Updates for the Tax Increase Prevention Act of 2014

Transcription

1 Quickfinder Small Business Quickfinder Handbook (2014 Tax Year) Updates for the Tax Increase Prevention Act of 2014 Instructions: This packet contains marked up changes to the pages in the Small Business Quickfinder Handbook that were affected by the Tax Increase Prevention Act of 2014, which was enacted after the handbook was published. To update your handbook, you can make the same changes in your handbook or print the revised page and paste over the original page. Note: For many pages, the change is simply a matter of crossing out a paragraph and/ or inserting an amount or date.

2 TAX PREPARATION Small Business Quickfinder Handbook Filing Information Tax Return Return Due Extensions Form 1065: Partnership/LLC Forms 1120/1120S: Corporation Form 1041: Estates and Trusts Form 706: Estates Form 709: Gift Tax Form 990: Exempt Organizations Form 1120 Corporation Tax Rate Schedule Quick Tax Method For tax years beginning after December 31, 1992 Taxable Income % Minus $ = Tax $ 0 $ 50,000 15% minus $ 0 = Tax 50,001 75, minus 5,000 = Tax 75, , minus 11,750 = Tax 100, , minus 16,750 = Tax 335,001 10,000, minus 0 = Tax 10,000,001 15,000, minus 100,000 = Tax 15,000,001 18,333, minus 550,000 = Tax 18,333,334 and over 35 minus 0 = Tax Note: See Basics of Corporations on Page C-1 for exceptions to above tax rates and an example of how to use the Quick Tax Method. Form Fiduciary Tax Rate Schedule Quick Tax Method Taxable Income % Minus $ = Tax $ 0 $ 2,500 15% minus $ 0.00 = Tax 2,501 5, minus = Tax 5,801 8, minus = Tax 8,901 12, minus = Tax 12,151 and over 39.6 minus 1, = Tax Note: The 10% tax bracket that applies to individuals does not apply to estates and trusts. 15th day of fourth month following close of tax year. 15th day of third month following close of tax year. 15th day of fourth month following close of tax year. Nine months after date of decedent s death. April 15th following close of tax year of gift. 15th day of fifth month following close of tax year. Form 7004 extends deadline five months. Form 7004 extends deadline six months. Form 7004 extends deadline five months. Form 4768 extends deadline six months. Form 4868 or 8892 extends deadline six months. Form 8868 extends deadline three months. A second Form 8868 extends three additional months. Forms: 1065, 1120, 1120S, 1041, 706, 709 and Tax Year Forms 706 and 709 Estate and Gift Tax Rate Schedule Quick Tax Method For gifts made and estates of decedents dying after 2012 Taxable Amount % Minus $ = Tax 1 $ 0 $ 10,000 18% minus $ 0 = Tax 10,001 20, minus 200 = Tax 20,001 40, minus 600 = Tax 40,001 60, minus 1,400 = Tax 60,001 80, minus 2,600 = Tax 80, , minus 4,200 = Tax 100, , minus 6,200 = Tax 150, , minus 9,200 = Tax 250, , minus 14,200 = Tax 500, , minus 29,200 = Tax 750,001 1,000, minus 44,200 = Tax 1,000,001 and over 40 minus 54,200 = Tax 1 Less applicable credit amount. See the charts at the beginning of Tab H. Estate Tax Exclusion Estate and Gift Tax Exclusion Amounts Gift Tax Exclusion 1 Annual Gift Exclusion $5,340,000 $5,340,000 $14,000 1 Plus the amount, if any, of deceased spousal unused exclusion amount see Tab H Business Quick Facts Section 179 Deduction: Maximum deduction... $ 500,000 Qualifying property limit... 2,000,000 SUV deduction limit... 25,000 Depreciation Limits (First Year): Luxury autos... $ 1 3,160 Light trucks and vans... 3,460 1 Standard Mileage Rate Business miles... $.56 Depreciation component Greater Section 179 deduction thresholds expired for property placed in service after 2013, but could be reinstated. Tax professionals should watch for developments. 1 Plus $8,000 if special (bonus) depreciation is claimed.

3 Reference Materials and Worksheets Where to File: Business Returns Filing Addresses 2014 Returns...Page A-1 Principal Business Activity Codes Forms 1065, 1120 and 1120S...Page A-1 Business Quick Facts Data Sheet...Page A-1 Types of Payments Where to Report...Page A-2 Guide to Information Returns...Page A-3 Cash and Accrual Accounting Methods Treating Commonly Encountered Items...Page A-5 S Corporation Shareholder s Adjusted Basis Worksheet...Page A-6 Partner s Adjusted Basis Worksheet...Page A-7 Tax Info for Partnership, Corporation, LLC and LLP Returns...Page A-8 Tab A Topics Transferor s Section 351 Statement...Page A-10 Tax Info Sheet for Gift Tax Returns... Page A-11 Estate Inventory Worksheet...Page A-12 Reconciliation of Income Reported on Final Form 1040 and Estate s Fiduciary Return (or Beneficiary s Return)...Page A-13 Allocation of Indirect Costs to Ending Inventory Under Section 263A...Page A-14 Business Valuation Worksheet...Page A-15 Foreign Asset Reporting Forms 8938 and FinCEN Page A-16 Types of Foreign Assets and Whether They are Reportable...Page A-16 Where to File: Business Returns Filing Addresses 2014 Returns Note: At the time of publication, the IRS had not released the 2014 filing addresses for business returns. This information will be posted to the Updates section of tax.thomsonreuters.com/quickfinder when available. Principal Business Activity Codes Forms 1065, 1120 and 1120S Note: At the time of publication, the IRS had not released the 2014 principal business activity codes for business returns. This information will be posted to the Updates section of tax.thomsonreuters.com/quickfinder when available. Business Quick Facts Data Sheet FICA/SE Taxes Maximum earnings subject to tax: Social Security tax $ 118,500 $ 117,000 $ 113,700 $ 110,100 $ 106,800 Medicare tax No Limit No Limit No Limit No Limit No Limit Maximum tax paid by: Employee Social Security $ 7, $ 7, $ 7, $ 4, $ 4, SE Social Security 14, , , , , Employee or SE Medicare No Limit No Limit No Limit No Limit No Limit Business Deductions Section 179 deduction limit $ 25,000 4 $ 500,000 $ 500,000 $ 500,000 $ 500,000 Section 179 deduction SUV limit (per vehicle) 25,000 25,000 25,000 25,000 25,000 Section 179 deduction qualifying property phase-out threshold 200, ,000,000 2,000,000 2,000,000 2,000,000 Depreciation limit autos (1 st year with special depreciation) N/A 11,160 11,160 11,160 11,060 Depreciation limit autos (1 st year with no special depreciation) 2 3,160 3,160 3,160 3,060 Depreciation limit trucks and vans (1 st year with special depreciation) N/A 11,460 11,360 11,360 11,260 Depreciation limit trucks and vans (1 st year with no special depreciation) 2 3,460 3,360 3,360 3,260 Retirement Plans SIMPLE IRA plan elective deferral limits: Under age 50 at year end $ 12,500 $ 12,000 $ 12,000 $ 11,500 $ 11,500 Age 50 or older at year end 15,500 14,500 14,500 14,000 14, (k), 403(b), 457 and SARSEP elective deferral limits: Under age 50 at year end $ 18,000 $ 17,500 $ 17,500 $ 17,000 $ 16,500 Age 50 or older at year end 24,000 23,000 23,000 22,500 22,000 Profit-sharing plan/sep contribution limits 53,000 52,000 51,000 50,000 49,000 Compensation limit (for employer contributions to profit-sharing plans) 265, , , , ,000 Defined benefit plans annual benefit limit 210, , , , ,000 Key employee compensation threshold 170, , , , ,000 Highly compensated threshold 120, , , , ,000 Estate and Gift Taxes Estate tax exclusion $5,430,000 3 $5,340,000 3 $5,250,000 3 $ 5,120,000 3 $ 5,000,000 3 Gift tax exclusion 5,430, ,340, ,250, ,120, ,000,000 3 GST tax exemption 5,430,000 5,340,000 5,250,000 5,120,000 5,000,000 Gift tax annual exclusion 14,000 14,000 14,000 13,000 13,000 1 See Tab 3 in the 1040 Quickfinder Handbook for an expanded Quick Facts Data Sheet amount not available at the time of publication. 3 Plus the amount, if any, of deceased spousal unused exclusion amount see Tab H. 4 Congress has increased this amount several times in the past. Watch for possible developments Tax Year Small Business Quickfinder Handbook A-1

