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000

The net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).

Affordable Care Act

Additional Medicare Tax 0.9%Wages (including noncash fringe benefits) &

SE income ($250K married, $125K MFS, $200K others)

Affordable Care Act Example 1: C, a single filer, has $130,000 in wages

and $145,000 in self-employment income.C’s wages are not in excess of the $200,000 threshold

for single filers, so C is not liable for Additional Medicare Tax on these wages

Before calculating the Additional Medicare Tax on self-employment income, the $200,000 threshold for single filers is reduced by C’s $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000

C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

Affordable Care Act Example 2: D & E are married and file jointly. D has

$150,000 in wages and E has $175,000 in self employment income.D’s wages are not in excess of the $250,000 threshold for

joint filers, so D and E are not liable for Additional Medicare Tax on D’s wages

Before calculating the Additional Medicare Tax on E’s self-employment income, the $250,000 threshold for joint filers is reduced by D’s $150,000 in wages resulting in a reduced self-employment income threshold of $100,000.

D & E are liable to pay Additional Medicare Tax on $75,000 of self-employment in come ($175,000 in self-employment income minus the reduced threshold of $100,000

Affordable Care Act Example 3: F, who is married and files separately, has

$175,000 in wages and $50,000 in self-employment incomeF is liable to pay the Additional Medicare Tax on $50,000 of his

wages ($175,000 minus the $125,000 threshold for married persons who file separately).

Before calculating the Additional Medicare Tax on self-employment income, the $125,000 threshold for married persons who file separately is reduced by F’s $175,000 in wages to $0 (reduced, but not below zero)

F is liable to pay Additional Medicare Tax on $50,000 of self-employment income ($50,000 in self-employment minus the reduced threshold of $0).

In total, F is liable to pay Additional Medicare Tax on $100,000 ($50,000 of his wages and $50,000 of his self-employment income)

Affordable Care Act

Employer responsibilitiesEmployer responsible for withholding in excess

of $200,000 beginning in the pay period the employee surpasses the threshold

No employer match as with normal Medicare TaxForm 941 will be updated for the changesSubject to same rules for over/under withholding

as with other payroll taxes

Affordable Care Act

Other business effectsReporting on form W-2 for employer

provided health coverage (informational)Small business Health Care Credit (This is

been in effect)○ Encourage small business to offer health care○ Intended for low-income workers○ Variable premiums paid○ Variable levels of qualifying FTES (part-timers

add up to full-timers)

Tangible Property Regs

Tangible Property Regs Regulations were finalized on Friday,

September 13th

Standardizes what must be capitalized or expensed

Allows for disposition of a portion of an asset Qualitative standards in all situations based

on all facts and circumstancesMeaning taxpayer “facts and circumstances” will

trump other general considerations in most cases

Tangible Property Regs Unit of Property – Buildings

Buildings: a boon for the cost segregation industry The building susters (Units of Property) that make up a building are:

○ Building Structural Components○ Heating, Ventilation and air conditioning○ Plumbing systems○ Electrical systems○ All escalators○ All elevators○ Fire-protection and alarm systems○ Security systems for protection of building and inhabitants○ Gas distribution system○ Other structural components (roof, walls, partitions, floors, foundation,

windows, doors, etc.)

Tangible Property Regs Unit of Property – Buildings

Taxpayers will be expected to capitalize building costs based on the improvement or betterment (or increase in value) that it creates for the particular building system– this means a lot more capitalization

With more capitalization of 39 year property comes the obvious desire to write off more of the old disposed property. It has been a common argument to not capitalize a replaced building system or part (roof, HVAC) because the old one is still depreciating and the new did not materially enhance the value of the building overall. The building is no longer the yardstick for measuring an improvement or betterment.

Cost Segregation of a building becomes much more important over the long haul to be able to defend costs disposed when new costs must be capitalized. Also, it enables taxpayers to defend that a cost was not material to a building component and should be expensed by being able to demonstrate the actual total costs of the particular component

Cost segregation studies are not cheap – still will need to do a cost-benefit analysis for smaller buildings (if possible, have contractor break out costs if cost-seg not an option)

Tangible Property Regs Improvements

Aside from costs expended for new tangible property that must be capitalized, the Regs also focus heavily on costs to improve property already owned.

The Final regs retained the types of improvements categories that must be capitalized and provide extensive examples of how costs expended interact with each. Improvements (and thus capitalization) may result from Betterments, Adaptations, or Restorations to a unit of property.

Again, facts and circumstances appear to play a large role in making determinations as to whether a cost may be expensed

Tangible Property Regs Improvements – Betterments

Betterments are defined as amounts paid that:○ Ameliorates a material condition or defect that existed

prior to acquisition or arose during production of the unit of property, whether or not the taxpayer was aware of the condition or defect at the time,

○ Is for a material addition, including physical enlargement, expansion, extension, or addition of a major component to the unit of property or material increase in capacity; OR

○ Is reasonably expected to materially increase productivity, efficiency, strength, quality, or output of the unit of property.

