Tips on Tax Planning, Net

Transcription

1 Tips on Tax Planning, Net Investment Income and Repair Regulations December 3, 2014 Anders CPAs + Advisors TAX TIPS FOR 2014 JENNY L. MEYER, CPA PRINCIPAL + TAX SERVICES 1

2 2014 Individual Income Tax Brackets (Married Filing Jointly - MFJ) Marginal Income Ranges Ordinary Tax Rate $0 18,150 10% $18,150 73,800 15% $73, ,850 25% $148, ,850 28% $226, ,100 33% $405, ,600 35% Over $457, % Capital Gains & Dividends Long-Term Capital Gains & Qualified Dividends Tax Rates Remain the Same as 2013 Marginal Income Ranges Ordinary Tax Rate Capital Gains Rate $0 18,150 10% 0% $18,150 73,800 15% 0% $73, ,850 25% 15% $148, ,850 28% 15% $226, ,100 33% 15% $405, ,600 35% 15% Over $457, % 20% 2

3 Itemized Deductions Phase Out Pease Limitation increased for inflation Reduce itemized deductions by 3% of AGI in excess of $305,050 for MFJ in 2014 Net Investment Income Tax (NII) 3.8% tax on net investment income Wages Taxable Interest Capital Gains Exempt Interest Dividends Annuity Income Passive Income Rental Income Subject to NII X X X X X X Exempt from NII X X 3

4 Additional Medicare Tax 0.9% tax on earned income Employee s portion subject to additional tax for earned income exceeding $250,000 for married couples Additional withholding from wages begins at $200,000 Expired Individual Tax Extenders State and local sales tax Above-the line deduction for certain teacher expenses Above-the line deduction for qualified tuition and related expenses Qualified Charitable Distributions from IRAs to charitable organizations 4

5 Estate Tax The exclusion amount for estates of decedents who die in 2014 is $5,340,000 Maximum tax rate remains at 40% Gift Tax The annual exclusion for gifts is $14,000 for 2014 Lifetime gift tax exemption is $5,340,000 for

6 2014 Trust Income Tax Brackets Marginal Income Ranges Tax Rate $0 2,500 15% $2,500 $5,800 25% $5,800 8,900 28% $8,900 12,150 33% Over $12, % Expired Business Tax Extenders Research and development credit Work opportunity tax credit $500,000 IRC 179 deduction on first $2 million of purchases Bonus depreciation 15-year straight line depreciation for qualified leasehold, restaurant, and retail improvements. 6

7 Depreciation If accelerated depreciation not reinstated, current law states: IRC 179 $25,000 No Bonus Depreciation 39 years for Qualified Leasehold Improvements Repair Regulations PLANNING CONSIDERATIONS 7

8 Planning Considerations 1. Defer income or accelerate deductions 2. Harvest capital losses 3. Maximize your business expenses 4. Roth IRA Conversions 5. Maximize retirement plan contributions Planning Considerations 6. Utilize pre-tax savings plans 7. Timing of state tax payments 8. Charitable contributions 9. Make your year end gifts 10.Reduce taxable income held in trusts 8

9 NET INVESTMENT INCOME TAX ROBERT L. BERGER, CPA/CGMA PRINCIPAL + TAX SERVICES 3.8% Net Investment Income Tax (NIIT) Enacted by the 2010 Health Care Reconciliation Act Governed by IRC Section 1411 and calculated on Form 8960 NIIT is paid by individuals, estates and trusts in addition to regular tax and AMT 9

10 3.8% Net Investment Income Tax (NIIT) 3.8% NIIT is imposed on the lesser of: Net Investment Income (NII), or The excess of modified adjusted gross income (MAGI) over the following thresholds Filing Status Threshold Married Filing Jointly $250,000 Single, Head of Household $200,000 Married Filing Separately $125,000 What is included in NII? Subject to NIIT Exempt from NIIT Wages X Taxable Interest Capital Gains X X Exempt Interest X Dividends X Retirement Income X Passive Income Rents X X 10

11 NII Properly Allocable Deductions Amounts paid or incurred to produce gross income or net gain Investment interest expense, investment expenses, and state taxes Deductions limited by 2% floor or pease limitations are also limited for NII Exceptions Trade or business income Material Participation Required 500 hours Real estate professionals More than one-half of personal services performed are real estate related 750 hours 11