4 Depreciation and Amortization OMB No Form 4562 (Including Information on Listed Property) Attach to your tax return. Department of the Treasury Internal Revenue Service (99) Information about Form 4562 and its separate instructions is at Name(s) shown on return Business or activity to which this form relates Identifying number Part I Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I. 1 Maximum amount (see instructions) Total cost of section 179 property placed in service (see instructions) Threshold cost of section 179 property before reduction in limitation (see instructions) DRAFT AS OF June 10, 2014 DO NOT FILE 4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions (a) Description of property (b) Cost (business use only) (c) Elected cost Equipment Airplane 7 Listed property. Enter the amount from line Total elected cost of section 179 property. Add amounts in column (c), lines 6 and Tentative deduction. Enter the smaller of line 5 or line Carryover of disallowed deduction from line 13 of your 2013 Form Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line Carryover of disallowed deduction to Add lines 9 and 10, less line Note: Do not use Part II or Part III below for listed property. Instead, use Part V. 20a Class life b 12-year c 40-year Part IV Summary (See instructions.) 21,000 21, ,000 4, Attachment Sequence No. 179 Shout and Jump Recreation Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.) 14 Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions) Property subject to section 168(f)(1) election Other depreciation (including ACRS) Part III MACRS Depreciation (Do not include listed property.) (See instructions.) Section A 17 MACRS deductions for assets placed in service in tax years beginning before If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here Section B Assets Placed in Service During 2014 Tax Year Using the General Depreciation System (a) Classification of property (b) Month and year (c) Basis for depreciation (d) Recovery placed in (business/investment use period service only see instructions) (e) Convention (f) Method (g) Depreciation deduction 19a 3-year property b 5-year property 171, HY 200 DB 22,800 c 7-year property d 10-year property e 15-year property f 20-year property g 25-year property h Residential rental property i Nonresidential real property 25 yrs yrs yrs. 39 yrs. MM MM MM MM Section C Assets Placed in Service During 2014 Tax Year Using the Alternative Depreciation System 12 yrs. 40 yrs. MM 500, ,000 2,000, ,000 25,000 25, ,040 25, Listed property. Enter amount from line Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporations see instructions , For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs For Paperwork Reduction Act Notice, see separate instructions. Cat. No N Form 4562 (2014) Form 4562, Page 1 Line 12 reference. Partnerships and S corporations do not include the Section 179 deduction in the amount on line 22 below; the deduction is reported on line 12 of Schedule K (Form 1065). Line 22 reference. Line 22 is reported on line 16a of Form 1065 (page 1). If the partnership is subject to UNICAP, part of this amount may have to be reported on line 4 of Form 1125-A as part of COGS. Any amount reported in Form 1125-A must also be entered on line 16b of Form B Tax Year Small Business Quickfinder Handbook

5 Basis of Section 1244 Stock The basis of Section 1244 stock is limited to the original capital contribution paid directly for the stock. Future increases in overall basis will not increase the amount allocated to Section 1244 stock. If the shareholder contributes additional capital after the original stock purchase, the allowable loss under Section 1244 is allocated in proportion to original basis to total basis. [Reg (d)-2] Actual Loss Original Basis Total Basis = Section 1244 Loss Example: Cliff contributes $10,000 to PRT Corporation in exchange for 100 shares of stock. One year later, he contributes an additional $2,000 to the capital of the corporation, increasing his basis to $12,000. Eight years later, the corporation is liquidated and Cliff receives $1,000 cash in exchange for his stock. Of the $11,000 actual loss, $9,167 [$11,000 ($10,000 $12,000)] is an ordinary loss under Section 1244 and the remaining $1,833 is a capital loss. Court Case #1: Two individuals agreed to pay business expenses out of their personal funds in exchange for stock in a corporation. Even though the resulting capital contributions were made over a period of time, the court ruled that the amounts were a direct purchase of the stock, relying in large part on the original intent of the shareholders. The Tax Court overruled a previous IRS determination and allowed the taxpayers to treat the entire amount paid as basis under Section (Miller, TC Memo ) Court Case #2: In another case, the court determined that the amount originally paid for stock ($7,500) was the only amount allowable under Section Subsequent contribution of capital of $189,000 was considered allocable to stock which is not Section 1244 stock. (Bledsoe, TC Memo ) Strategy: Careful planning of stock purchases can preserve the benefits of Section 1244 for shareholders. Especially if there is a risk of loss on investment in Section 1244 stock, the purchaser should make sure additional shares are issued for each contribution made to capital. If shares are purchased over time, as in the case of agreement to pay corporate expenses in exchange for stock, a written plan should be drafted and carefully followed. Partners and S corporation shareholders. If a partnership acquires Section 1244 stock and later sells at a loss, an ordinary loss deduction may be claimed only by individuals who were partners when the stock was issued. However, loss incurred by an S corporation on the sale of Section 1244 stock cannot be passed on to the shareholders as an ordinary loss [Reg (a)-1(b)]. They must treat the loss as a capital loss. Small Business Stock IRC 1202 and 1045 Owners of qualified small business stock (QSBS) can take advantage of two special rules if the stock is sold at a gain. Section 1202 allows all of part of the capital gain on the sale of QSBS to be excluded from income. [IRC 1202(a)(2)] Section 1045 allows taxpayers to roll over gain from the sale of QSBS. QSBS Treatment of Gains Holding Period Gain Options Six months or less Short-term capital gain Over six months but not Short term capital gain over one year Section 1045 gain rollover (elective) Over one year but not over Long-term capital gain rollover (elective) five years Section 1045 gain rollover (elective) Over five years Section 1045 gain rollover (elective) Section 1202 gain exclusion (50%-100%) Long-term capital gain (to the extent not subject to Section 1202 or Section 1045). 12/31/14 Exclusion of Gain An individual may exclude 50% (75% for stock acquired 2/18/09 9/27/10; 100% for stock acquired 9/28/10 12/31/13) of the gain from sale of qualified small business stock (QSBS) (IRC 1202). The stock must have been issued by a C corporation after August 10, 1993, and held more than five years. The exclusion may not exceed 10 times the taxpayer s basis or $10 million, whichever is greater. Gain remaining after the exclusion is taxed at a 28% rate, resulting in an effective tax rate of 14%, for example, for 50% exclusion gain. N Observation: Because of the five-year holding period requirement, 2014 is the earliest a taxpayer can take advantage of the 75% gain exclusion (2015 for the 100% exclusion). Note: For taxpayers qualifying for the 0% capital gains rate in 2014, the Section 1202 exclusion can create a higher tax liability than if the exclusion had not been in place. However, the Section 1045 rollover remains a benefit of meeting the QSBS requirements (see Rollover of gain below) and the Section 1202 exclusion can be a benefit for taxpayers whose capital gains are taxed at a 15% or higher rate. 12/31/14 Alternative minimum tax. The excluded portion of gain on QSBS is a tax preference item in computing alternative minimum taxable income (AMTI). Seven percent of the amount of gain excluded under Section 1202 is the preference amount [IRC 57(a)(7)]. However, for 100% gain exclusion QSBS acquired 9/28/10 12/31/13, none of the excluded gain is added back in computing AMTI. Empowerment zone businesses. The exclusion is 60% for stock acquired after 12/21/00 (75% for stock acquired from 2/18/09 9/27/10; 100% for stock acquired 9/28/10 12/31/13) for 12/31/14 gains attributable to periods through 12/31/18 in corporations that conduct business within an empowerment zone, as designated by the Secretaries of Agriculture and HUD [IRC 1202(a)(2)]. The District of Columbia Empowerment Zone is not treated as an empowerment zone for purposes of the exclusion. Capital gain from the sale of qualified empowerment zone assets held for more than one year may be rolled over if new property in the same zone is purchased within 60 days of the sale. (IRC 1397B) Rollover of Gain An election is available for tax-deferred rollover of gain from the sale of qualified small business stock (QSBS) held more than six months (IRC 1045). The taxpayer must purchase new QSBS within 60 days to qualify for the election. The entire gain is deferred if the new stock costs at least as much as the amount realized from the sale of the old stock. If the new stock costs less than the amount realized, the difference is taxable up to the amount of gain. The basis of the new stock is reduced by the amount of gain deferred. The new stock must continue to meet the active business requirement for at least six months after purchase to qualify for Section 1045 rollover. (See Active business requirement on Page C-8.) For determining capital gain rates on a subsequent sale, the holding period of the new stock generally includes the holding period of the old stock. However, the holding period of the old stock does not count for meeting the six-month test. For guidance on sales by partnerships (and partner distributees) of QSBS, see Regulation Section Qualified Small Business Stock (QSBS) C corporation. The stock must be issued by a C corporation with total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock, and immediately after it issued the stock Tax Year Small Business Quickfinder Handbook C-7