Tangible Property Regs Improvements – Restorations

Restorations are defined as amounts paid for:○ Replacement of a component of a UOP for which the taxpayer has

properly deducted a loss for that component○ Replacement of a component of a UOP for which the taxpayer has

properly taken into account the adjusted basis of the component in realizing gain or loss resulting from sale or exchange

○ Restoration of damage to a UOP for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165 or relating to a casualty event under section 165 (subject to limitations)

○ Returning the UOP to an ordinary, efficient operating condition if property has deteriorated to a state of disrepair and is no longer functional for its intended use

○ Rebuilding the UOP to like-new condition after the end of its class life, OR

○ Replacing of a part or combination of parts that comprise a major component or a substantial structural part of the unit of property

Tangible Property Regs

Improvements – AdaptationsAdaptation does not come with the

extensive definition that betterment and restoration have ○ In general, an amount is paid to adapt a unit

of property to a new or different use if the adaptation is not consistent with the taxpayer's ordinary use of the unit of property at the time originally placed in service by the taxpayer.

Tangible Property Regs The New & Improved De Minimis Rule

IRS received a “significant number” of comments and sought to address what taxpayers apparently thought would be overly burdensome rules.

The revised rules offer taxpayers with an AFS a simple ceiling of $5,000 per invoice, or per item as substantiated by the invoice.○ Must treat the item as an expense on the AFS in

accordance with its written procedures○ Still applies only to audited financials, not reviews,

not compilations

Tangible Property Regs The New & Improved De Minimis Rule

This time around, the IRS finally recognized that taxpayers without an AFS exist also

Taxpayers without an AFS now have a de minimis rule of $500 per invoice or per item as substantiated by the invoice○ Non-AFS taxpayers are still required to have a written

capitalization policy in place at the beginning of the tax year in which they treat the costs as expenses for non-tax purposes

○ Must follow your capitalization policy (this may require some training of the front-line folks inputting transactions into your system)

Tangible Property Regs The New & Improved De Minimis Rule

De minimis rules may not be used for inventory, land, or rotable/spare parts that taxpayer elects to capitalize or use the optional method for

Additional acquisition and production costs (delivery fees, installation services, etc.) are not included in the cost if not reflected on the invoice, but are included if shown on the same invoice.

Sales of items expensed are not capital assets or 1231 property (ordinary income) Anti-abuse rule in place

○ You cannot manipulate your invoices to componentize property to expense it (purchase a vehicle engine, frame, interior, tires, trailer, etc. in separate invoices will be considered abuse)

○ If the cost of the overall UOP is larger than the de minimis (outside of peripheral costs such as delivery, installation charges), it should be capitalized (i.e. – constructing a large item like a storage building)

Election is made yearly by attaching a statement to the return (this will eat in to the 16.5 minutes the IRS says it will take you to comply but may also avoid having to file for change in accounting method)

Preamble states that examiners are not to revise their materiality thresholds based on the de minimis amounts. If taxpayer and examiner agree a higher amount is acceptable (yeah, right) it may be used. For large businesses without an AFS (low/no debt companies), this may be only option.

Tangible Property Regs Example 1: De Minimis Safe Harbor – Taxpayer without

AFS In Year 1, B purchases 10 computers at $600 each for a total

cost of $6,000 as indicated by the invoice○ Assume each computer is a unit of property under § 1.263(a)-

3(e). B does not have an Applicable Financial Statement. B has accounting procedures in place at the beginning of Year

1 to expense amounts paid for property costing less than $1,000 and B treats these amounts paid for the computers as an expense on its books and records

The amounts paid for the printers do not meet the requirements for the de minimis safe harbor under paragraph (f)(1)(ii) of this Section because the amount paid for the property exceeds $500 per invoice (or per item as sustained by the invoice).○ B may not apply de minimis safe harbor election to the amounts

paid for the 10 computers under paragraph (f)(1) of this Section

Tangible Property Regs Example 2: De Minimis Safe Harbor – Taxpayer with AFS

C is a member of a consolidated group for Federal income tax purposes.○ C’s financial results are reported on the consolidated applicable financial statements for the

affiliated group.○ C’s affiliated group has a written accounting policy at the beginning of Year 1, which is

followed by C, to expense amounts paid for property costing $5,000 or less.

In Year 1, C pays $6,250,000 to purchase 1,250 computers at $5,000 each.○ C receives an invoice from its supplier indicating the total amount due ($6,250,000) and the

price per item ($5,000).○ Assume that each computer is a unit of property under § 1.263(a)-3(e).

The amounts paid for the computers meet the requirements for the de minimis safe harbor.○ If C elects to apply de minimis safe harbor under this paragraph (f) for Year 1, C may not

capitalize the amounts paid for the 1,250 computers or any amounts meeting the criteria for the de minimis safe harbor under paragraph (f)(1) of this Section.

○ Instead, under paragraph (f)(3)(iv), C may deduct these amounts under § 1.162-1 in the taxable year the amounts are paid provided the amounts otherwise constitute deductible ordinary and necessary expenses incurred in carrying on a trade or business.

Questions?

Contact Information

Sean Brewer865-769-1649sbrewer@pughcpas.com