12 Exceptions Self-rented property Self-charged interest Traders in financial instruments or commodities Sale of non-passive business interest Planning Points Donate appreciated securities Achieve material participation Consider grouping passive activities Distribute income from trusts using 65 day election 12

13 THE NEXT BIG THING IS HERE! FINAL TANGIBLE PROPERTY REGULATIONS NICOLE M. DOESCHOT, CPA, MSA DAVE M. FINKLANG, CPA/CGMA, MBA GOALS Understand the basics Why you should care about them Steps to implement What to expect for your 2014 tax filings What you should be doing before year end 13

14 WHAT ARE THE REPAIR REGULATIONS? Background Final and proposed regulations released September 19 th, 2013 In effect January 1, 2014 Regulations will affect all taxpayers that acquire, produce, or improve tangible property 14

15 Background Regulations aim to clarify the difference between capital asset and immediate expense Guidance was previously missing Must review every purchase and repair expenditure closely Background Since the inception of the Internal Revenue Code, this has been subjective We do not have all the answers.yet Elections, method changes, procedures must be in place 15

16 WHY SHOULD I CARE? STEP #1: DETERMINING UNIT OF PROPERTY 16

17 Unit of Property (UOP) All components functionally interdependent Performs a discrete and major function within the functionally interdependent component Different class lives = separate UOP Property Improvements Building Structure HVAC Plumbing Electrical Escalators Elevators Fire Protection Security Gas Other Systems Identified 17

18 STEP #2: DOES EXPENDITURE QUALIFY AS ROUTINE MAINTENANCE? Routine Maintenance Safe Harbor Not really an election It s a safe harbor taxpayers can follow. Amount paid is deemed not to improve the property if it was for the ongoing activities Recurring activity Perform to keep in its ordinarily efficient operating condition Ex. Inspecting, cleaning, testing, etc. What is routine? More than once in 10 years building More than one in tax depreciation life tangible property 18

19 STEP #3: DOES EXPENDITURE FALL UNDER THE DE MINIMIS SAFE HARBOR? De Minimis Safe Harbor Clearly defined capitalize vs. expense thresholds Taxpayers without AFS $500 safe harbor threshold Taxpayers with AFS $5,000 safe harbor threshold Tax method must follow book 19

20 Power of the De Minimis Safe Harbor No AFS: Taxpayer buys 10 I-Pads at $500 each - total of $5,000. If cap. policy in place, can EXPENSE entire $5,000 AFS: 1,250 computers at $5,000 each - total $6,250,000 If cap. policy in place, can EXPENSE entire $6,250,000 No policy = $200 De Minimis Capitalization policy must be in place Frequently Asked Question I currently do not have an audited financial I currently do not have an audited financial statement. I have a capitalization policy of $1,000, which is above the safe harbor. Does that mean that I cannot elect the DMSH? 20

21 Materials and Supplies A taxpayer may elect to capitalize and depreciate the cost of rotable spare parts, temporary spare parts, or standby emergency spare parts. Does NOT cover regular materials and supplies STEP #4: APPLY THE B.A.R. TEST 21

22 BAR TEST Capitalization Rules Any improvement amount paid for: Betterment to property Adapting to new or different use Restoring or Improving property Betterment An amount is paid for a betterment to a unit of property only if it-- Ameliorates a material condition or defect that either existed prior Is for a material addition, including a physical enlargement, expansion, extension, or addition of a major component to the unit of property or a material increase in the capacity Is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output 22

23 Betterment Example Betterment Replacing 25-year shingles with lightweight, composite, and maintenance-free shingles with a 50-year warranty and a Class A fire rating. Not a Betterment Replacing wooden shingles that are no longer available with comparable asphalt shingles that are somewhat stronger than the wooden shingles. 45 Adaptation Adapting a unit of property to a new or different use. Adaptation is not consistent with the taxpayer s intended ordinary use of the unit of property at the time originally placed in service by the taxpayer. 23