6 Example #1: BNG Corporation sustains a $30,000 loss from operations. It received $90,000 in dividends from a 20%-owned corporation. Its taxable income is $60,000 ($90,000 $30,000) before the deduction for dividends received. By claiming the full dividends-received deduction of $72,000 ($90,000 80%), BNG Corporation calculates its NOL as follows: Operating losses... < $ 30,000> Dividend income... 90,000 Dividends-received deduction... < 72,000> NOL... < $ 12,000> Since BNG has an NOL, the 80% of taxable income limitation does not apply and it is entitled to a full dividends-received deduction of $72,000. Example #2: Assume the same facts as Example #1, except BNG loses $10,000 from operations instead of $30,000. Taxable income before the dividends-received deduction is $80,000 ($90,000 $10,000). After claiming a dividends-received deduction of $72,000 ($90,000 80%), the corporation has net income of $8,000 ($80,000 $72,000). Since in this example there is no NOL after a full dividends-received deduction, the allowable dividends-received deduction is limited to 80% of taxable income, or $64,000 ($80,000 80%). BNG calculates income as follows: Operating losses... < $ 10,000> Dividend income... 90,000 Dividends-received deduction (DRD) (limited to 80% of taxable income before DRD)... < 64,000> Taxable income... $ 16,000 Charitable Contributions C corporations are allowed to deduct charitable contributions as a business expense. The deduction is limited to 10% of the corporation s taxable income. [IRC 170(b)(2) and (c)] Taxable income for limitation purposes is calculated without taking into account the deductions for: Charitable contributions. Dividends received. Premium on repurchase of convertible debt. Domestic production activities deduction. Dividends paid on certain public utility preferred stock. Net operating loss carrybacks. Capital loss carrybacks. Unused contributions from this limitation can be carried forward for five years. No carryback is allowed. [IRC 170(d)(2)] Research property. An exception to the contribution limit applies to contributions of scientific equipment for use in experimentation or for certain research training. This exception is only available for C corporations other than PHCs or service organizations as described in Section 414(m)(3) [IRC 170(e)(4)]. These contributions are subject to the special computation rules discussed at Charitable Contributions of Inventory in the next column. Intellectual property. In addition to the initial deduction, a taxpayer who has donated qualified intellectual property may claim a subsequent charitable contribution based on a percentage of the net income received by the charity (other than certain private foundations) from the property. [IRC 170(m)] Substantiation requirements. Strict rules exist for substantiating charitable contributions. For all monetary contributions, the corporation must maintain a bank record or a receipt, letter or other written communication from the donee organization indicating the organization s name, the date of the contribution and the amount [IRC 170(f)(17)]. Tthere is no de minimis exception. For contributions of $250 or more of either cash or property, the taxpayer must have a contemporaneous written acknowledgement from the donee (a canceled check will not suffice). [Reg A-13(f)] Charitable contributions of property over $5,000. C corporations are required to obtain a qualified appraisal for donated property if the claimed deduction exceeds $5,000. If the claimed deduction of property other than cash, inventory or publicly traded securities exceeds $500,000, a qualified appraisal must be attached to the donor s tax return. Conservation easements. A deduction is available for qualified donations. See Conservation easements on Page N-14. Charitable Contributions of Inventory The deduction for a charitable contribution of inventory or other ordinary income producing property is generally limited to the adjusted basis of the property. A provision in the Code allows a C corporation (not an S corporation) to donate inventory to charity and deduct up to one-half of FMV above cost as a charitable contribution [IRC 170(e)(3) and Reg A-4A]. For purposes of this provision, depreciable property under Section 1221(a)(2) also qualifies for the deduction. The following rules must be met: [IRC 170(e)(3)] 1) The charity must be a Section 501(c)(3) organization, 2) The charity must use the donated property solely for the care of the ill, the needy or infants, 3) The charity cannot exchange the donated property for money, other property or services, 4) The corporation must be given a written statement from the charity that says it will follow rules (2) and (3) above, 5) If the property is subject to the Federal Food, Drug and Cosmetic Act regulations, all such regulations must be satisfied and 6) Use of the donated property must be related to the purpose or function that gives the charity its exempt status. The charitable deduction is computed by taking the FMV of the donated property at the time of contribution and subtracting one-half the gain that would not have been long-term capital gain if the property had been sold at its FMV. The deduction is further limited to twice the basis of the donated property. If the donated property has any potential recapture of ordinary income under Section 617, 1245, 1250 or 1252 (depreciation recapture), then the FMV for the above computation purposes must first be reduced by the recapture amount before making the above charitable deduction computation. [IRC 170(e)(3)(E)] Note: If the inventory s cost is incurred in the same year as the contribution, the amount is included in cost of goods sold (COGS). The contribution is not subject to the 10% of taxable income limitation. If the contribution is made from beginning inventory, the item is removed from inventory and shown as a charitable contribution subject to the 10% limitation. [Reg A-1(c)(4)] Example: GIJ Corporation donates inventory to Toys for Tots. The FMV of the inventory equals $1,000, and GIJ s basis in the inventory equals $200. If GIJ had sold the inventory for its FMV, the amount of gain that would not be long-term capital gain is $800 ($1,000 $200). One-half of $800 is $400. The charitable deduction would be $600 ($1,000 $400) except for the fact that the deduction is limited to twice its basis ($200 2 = $400). GIJ can take a charitable contribution deduction of $400 and must reduce its COGS by $200. N Observation: Some corporations making donations that qualify for the enhanced deduction for inventory may, because of the 10% of taxable income limitation, prefer to limit their deduction and the required cost of goods sold adjustment to the inventory s basis. While it studies this issue, the IRS will not challenge either method. (Notice ) Expired Provision Alert: The Section 170(e)(3)(C) special rules for contributions of food inventory expired for contributions after December 31, C Tax Year Small Business Quickfinder Handbook are extended for donations made in 2014

7 Analysis of Unappropriated Retained Earnings per Books Schedule M-2, Page 5, Form 1120 This schedule explains line 25 of Schedule L (balance sheet). The method of figuring book income is the same as the E&P calculation used to determine the taxable status of dividend distributions to the shareholders. The necessary entries are the addition of the current-year book income minus the amount of taxable dividends distributed to the shareholders. Form 4562, Page 1 Unlike partnerships and S corporations, C corporations combine the Section 179 deduction with other depreciation on the tax return. The total amount from line 22 of Form 4562, less amounts claimed on Form 1125-A (COGS) and elsewhere, is reported on Form 1120, page 1, line 20. C corporations file Form 4562 to claim depreciation each year, even if no new property is placed in service. Form 1040, Page 1 This page illustrates how Jerry reports his share of income from the corporation. Unlike the partnership example in Tab B, each shareholder is an employee of the business and receives a wage for services rendered. Jerry s share of the $20,000 dividend distribution is $12,000 (he owns 60% of the stock). The dividend distribution is not tax deductible by the corporation. This illustrates how C corporation profits are double taxed, once to the corporation, and again when distributed to the shareholders. In the partnership example in Tab B, the distribution was not taxable. Jerry s basis in stock at the end of 2014 is $69,000. It does not change unless he contributes capital, sells stock or receives distributions in excess of the corporation s E&P. In the partnership and S corporation examples, basis increases or decreases when income is earned or amounts are distributed from profits. Depreciation and Amortization OMB No Form 4562 (Including Information on Listed Property) Attach to your tax return. Department of the Treasury Internal Revenue Service (99) Information about Form 4562 and its separate instructions is at Name(s) shown on return Business or activity to which this form relates Identifying number Part I Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I. 1 Maximum amount (see instructions) Total cost of section 179 property placed in service (see instructions) Threshold cost of section 179 property before reduction in limitation (see instructions) Form 2106, Page 1 DRAFT AS OF June 10, 2014 DO NOT FILE 4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions (a) Description of property (b) Cost (business use only) (c) Elected cost 7 Listed property. Enter the amount from line Total elected cost of section 179 property. Add amounts in column (c), lines 6 and Tentative deduction. Enter the smaller of line 5 or line Carryover of disallowed deduction from line 13 of your 2013 Form Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line Carryover of disallowed deduction to Add lines 9 and 10, less line Note: Do not use Part II or Part III below for listed property. Instead, use Part V. 20a Class life b 12-year c 40-year Part IV Summary (See instructions.) As an employee, Jerry reports unreimbursed expenses on Form 2106, Employee Business Expenses. The amounts are subject to the 2%-of-AGI floor on Schedule A. Note: Even if Jerry is able to deduct the expenses from taxable income, his share of FICA tax is not reduced. Compare with the same expenses incurred by a partner in a partnership, which directly reduce taxable income and also reduce income subject to SE tax. See Partnership Example on Page B-10. Note: The IRS and many court decisions have held that expenses paid by 2014 Attachment Sequence No. 179 Shout and Jump, Inc. Recreation Equipment Airplane 21, ,000 21,000 4,000 Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.) 14 Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions) Property subject to section 168(f)(1) election Other depreciation (including ACRS) Part III MACRS Depreciation (Do not include listed property.) (See instructions.) Section A 17 MACRS deductions for assets placed in service in tax years beginning before If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here Section B Assets Placed in Service During 2014 Tax Year Using the General Depreciation System (a) Classification of property (b) Month and year (c) Basis for depreciation (d) Recovery placed in (business/investment use period service only see instructions) (e) Convention (f) Method (g) Depreciation deduction 19a 3-year property b 5-year property 171,000 5 yrs HY 200 DB 22,800 c 7-year property d 10-year property e 15-year property f 20-year property g 25-year property h Residential rental property i Nonresidential real property 25 yrs yrs yrs. 39 yrs. MM MM MM MM Section C Assets Placed in Service During 2014 Tax Year Using the Alternative Depreciation System 12 yrs. 40 yrs. MM 500, ,000 2,000, ,000 25,000 25, ,840 25, Listed property. Enter amount from line Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporations see instructions , For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs For Paperwork Reduction Act Notice, see separate instructions. Cat. No N Form 4562 (2014) shareholders for carrying out corporate activities belong to the corporation and are not eligible for deduction on the individual s tax return (see Revenue Ruling ). Report on Form 2106 only ordinary and necessary expenses directly related to the individual s activities as an employee. N Observation: Generally it is more advantageous for the corporation to reimburse the employee under an accountable plan for employee business expenses versus having the employee-shareholder deduct the costs on his or her individual income tax return. See Accountable plan on Page O-1. C Tax Year Small Business Quickfinder Handbook

8 Example #2: Assume that in Example #1, the $40,000 of passive investment income consisted of $12,000 from interest and $28,000 from rents. The amount of the $3,938 passive income tax allocated to interest is $1,181 ($3,938 $12,000 $40,000). The amount allocated to rents is $2,757 ($3,938 $28,000 $40,000). The amount reported on Schedule K for interest and rental income is reduced by the tax allocated above. The tax is reported on Form 1120S, line 22a; it is computed using a worksheet provided in the 1120S instructions. Built-In Gains (BIG) Tax Combined FMV of Assets Combined Basis of Assets = Net Unrealized Built-In Gain Built-in gains are triggered by property disposition. At the time a C corporation elects S status, if the combined FMV of its assets exceeds basis, the difference is net unrealized built-in gains (IRC 1374). If the assets with built-in gains are later sold, a special tax applies. These rules apply only to corporations that elected S status after 1986, and affect dispositions of property for 10 years after the date of S election (the recognition period). Note: If FMV is less than basis as of the date of S election, the built-in gains rules do not apply. When determining whether a corporation is subject to the BIG tax, the corporation s most recent S election applies, not an earlier election that was revoked or terminated (Regs and ). Built-in gains and losses are computed for each asset at the beginning of the first tax year of the S corporation. Unrealized gain or loss then carries with each asset and is recognized when the property is disposed of. Net unrealized built-in gains are listed in the available space on line 8 of Schedule B (Form 1120S). When the built-in gain assets are sold, the number shown on line 8 is reduced by the amount of gain recognized in prior years. Example: Welcome, Inc., a C corporation, elects S corporation status. On the first day of the S election, Welcome s assets have FMV and basis as follows: FMV Basis Difference Machine... $ 9,000 $ 4,000 $ 5,000 Truck... 7,000 9,000 < 2,000> Building... 55,000 52,000 3,000 Totals... $ 71,000 $ 65,000 $ 6,000 Welcome, Inc., has net unrealized built-in gains of $6,000 at the date of S election. The machine and building are built-in gain assets; the truck is a built-in loss asset. Caution: Fair market value is a frequent IRS target with regard to BIG tax. It may be wise to obtain a professional appraisal of a corporation s assets to avoid IRS adjustment. BIG tax generally will not apply for assets acquired while the corporation is an S corporation, or if the corporation elected S status for all years. Exception: If an S corporation acquires an asset from a C corporation (or another S corporation that is subject to the BIG tax) and the asset s basis is the transferred basis from the other corporation, BIG tax may apply. Calculating BIG tax. Net recognized built-in gain is subject to the top corporate tax rate of 35%. BIG tax is reported on Schedule D, Part III of Form 1120S. Net recognized built-in gain is the smallest of: 1) The overall limit net unrealized built-in gain, 2) The current recognition limit the amount that would be taxable income if only recognized built-in gains and losses were taken into account or 3) The taxable income limit the corporation s taxable income for the year, computed as if it were a C corporation. Carryovers. If net recognized built-in gain for the year is reduced by the taxable income limit (item 3 above), the remainder is carried forward and subject to BIG tax in the following year. However, if a sale of built-in gain property results in a net loss, the loss is not carried forward. Strategy: If sale of an asset triggers built-in loss, offset the loss by selling an asset with built-in gain. This will take the asset with built-in gain off the table without triggering BIG tax. Loss carryovers/accrued expenses. Capital losses or NOLs that carry over from a C to an S corporation reduce the S corporation s net recognized built-in gain; carried over minimum tax credits and business tax credits reduce the BIG tax. Also, for cash basis taxpayers, expenses paid after the S election that would have been deducted by an accrual method taxpayer before the S election are deductible against recognized built-in gains. Example #1: Liner, Inc., an S corporation sells a machine with basis of $4,000 for $10,000. The machine carried a built-in gain of $5,000. The corporation pays built-in gains tax of $1,750 ($5,000 35%) on the $5,000 built-in gain and passes $4,250 of gain ($6,000 $1,750) through to its shareholders. Example #2: TUGG, Inc., a cash basis S corporation collects $5,000 in accounts receivable for sales that occurred before the corporation elected S status. In the same tax year, TUGG pays $2,000 in expenses that would have been deductible prior to the S election if the taxpayer had been on the accrual basis. The net built-in gain from these items for the year is $3,000 ($5,000 built-in gain $2,000 built-in loss). Exceptions: Built-in gains tax does not apply to gain from the sale of standing timber or subsequently produced coal or domestic iron ore (Rev. Rul ). Similarly, the sale of oil and gas subsequently produced from a working interest held on the date of the corporation s S election is not subject to the built-in gains tax. [Reg (a)] Expired Provision Alert: The BIG tax was suspended for certain tax years for qualifying S corporations. BIG tax was not imposed during 2009 and/or 2010 if the seventh tax year of the corporation s 10-year recognition period ended before that tax year. For tax years beginning in , the BIG tax was not imposed if the fifth year of the recognition period ends before that tax year. [IRC 1374(d)(7)(B)] 2014 is Unless the S corporation s 10-year recognition period expired in or legislation is enacted extending the temporary suspension provision, the S corporation is again subject to the BIG tax for the tax year beginning in Example: XL, Inc., a calendar year C corporation, elected S status on March 1, 2006, effective January 1, The fifth tax year of XL s 10-year recognition period ended on December 31, Thus, XL s net recognized BIG during was not subject to the BIG tax. XL s 10-year recognition period ends on December 31, 2015, therefore XL will be subject to the BIG tax for 2014 and is Investment Credit Recapture Tax The general business credit is composed of many different credits (see Tax Credits on Page O-7 and Form 3800, General Business Credit). Business credit recapture is the responsibility of the party that claims the credit. Therefore, if a C corporation claims the credit, the succeeding S corporation is responsible for the recapture. If the company is an S corporation when the credit originates, the credit passes through to the shareholders and they must report the recapture; they remain responsible for the recapture if the S election terminates and the recapture occurs when the corporation is in C status. See Form 4255, Recapture of Investment Credit, for tax computation details Tax Year Small Business Quickfinder Handbook D-7

9 Line 7. This is the amount of current year distributions, $20,000. Column (b). The other adjustments account is increased by taxexempt income and decreased by nondeductible expenses related to tax-exempt income, federal taxes attributable to a C corporation tax year and shareholder distributions. In this example, the OAA column is blank because the corporation had none of these items. Column (c). The PTI account relates to rules used for S corporations before the Subchapter S Revision Act of 1982 became effective. No adjustments are made other than to reduce the account for distributions made to shareholders from it. PTI does not apply to this example because the corporation was not an S corporation before Note: Schedule M-2 does not include retained C corporation earnings. The total of columns (a) (c) on line 8 does not have to equal column (d), line 24 of Schedule L. Schedule M-3, Form 1120S Schedule M-3, Net Income (Loss) Reconciliation for S Corporations with Total Assets of $10 Million or More, may be required with the 2014 Form 1120S. Box C on page 1 of Form 1120S must be checked if Schedule M-3 is attached. If Schedule M-3 is filed, do not complete Schedule M-1. Schedule M-3 is a detailed reconciliation of income reported in financial statements to taxable income. It separates book/tax differences into temporary differences and permanent differences. Schedule M-3 is required if end-of-year total assets reported on Form 1120S, Schedule L are $10 million or more. In addition, Form 8916-A is filed to reconcile cost of goods sold and interest income and expense reported on Schedule M-3. S corporations not required to file Schedule M-3 may voluntarily file it instead of Schedule M-1. For these corporations and for those that are required to file Schedule M-3 but who have less than $50 million total as sets at the end of the tax year, there is an option concerning how Schedule M-3 is completed. In lieu of completing all parts of Schedule M-3, these corporations may complete the schedule only through Part I, and then complete Schedule M-1 of Form 1120S instead of completing Parts II and III of Schedule M-3. In addition, these filers are not required to file Form 8916-A. If this option is selected, make sure line 1 of Schedule M-1 equals line 11 of Part I of Schedule M-3. Depreciation and Amortization OMB No Form 4562 (Including Information on Listed Property) Attach to your tax return. Department of the Treasury Internal Revenue Service (99) Information about Form 4562 and its separate instructions is at Name(s) shown on return Business or activity to which this form relates Identifying number Shout and Jump, Inc. Part I Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I. 1 Maximum amount (see instructions) Total cost of section 179 property placed in service (see instructions) Threshold cost of section 179 property before reduction in limitation (see instructions) DRAFT AS OF June 10, 2014 DO NOT FILE 4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions (a) Description of property (b) Cost (business use only) (c) Elected cost Equipment Airplane 7 Listed property. Enter the amount from line Total elected cost of section 179 property. Add amounts in column (c), lines 6 and Tentative deduction. Enter the smaller of line 5 or line Carryover of disallowed deduction from line 13 of your 2013 Form Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line Carryover of disallowed deduction to Add lines 9 and 10, less line Note: Do not use Part II or Part III below for listed property. Instead, use Part V. 20a Class life b 12-year c 40-year Part IV Summary (See instructions.) 21, ,000 21,000 4, Attachment Sequence No. 179 Form 1120S Recreation Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.) 14 Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions) Property subject to section 168(f)(1) election Other depreciation (including ACRS) Part III MACRS Depreciation (Do not include listed property.) (See instructions.) Section A 17 MACRS deductions for assets placed in service in tax years beginning before If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here Section B Assets Placed in Service During 2014 Tax Year Using the General Depreciation System (a) Classification of property (b) Month and year (c) Basis for depreciation (d) Recovery placed in (business/investment use period service only see instructions) (e) Convention (f) Method (g) Depreciation deduction 19a 3-year property b 5-year property 171, HY 200 DB 22,800 c 7-year property d 10-year property e 15-year property f 20-year property g 25-year property h Residential rental property i Nonresidential real property 25 yrs yrs yrs. 39 yrs. MM MM MM MM Section C Assets Placed in Service During 2014 Tax Year Using the Alternative Depreciation System 12 yrs. 40 yrs. MM 500, ,000 2,000, ,000 25,000 25, ,022 25, Listed property. Enter amount from line Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporations see instructions , For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs For Paperwork Reduction Act Notice, see separate instructions. Cat. No N Form 4562 (2014) Form 4562, Page 1 Line 12 reference. Partnerships and S corporations do not include the Section 179 deduction in the amount on line 22 below; the deduction is reported on line 11 of Schedule K (Form 1120S). Line 22 reference. The amount from line 22 of Form 4562 is reported on line 14 of Form 1120S (page 1). D Tax Year Small Business Quickfinder Handbook