24 Adaptation Examples Adaptation Conversion of manufacturing building into a retail showroom Re-grading of land used for manufacturing to be used for residential purposes Reconfiguration to add walk-in clinic to retail drug store Not an Adaptation Building designed to combine adjoining spaces and tenant expands to occupy two adjoining spaces Prepare retail building for sale by repainting interior walls and refinishing hardwood floors Addition of a sushi bar to a grocery store that sells prepared foods Restoration and Improvement An amount is paid to RESTORE, and therefore IMPROVE, a Unit of Property if it: 1. It returns the Unit of Property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and was no longer functional for its intended use. 2 It is rebuilding to like-new condition: results in the 2. It is rebuilding to like new condition: results in the rebuilding of the Unit of Property to a like-new condition after the end of its class life (brought to the status of new, rebuilt, remanufactured, or similar status under the terms of any federal regulatory guideline or the manufacturer s original specifications). 24

25 Restoration and Improvement Example Restoration An office building with: 1 HVAC System 1 Chiller 1 Boiler 1 Cooling Tower The chiller is replaced with a comparable unit and performs a discrete and critical function of the HVAC system Not a Restoration An office building with: 1 HVAC System 3 Furnaces 3 AC Units Duct Work Throughout A broken furnace is replaced with a new furnace. Together the 3 furnaces perform a critical function in the operation of the HVAC system, but replacing a single furnace is not a significant portion of this major component of the HVAC system. IMPACT ON 2014 TAX RETURNS 25

26 TAX RETURN ELECTIONS Summary of Tax Return Elections De Minimis Safe Harbor Capitalize and depreciate certain M&S Capitalize amounts paid for employee compensation or overhead Capitalize repair and maintenance costs Small Taxpayer Safe Harbor Partial Disposition 26

27 Small Taxpayers Safe Harbor How to qualify? Average gross receipts preceding three years < $10m Building adjusted gross basis < $1m Total amount paid during the taxable year for R & M, improvements, and similar activities performed on the eligible building property does not exceed the lesser of 2 % of the unadjusted basis of the eligible building property; or $10,000 Do not include items capitalized under de minimis safe harbor or those amounts deemed expenses CHANGE OF ACCOUNTING METHODS 27

28 Method Changes Every taxpayer affected by the regulations will need to file a Change in Accounting Method Form 3115 Formally adopting a change to comply with the new regulations Will require additional time with all 2014 tax filings PARTIAL ASSET DISPOSITIONS 28

29 Partial Asset Dispositions Partial Asset Disposition Election A TP can make an election to dispose of a portion of an asset 57 Partial Dispositions Partial Asset Disposition iti Election Allows TP to claim a loss upon the disposition of a structural component (or a portion thereof) of a building, OR Upon the disposition of a component (or a portion thereof) of any other asset WITHOUT identifying the component as an asset prior to the disposition event 58 29

30 Then Versus Now Quick Roof Replacement Example THEN The new roof would be capitalized and depreciated. And, the old roof would also be depreciated. If the roof was replaced again, there could potentially be three roofs on the books being depreciated. NOW The new roof would be capitalized and depreciated. BUT, if the partial disposition election was made, the old roof could be written off. The same would apply if subsequent roofs were installed. The TP would get an immediate deduction for the disposed roof, and would depreciate only one roof. Partial Disposition Going Back in Time The BEST part? We can go back in time! Allows us to claim partial disposition on 2014 tax return for prior years September 15, 2015 deadline for 2014 extended returns. 30

31 REPAIR REGULATION STUDIES WRAPPING IT UP 31

32 Written Off Examples Capitalize Examples 32

33 Potential Tax Benefits Possibility to expense more items under: De Minimis Safe Harbor Routine Maintenance Safe Harbor Partial Asset Dispositions Repair Regulation Studies What To Do Now? Make sure your capitalization policy is in place! Review prior-year transactions in detail Discuss issues with your tax consultant Be on the lookout for extra tax filings (those change in accounting method forms) Get ready for 2014 tax season! 33

34 Contact Us Nicole M. Doeschot, CPA, MSA (314) Dave M. Finklang, CPA, CGMA, MBA (314) Jenny L. Meyer, CPA, MBA (314) Robert L. Berger, CPA/CGMA (314)