10 Tax-Exempt Income Life insurance benefits. (IRC 101) Interest on state or local bonds, including exempt-interest dividends received from a mutual fund. (IRC 103) Compensation for certain injuries or sickness. (IRC 104) Income from discharge of indebtedness. (IRC 108) If a trust or estate has tax-exempt income, some of its deductions may be disallowed or reduced: (IRC 265) Expenses directly attributable to tax-exempt income are not deductible. For example, interest expense on debt incurred to buy tax-exempt bonds. Expenses directly attributable to taxable income are deductible. For example, rental expenses, tax return preparation. Expenses not exclusively related to either tax-exempt or taxable income (indirect expenses) must be reduced by the portion attributable to tax-exempt income. The apportionment can be made based on gross income (calculation below) or by using any reasonable method. Attach calculation to Form Gross Tax-Exempt Income Gross Accounting Income Indirect Expenses Exception: For tax-exempt interest, only allocable Section 212 expenses and interest expense are subject to disallowance [IRC 265(a)]. Other expenses, such as state and local income taxes and business expenses, are deductible even if directly allocable to the exempt interest income. For more on Section 212 expenses, see Administration expenses in the next column. Reporting tax-exempt income. If the estate or trust received tax-exempt income, allocate expenses between tax-exempt and taxable income on a separate sheet and attach it to the return. Enter only the deductible amounts on the return. Answer to Question 1 under Other Information on page 2 of Form If tax-exempt income includes tax-exempt interest, report the amount of tax-exempt interest (including exempt-interest dividends from mutual funds) in the space provided at the end of Question 1. Do not include other types of tax-exempt income in the total. See Tax-Exempt Interest on Page G-10 for an example. Deductions Most deductions allowed to individuals are also allowed on fiduciary returns. (IRC 641) See Complex Trust Detailed Example on Page G-14 for calculation of AGI. Interest (line 10): Investment interest (limited to net investment income). Calculate on Form Interest on debt used to purchase or carry taxexempt obligations is not deductible. Interest on a mortgage secured by a home that is owned by an estate or trust is deductible if (1) a beneficiary uses the home as a principal or second residence and (2) that beneficiary has a present or residual interest in the estate or trust. Interest paid on the unpaid portion of estate tax attributable to the value of a reversionary or remainder interest in property. [IRC 163(h)(2)(E)] Example: Rob was living with his mother Mimi when she died. Her house became part of the probate estate. The estate continued to make Mimi s mortgage payments during probate and Rob continued to live in the house. Her estate will pass to her four children equally under state law because she had no will. The interest is deductible because Rob used the house as his principal residence and he is a beneficiary with a residual interest. Taxes (line 11): State and local income, general sales (if no state and local income taxes are deducted), personal property and real property taxes that are not deducted on Schedules C, E or F. Expired Provision Alert: The election to deduct state and local general sales tax expired December 31, However, Congress has on several occasions extended the provision so tax professionals should watch for developments. Generation-skipping transfer (GST) tax on trust income distributions. Foreign or U.S. possession income and excess profits taxes. Administration expenses. Section 212 authorizes deduction of expenses for: Production or collection of income, Management, conservation or maintenance of property held for the production of income and Determination, collection or refund of any tax (including preparation and advice for income, estate, gift, property or other tax). Fiduciary fees and other ordinary and necessary administration expenses are deductible as miscellaneous itemized deductions under Section 212 [Reg (i)]. Expenses deductible under Section 212 are generally allowed only to the extent they exceed 2%-of-AGI. Deductions not subject to the 2% limitation: To be fully deductible on Form 1041, administration expenses must be paid or incurred in connection with the administration of the estate or trust and would not have been incurred if the property were not held in the estate or trust [IRC 67(e)(1)]. Fully deductible expenses generally include: Trustee and personal representative fees (line 12). Attorney and accountant fees for administration (line 14). Form 1041 tax return preparation (line 14). Fiduciary bonds, court fees, court-required appraisal fees and other required expenses (line 15a). Deductions subject to the 2% limitation: Expenses that would be commonly or customarily incurred by an individual holding the same property. For examples of commonly or customarily incurred expenses, see below. Third-party investment advisory fees. The Supreme Court held that a trust s investment advisory fees are subject to the 2%-of- AGI floor if they are commonly incurred outside of a trust. (Knight) In response to the Supreme Court s decision in Knight, the IRS issued regulations stating that estates and nongrantor trusts will be subject to the 2% limitation if the cost is a miscellaneous itemized deduction under Section 67(b) that would be commonly or customarily incurred by a hypothetical individual holding the same property [Reg (a)]. The type of product or service rendered, rather than the description of the cost of that product or service, determines whether the cost is commonly or customarily incurred. [Reg (b)] Costs considered commonly or customarily incurred include: Those not dependent upon the identity of the payor. Examples include costs incurred to defend a claim against the estate, the decedent or the nongrantor trust that are unrelated to the existence, validity or administration of the estate or trust. Those incurred by a property owner simply by reason of being the owner of the property (for example, condominium fees, real estate taxes, insurance premiums, maintenance and lawn services). Tax preparation fees for preparing returns other than estate and generation-skipping transfer tax returns, fiduciary income tax returns and the decedent s final individual income tax returns. Investment advisory fees, except for those incremental costs beyond the amount that would normally be charged to an individual investor (for example, additional fees charged solely because the investment advice is provided to an estate or trust, additional fees due to the estate s or trust s unusual investment objective, or a specialized balancing of the interest of various parties). Note: Final regulations were issued in May 2014 and are effective for tax years beginning after 2014 but may be followed 2014 Tax Year Small Business Quickfinder Handbook G-5

11 Income and Expense Chart for a Decedent (Continued) Cash Method of Accounting Category Where to Report Explanation Medical Expenses Final Form 1040, Schedule A Medical expenses paid before death. Can elect to deduct medical expenses incurred before death but paid from the estate within one year of the day following death [Reg (d)]. Election does not apply to medical expenses for dependents of the decedent. To elect, attach a statement to Form 1040 stating the estate has waived the right to claim medical expense for estate tax. With the election, deduction is taken on Form 1040, Schedule A in year costs were incurred (a Form 1040X may be needed). Amounts not allowed due to 10%-of-AGI threshold cannot be claimed on Form 706. Note: For , if either the taxpayer or spouse turns 65 before the end of the Miscellaneous Itemized Deductions Net Investment Income Tax Partnership Income (Loss) Form 706, Schedule K tax year, the threshold remains at 7.5% of AGI. Unpaid medical expenses at death are reported on Form 706 as a claim against the estate, unless an election is made to report on decedent s final Form Amounts deducted on Form 706 are not subject to the 10% of AGI deduction threshold. If deduction taken on Form 1040, amount not allowed due to 10% of AGI threshold cannot be claimed on Form 706. Note: Before 2017, if either the taxpayer or spouse turns 65 before the end of the tax year, the threshold remains at 7.5% of AGI. Form 1041 Any insurance reimbursements after death of amounts previously deducted on Form Report as IRD. Final Form 1040, Schedule A Miscellaneous itemized deductions paid before death. Form 706, Schedule J or Form Unpaid miscellaneous itemized deductions at date of death are reported on Form 706. When paid, deduct on 1041 Form 1041 as DRD. Form 1041 Incurred and paid after death: may be subject to 2% AGI limit. See Deductions on Page G-5. Form 8960 Estates are subject to the 3.8% net investment income tax. See Tab G for additional discussion. Final Form 1040, Schedule E Form 1041 (or beneficiary s return) Income (or loss) up to date of death using any reasonable method of allocating income (loss). Allocation is often based on pro rata amount for year or interim closing of books. Income (or loss) after death not included on final Form Passive Losses Final Form 1040 Losses are allowed to extent of passive income, plus accumulated unused losses to extent they exceed any increase in basis allocated to the activity. For example, if a passive activity s basis is increased $6,000 upon taxpayer s death, and unused passive activity losses as of date of death are $8,000, decedent s deduction is $2,000 ($8,000 $6,000). Form 1041 Estates are subject to the same passive loss limitation rules as individuals. The fiduciary s level of participation determines the classification. If decedent actively participated in a rental real estate activity before death, the estate will be allowed the special $25,000 rental real estate exemption for up to two years after decedent s death. Personal Residence Form 1041 The Section 121 exclusion of gain from sale of personal residence does not apply to estates. If personal residence is a capital asset to the estate (either held for investment or rental purposes), estate can deduct loss on sale. If property is used by estate beneficiaries for personal purposes, loss on sale is not deductible. If home was not subject to probate and passed directly to heirs, sale of home is reported on beneficiaries Form Real Estate, State and Local Income Taxes Rental Income and Expenses S Corporation Income (Loss) Savings Bond Interest (Decedent did not elect to report interest annually) Savings Bond Interest (Decedent elected to report interest annually) Final Form 1040, Schedule A Form 706, Schedule K and Form 1041 (or beneficiary s return) Paid before death. General sales taxes deductible if state and local income taxes not deducted. [IRC 164(b)(5)] Expired Provision Alert: The deduction for general sales tax expired December 31, 2013, so it is not available for 2014 unless Congress enacts legislation extending the provision. Real estate taxes accrued before death but paid after death. Form 1041 (or beneficiary s return) Accrued and paid after death. Final Form 1040, Schedule E Income and expenses received or paid before death. Form 706 and Form 1041 (or Income and expenses accrued before death but not actually received or paid until after death (IRD and DRD). beneficiary s return) Passive activity loss rules apply to estates (for Form 1041 reporting). Form 1041 (use Schedule E of Income and expenses accrued and received or paid after death. Passive loss rules apply to estates. Form 1040) Final Form 1040, Schedule E Pro rata share of income (or loss) up to death. Generally, amount of income (or loss) is computed as follows: S corporation income or loss for the year, divided by number of days in S corporation s year, multiplied by number of days shareholder was alive. Can elect under Section 1377(a)(2) to close S corporation books on day of death. Form 1041 (or beneficiary s return) Income (or loss) after date of death and not included on final Form Final Form 1040 or Form 1041 Two options: (Rev. Rul ) 1) Executor elects to report interest accrued before death on final Form Interest accrued after death is reported on Form 1041 (or beneficiary s return) in year bond is redeemed or matures. 2) All interest (both before and after death) is reported on Form 1041 (or beneficiary s return) in year bond is redeemed, matures or an election is made to report income. Interest accrued before death is IRD. Alternatively, recipient of an inherited bond can elect to report interest annually. (Rev. Rul ) Form 706, Schedule B FMV of bonds, including interest accrued up to date of death, which may be IRD. Final Form 1040 Interest accrued up to date of death. Form 1041 (or beneficiary s Interest accrued after death. Note that the last Series E bonds matured in 2010 and the last Series H bonds return) matured in These bonds stopped paying interest at that time and any deferred interest should have been recognized on the 1040 in the year the bond matured. Form 706, Schedule B FMV of bonds as of date of death. No IRD. Social Security Final Form 1040 Payments cease at death; therefore, subject to reporting on final Form Standard Deduction Final Form 1040 Full amount allowed. No proration required. Wages Final Form 1040 Wages received before death. Form 706, Schedule F and Form 1041 (or beneficiary s return) Wages earned before death but received after death (IRD) Tax Year Small Business Quickfinder Handbook H-3

12 Partial Table of Class Lives and Recovery Periods IRS Publication 946, Appendix B (Continued) Asset Class Description of assets included: Class Life (in years) GDS Life (MACRS) ADS Cotton ginning assets Cattle, breeding or dairy Any breeding or work horse 12 years old or less at the time it is placed in service Any breeding or work horse more than 12 years old at the time it is placed in service Any race horse more than two years old at the time it is placed in service Any horse more than 12 years old at the time it is placed in service that is neither a race horse nor a horse described in Class Any horse not described in Classes , , or Hogs, breeding Sheep and goats, breeding Farm buildings except structures included in Class Single-purpose agricultural or horticultural structures [within meaning of Section 168(i)(13)] Mining. Includes assets used in the mining and quarrying of metallic and nonmetallic minerals (including sand, gravel, stone and clay) and the milling, beneficiation and other primary preparation of such materials Drilling of oil and gas wells. Includes assets used in the drilling of onshore oil and gas wells and the provision of geophysical and other exploration services; and the provision of such oil and gas field services as chemical treatment, plugging and abandoning of wells and cementing or perforating well casings Exploration for and production of petroleum and natural gas deposits. Includes assets used by petroleum and natural gas producers for drilling of wells and production of petroleum and natural gas, including gathering pipelines and related storage facilities Construction. Includes assets used in construction by general building, special trade, heavy and marine construction contractors, operative and investment builders, real estate subdividers and developers and others, except railroads Manufacturing of apparel and other finished products. Includes assets used in the production of clothing and fabricated textile products; does not include apparel from rubber and leather Timber cutting equipment Assets used in the manufacturing of wood products and furniture Printing, publishing and allied industries. Includes assets used in printing by one or more processes, such as letter-press, lithography, gravure or screen; the performance of services for the printing trade, such as bookbinding, typesetting, engraving, photo-engraving and electrotyping; and the publication of newspapers, books and periodicals Manufacture of athletic, jewelry and other goods. Includes assets in the production of jewelry, musical instruments, toys and sporting goods, motion picture and television films and tapes, and pens, pencils, office and art supplies, brooms, brushes, caskets, etc Distributive trades and services. Includes assets used in wholesale and retail trade, and personal and professional services. Includes Section 1245 assets used in marketing petroleum and petroleum products Recreation. Assets used in the provision of entertainment services for a fee or admission charge, such as bowling alleys, pool halls, theaters, concert halls and miniature golf courses. Does not include amusement and theme parks and specialized land improvements such as golf courses, sports stadiums, race tracks, ski slopes and buildings Personal property with no class life Section 1245 real property with no class life Residential rental real property Nonresidential real property. Includes office buildings, warehouses and qualified office-in-home Properties described in asset classes , and are assigned recovery periods but have no class lives. 2 High technology medical equipment is assigned a five-year recovery period for alternate MACRS method. 3 Expired Provision Alert: For , the three-year recovery period applied to all race horses. GDS General Depreciation System. 200% declining-balance (DB) depreciation method for three-year, five-year, seven-year and 10-year property; 150% DB for farm, 15-year and 20-year property; straight-line (SL) depreciation method for and 39-year property; and recovery years for alternative minimum tax (AMT) depreciation for assets placed in service after ADS Alternative Depreciation System. Recovery years for AMT depreciation for assets placed in service prior to 1999, C corporation book depreciation and exempt organizations. Can be elected for tax depreciation. Note: Use this table for assets placed in service after See IRS Publication 946 for a list of all asset recovery periods. For , the three-year recovery period applies to all race horses. J Tax Year Small Business Quickfinder Handbook

13 Section 179 Deduction See Tab 10 in the 1040 Quickfinder Handbook for Section 179 rules concerning: Qualifying and non-qualifying property. Limitations for using the Section 179 deduction. Maximizing benefits of Section 179 planning. Section 179 recapture. See Tab 11 in the 1040 Quickfinder Handbook for limits on Section 179 deductions for certain heavy vehicles, including SUVs. Section 179 Expense Limit For tax years beginning in 2014, the annual deduction limit is $25,000. $500,000 Note: Tax professionals should be alert for possible legislation that would increase the overall expense limit for Qualifying Property Limitation The Section 179 deduction limit is reduced dollar-for-dollar to the extent the amount of qualifying Section 179 property placed in service during the year exceeds $200,000 (for 2014). Thus, the Section 179 deduction is completely phased out when the amount of Section 179 property placed in service during the year exceeds $225,000 (for 2014). $2,000,000 Note: $2,500,000 Tax professionals should be alert for possible legislation that would increase the qualifying property limit for Business Taxable Income Limitation The Section 179 deduction cannot cause a business loss [IRC 179(b)(3)]. The expense deduction is limited to taxable income computed as follows. Partnerships. The limitation is the aggregate of the partnership s items of income and expense from any trade or business the partnership actively conducted without regard to credits, tax-exempt income, the Section 179 deduction and guaranteed payments. S corporations. The limitation is the aggregate of the corporation s items of income and expense from any trade or business the corporation actively conducted without regard to credits, taxexempt income, the Section 179 deduction and the deduction for shareholder-employee compensation. C corporations. The limitation is the corporation s taxable income before the Section 179 deduction, net operating loss deduction and special deductions, excluding items not derived from a trade or business actively conducted by the corporation Election The Section 179 election is made on an item-by-item basis for qualifying property. The election is made by completing Part I of Form Section 179 elections made in any tax year beginning after 2002 and before 2014 can be revoked without the consent of the IRS, including the election to treat real property as Section 179 property. [IRC 179(c)(2)] For 2014, however, the election cannot be revoked without IRS consent, unless Congress enacts legislation extending the prior rule. Partnerships and S Corporations Partnerships and S corporations must apply the annual deduction limit, qualifying property limit and business taxable income limit before passing through any Section 179 expense. The limits then apply separately to each individual partner or shareholder [Reg (b) and (c)]. However, an owner does not include his allocable share of the pass-through entity s cost of qualifying property in determining whether his qualifying property additions exceed the current year threshold. The cost of property that is not deductible under Section 179 because of the business taxable income limitation may be carried over to the next tax year and added to the cost of qualifying property placed in service in that tax year. Amounts carried over must be applied on a first-in first-out (FIFO) basis. If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, the costs being carried forward from the earliest year must be deducted first. U Caution: A partner or S shareholder who is passed through more Section 179 deduction in a single tax year than what is allowed on his return (after considering all his sources of the Section 179 deduction) cannot carry over the excess deduction. Instead, it is lost even though the partner or S shareholder must reduce his basis in the pass-through entity by the lost deduction. (Rev. Rul. 89-7) Example: Martha is a 50% partner in Better Living Partnership. The partnership netted $24,000 in profits in 2014 without regard to any Section 179 deduction. The partnership elects to expense $34,000 under Section 179. The partnership is only permitted to pass through $24,000 to its partners because of the income limit. The $10,000 excess Section 179 deduction is carried over to 2015 to be added to the 2015 partnership Section 179 deduction. Martha receives a 2014 Schedule K-1 from the partnership reporting a $12,000 Section 179 deduction (50% of $24,000). $495,000 Martha is also a 100% shareholder of Insider Magazine, an S corporation. The S corporation passes through $20,000 of Section 179 expense on her 2014 Schedule K-1. The $7,000 of excess Section 179 deductions passed through to Martha ($12,000 + $20,000 $25,000) is not deductible on her Form 1040, nor can it be carried over to her 2015 Form In addition, Martha must reduce her basis in her partnership interest and S corporation stock by the $7,000 unused Section 179 expense. $500,000 UNICAP Rules Amounts allowed as a Section 179 deduction are not subject to Section 263A uniform capitalization. [Reg (j)] Advantages of Electing Section 179 May reduce business owner s adjusted gross income (AGI), which could increase deductions subject to limitations and phase-outs based on AGI. May claim the full Section 179 deduction even if the qualifying property is placed in service on last day of tax year. May avoid the short-year depreciation rules. May avoid the mid-quarter convention depreciation rule. May avoid UNICAP rules. May avoid an AMT depreciation adjustment. Recapture Section 179 and Listed Property Section 179 Recapture The Section 179 deduction must be recaptured as ordinary income if business use of the property falls to 50% or less during its regular MACRS recovery period. [Reg (e)] The amount originally deducted as Section 179 expense is reduced by the depreciation on the same amount that would have been allowed under regular MACRS, using the same property class and recovery period as the underlying property. The excess is recaptured as ordinary income. The basis of the underlying property is then increased by the recaptured amount. Recapture Rule for Listed Property If listed property (for example, autos, computers and entertainment property) business use falls to 50% or less for any year during its alternate MACRS recovery period, the excess depreciation must be recaptured. (The recapture rule applies to listed property regardless of whether a Section 179 deduction was claimed.) [IRC 280F(b)] 2014 Tax Year Small Business Quickfinder Handbook J-3

14 Under SL, depreciation after the short tax year is determined by dividing the number one by the years remaining in the recovery period at the beginning of a year, then multiplying the result by the unrecovered adjusted basis. When figuring the number of years remaining, consider the convention used in the year the property is placed in service. If the number of years remaining is less than one, the depreciation rate for that tax year is 1.0 (100%). Example #5. Same facts as Example #4 except that SL is elected. Short tax year depreciation in first year is: 20X1: $ 2, = $60 Depreciation for years 20X1 through 20X7 is as follows: 20X2: $ 2,000 $ 60 = $ 1, yrs = $286 ( years is equal to 6 years months) 20X3: $ 1,940 $ 286 = $ 1, yrs = $286 20X4: $ 1,654 $ 286 = $ 1, yrs = $285 20X5: $ 1,368 $ 285 = $ 1, yrs = $286 20X6: $ 1,083 $ 286 = $ yrs = $285 20X7: $ 797 $ 285 = $ yrs = $286 20X8: $ 512 $ 286 = $ % = $226 Except for the first and last year, SL will thus produce the same results as if the short year rules were not used. 20X1: Using short year rules = $60 20X2 through 20X7: $2,000 7 = $286 20X8: Remaining unrecovered adjusted basis 100% = $224 Special (Bonus) Depreciation Expired Provision Alert: The special depreciation allowance generally is not available for assets placed in service after 2013 unless legislation is enacted that extends the provision. This section is included 2014 in the event the rules are extended to For 2013, a special (bonus) depreciation allowance equal to 50% of the qualified property s depreciable basis (cost or other basis less Section 179 deduction and credits) is available. The amount of the special depreciation allowance is not affected by a short taxable year or by the applicable convention. However, assets for which the special depreciation allowance is claimed are still counted for determining whether the mid-quarter convention applies for the normal MACRS deduction. If the special depreciation allowance is taken, there are no AMT adjustments for depreciation for that asset for the year placed in service or any later year. See Special Depreciation Allowance in Tab 10 of the 1040 Quickfinder Handbook for more information. Section 179 Deduction in a Short Tax Year When a Section 179 deduction is elected in a short year, no proration is required. Section 179 yearly limitations apply as if the short year was a full tax year. [Reg (c)(1)] Allowed or Allowable Depreciation Taxpayers must reduce the basis of depreciable property by the greater of allowed or allowable depreciation [IRC 1016(a)(2)]. Allowed depreciation is the depreciation deduction claimed on an income tax return accepted by the IRS. Allowable depreciation is the amount a taxpayer is entitled to deduct under the Code and regulations, etc. Sometimes a taxpayer will discover upon disposition of an asset that not all allowable depreciation was claimed, because the amount on the returns was less than that allowable. If so, the taxpayer may automatically change the depreciation accounting method for the under-depreciated assets, so as not to lose the benefit of the full allowable depreciation. (Rev. Proc ) This does not mean that depreciation should be corrected only upon asset disposition. It means that a taxpayer that discovers at disposition that it has under depreciated an asset has automatic IRS consent at that time to correct the depreciation and claim the remainder allowable in the disposition year. See Tab L for more information on accounting method changes. Depreciation Recapture Ordinary Income Treatment When depreciation is recaptured, some or all of the gain may be treated as ordinary income. The depreciation recapture rules often convert what would otherwise have been a Section 1231 gain (potentially taxed as a long-term capital gain) to ordinary income. U Caution: Any ordinary income due to Section 1245 or 1250 recapture cannot be reported on the installment method. The entire recapture income is recognized in the year of sale, regardless of the amount of payments received that year. Section 1245 Depreciation Recapture Section 1245 property is personal property (either tangible or intangible) that is (or has been) subject to depreciation or amortization. Examples include machinery, furniture, vehicles, livestock, franchises, covenants not to compete and Section 197 goodwill. When Section 1245 property is disposed of (whether by sale, exchange or involuntary conversion) at a gain, the gain is treated as ordinary income up to the lesser of: [IRC 1245(a)] The sum of all depreciation or amortization deductions allowed or allowable (see Allowed or Allowable Depreciation in the previous column) or Gain realized on the disposition. Any gain recognized that is more than the ordinary income from depreciation recapture is a Section 1231 gain. Section 1250 Depreciation Recapture Section 1250 property is any depreciable real property that is not and never has been Section 1245 property [Reg (e)]. Section 1250 property includes a depreciable leasehold of land or of Section 1250 property. However, a fee simple interest in land is not included because it is not depreciable. Gain on the disposition of Section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Additional Depreciation Section 1250 Property Held one year or less Held longer than one year All the depreciation allowed or allowable is additional depreciation. Excess of the depreciation allowed or allowable over the amount that would have been allowed using the SL method. Unrecaptured Section 1250 Gain The term unrecaptured Section 1250 gain generally refers to gain attributable to SL depreciation on real property. For noncorporate taxpayers, this gain is treated as a capital gain subject to the maximum 25% rate [IRC 1(h)(1)(D)]. For how to calculate unrecaptured Section 1250 gain, see Tab 7 in the 1040 Quickfinder Handbook. Depreciation Recapture C Corporations Section 1245 recapture is computed the same way for corporations and individuals. However, Section 1250 recapture is different for C corporations [and S corporations that were C corporations in the last three years IRC 1363(b)(4)]. Under Section 291(a)(1) for a sale of depreciable real estate that is Section 1250 property, 20% of the excess of the amount that would be treated as ordinary income if the property were Section 1245 property, over the amount treated as ordinary income under Section 1250, is additional ordinary income. J Tax Year Small Business Quickfinder Handbook

15 Employee Benefits Benefit Description Provision Accident and Health Insurance Adoption Assistance Cafeteria Plans Deferred Compensation Dependent Care Assistance De Minimis Fringe Educational Assistance Employee Achievement Awards Employer- Provided Vehicle Group Term-Life Insurance Job Placement Assistance (Work. Cond.) Meals and Lodging No-Additional- Cost Service On-Premises Athletic Facilities Qualified Employee Discounts Qualified Moving Expense Reimbursement Qualified Retirement Plans Qualified Transportation Fringe Retirement Planning Services Working Condition Fringe Cost of accident and health insurance provided to employee. Expenses connected with the legal adoption of an eligible person. Two or more benefits consisting of cash and qualified benefits that the employee can select. Employee agrees to work now and defer receipt of salary until a future date. Expenses for the care of a dependent while the employee is at work. Minimal benefits, such as occasional personal use of office equipment by employee. Educational costs, such as tuition, fees, books, supplies, etc. Education does not have to be job related. Tangible personal property, such as a watch, given to an employee for length of service or safety achievement. Cost of vehicle used by the employee for business or personal purposes. Cost of term life insurance provided to the employee. Cost of providing counseling on interviewing skills, resume preparation, secretarial services, etc. Meals and lodging provided to the employee on the employer s business premises. Hotel accommodations, telephone services, and transportation by aircraft, train, bus, subway and cruise liner. Athletic facilities on the employer s business premises. Goods and services the employer generally offers to the public. Amount received as payment or reimbursement for expenses that would be deductible under Section 217 if paid by the individual employee. Employer and/or employee contributions to an employer-sponsored retirement plan. Employer-provided commuter vehicle transportation between the employee s residence and place of employment, transit passes and qualified parking. Retirement planning advice to the employee and/or spouse. Property and services the employer provides to employees to perform their jobs Fringe Benefits Comparison Chart Tax free to the employee, subject to certain restrictions. Employer-paid expenses are tax free to the employee, within certain dollar limits and an AGI phase-out range. Non-Owner Employee Who Is Considered an Employee? Self-Employed Individual 1 Partner 2 >2% S Corp. Shareholder 3 C Corporation Shareholder 3 Tax free or tax deferred to the employee. May be tax deferred or taxable to the employee depending on conditions. Employees can pay for day care costs with pre-tax earnings or employer contributions. Tax free to the employee. Employer assistance payments of up to $5,250 are excluded from the employee s gross income. Tax free to the employee up to a specified dollar limit. May be taxable or tax free to the employee depending on conditions. Up to $50,000 of coverage tax free to the employee. Tax free to the employee unless the benefit is conditional or received in lieu of some other taxable benefit. Tax free to the employee if furnished on the business premises, furnished for the employer s convenience and for lodging only as a condition of employment. Value excluded from the employee s gross income if service is offered to public and employer incurs no additional cost by offering the service to the employee. Tax free to the employee if the facility is generally only used by employees, their spouses, children, etc. The value of discounted price offered to the employee is tax free to the employee when certain conditions are met. 5 4, , Tax free to the employee. Tax deferred to the employee until funds are withdrawn. $250 Exclude $130 per month for 2014 for the combined value of transit passes and employer-provided transportation; $250 per month in 2014 for qualified parking. (Rev. Proc ; IRC 132) Tax free to the employee Tax free to employee if it would have been deductible as a business expense had the employee paid for the goods or services. 1 8 An independent contractor who performs services for another company. Includes currently employed employee, and any director of the employer. 2 9 A partner who provides services for the partnership. Includes any individual currently employed by the employer, the spouse and dependent 3 Assumes S and C corporation shareholders are providing services as employees. children of the employee, any individual who was formerly employed by the employer and separated due to retirement or disability, and the surviving spouse of an employee who died 4 Not more than 5% of amounts paid by the employer during the year may be provided to while employed or after separation due to retirement or disability. more-than-5% owners (including their spouses and children). 10 Special rule for parents in the case of air transportation. 5 See Reg (b)(2) and (4). 11 Includes the spouse and children of the partner. 6 Includes any currently employed person, retired, disabled or laid-off employee and any 12 employee presently on leave (for example, armed forces). An independent contractor can participate in his own plan, but cannot participate in another company s plan as an independent contractor of that company. 7 Safety achievement awards cannot go to managerial, administrative, clerical or other 13 professional employees. The IRS has not comprehensively defined employee under Section 132(m) for this benefit. Note: The cost of employee fringe benefits is generally tax deductible to the employer, and tax free or tax deferred to the employee when certain requirements are met K Tax Year Small Business Quickfinder Handbook

16 Tax-Free Fringe Benefits IRC 132 No-Additional-Cost Services An employer may exclude the value of a no-additional-cost service from an employee s gross income if: [IRC 132(b)] 1) The service is offered for sale to customers in the ordinary course of the line of business in which the employee is performing services and 2) The employer does not incur any substantial additional cost (including foregone income and labor costs) in providing the service to an employee. Examples of no-additional-cost services: Excess capacity services such as hotel accommodations, telephone services and transportation by aircraft, train, bus, subway and cruise line. Qualified Employee Discounts Employees may exclude from gross income certain discounts on the purchase of their employer s goods or services if: [IRC 132(c)] 1) The discount received on property is not greater than the gross profit percentage of the price at which the property is offered for sale to the public. 2) The discount received on services is not greater than 20% of the price at which the services are offered to the public. To qualify for the tax-free benefit, the goods or services must be offered for sale to customers in the ordinary course of the employer s business. Furthermore, the discounts must be made available to all employees, not just to officers, owners or highly compensated employees [Reg (a)]. However, the tax-free discount rule does not extend to real property of any kind or personal property held for investment (such as stocks or bonds). Discounts may also be extended to retired or disabled former employees, surviving spouses and dependent children of employees. Working Condition Fringe Benefits An employer-provided service or property is tax free to an employee if it would have been deductible as a business expense by the employee if paid out of his own pocket. [IRC 132(d)] Employer provided cell phones. When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the employee s use of the cell phone for reasons related to the employer s trade or business is a working condition fringe benefit. The IRS will not require recordkeeping of business use. Rather, the key is to document the substantial noncompensatory business reason for providing the phone (for example, an employer s need to contact the employee at all times for work-related emergencies, the employer s requirement that the employee be available to speak with clients when the employee is away from the office and the employee s need to speak with clients located in other time zones at times outside the employee s normal work day). The value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes is excludable from the employee s income as a de minimis fringe benefit. Again, recordkeeping of business use will not be required. (Notice ) Note: IRS guidance does not address an employer provided cell phone allowance for a stated dollar amount (such as $100 per month). Without adequate substantiation, a stated dollar amount cell phone allowance would most likely be taxable income to the employee. Additionally, the IRS has indicated informally that ipads and other tablets will be treated like cell phones. De Minimis Fringe Benefits These minimal benefits are so small that it would be unreasonable or administratively impractical for an employer to account for the benefits. [IRC 132(e); Reg (a)] Examples: Occasional typing of personal letters by a secretary. Occasional personal use of office equipment (no more than 15% of total use). Holiday gifts of low-value noncash property, such as a turkey. Occasional sports or theater tickets, employee parties, picnics. Coffee, donuts and soft drinks. Flowers, fruit or similar items given on account of an illness. Group term-life insurance payable on the death of an employee s spouse or dependent if $2,000 or less. (IRS Notice ) Personal use of cell phones provided by employers primarily for noncompensatory business purposes. Little value and frequency. The question of whether or not a de minimis fringe benefit is of little value was addressed in Chief Counsel Advice A nonmonetary recognition award having a fair market value (FMV) of $100 did not qualify as a de minimis fringe benefit. (Informally, the IRS has indicated that this does not mean that noncash awards with a FMV of less than $100 are de minimis.) Other examples of de minimis fringe benefits in Regulation Section (e)(1) include theater and sporting event tickets, which often exceed $100 in value. In Field Service Advice , where meals and sporting event tickets were determined to not qualify as de minimis fringe benefits, the FSA stated in part: The smaller in value and less frequently a particular benefit is provided, the more likely that such a benefit is properly characterized as a de minimis fringe benefit. Meal furnished for the convenience of the employer. Meals provided under the convenience of the employer rules are a de minimis fringe benefit excludable by the employee and fully deductible by the employer. See Meals and Lodging on Page K-9. On-Premises Athletic Facilities The value of athletic facilities provided by an employer to its employees is excluded from an employee s income [IRC 132(j)(4)]. The facility must be located on premises owned or leased by the employer, and substantially all of its use must be by employees, their spouses and dependent children. The facility can be a tennis court, gym, pool or golf course. This exclusion does not apply if the facility is made accessible to the general public. The exclusion does not apply to any residential use facility. For example, a resort with athletic facilities does not qualify. [Reg (e)] $250 Qualified Transportation Benefits Employer-provided qualified transportation fringe benefits are excludable from the employee s income, up to certain limits. Public transportation. Employers can provide up to $130 per month in 2014 (Rev. Proc ; IRC 132) to help employees defray the costs of commuting. Employers can: 1) Give transit passes (including any token, fare card, voucher, or similar item plus shipping fees) each month to an employee for the monthly limit, 2) Sell tokens or transit passes to employees at a discount for the monthly limit or 3) Reimburse employees up to the monthly limit for public commuting expenses. Caution: A cash reimbursement arrangement for transit passes is allowed as a qualified transportation fringe only if no vouchers or transit passes are readily available for direct distribution by the employer to employees. [Reg (b), Q/A-16(b)(1)] Commuter transportation. An employer may provide a commuter highway vehicle (van pool) for transportation of employees to and from work. The combined value of employer-provided commuter 2014 Tax Year Small Business Quickfinder Handbook K-7

17 $250 transportation and transit passes excludable from income is limited to $130 per month for (Rev. Proc ; IRC 132) To qualify, these requirements must be met: [IRC 132(f)(5)] 1) Vehicle must seat at least seven adults, including driver, 2) 80% of van use must be for transporting employees to and from work and 3) At least half of the seating capacity must be used by employees (excluding the driver). Under the commuting valuation rule, each one-way trip is valued at a flat rate of $1.50 ($3.00 per round trip) (Notice 94-3). Workers do not have to include either type of assistance in gross income, as long as the statutory monthly limit is not exceeded. Amounts over the monthly limit are included in income and subject to federal income tax, federal withholding, FICA and FUTA. Qualified parking. In addition to transportation benefits, an employer may provide $250 per month in 2014 for qualified parking expenses (Rev. Proc ). This includes reimbursed costs incurred at park and ride lots. Employers can offer a choice between qualified parking as a taxfree fringe benefit or a taxable cash equivalent benefit. Parking on or near the business premises of the employer or on or near a location from which the employee commutes to work by mass transit or by carpool qualifies. This provision means parking costs at non-temporary work locations, which normally are not deductible under Section 162(a), are excluded from employee income when provided as a qualified transportation fringe benefit. (Chief Counsel Advice ) Qualified bicycle commuting. Defined as the purchase, repair, improvement and storage of a bicycle regularly used for travel between the employee s home and place of employment, qualified bicycle commuting reimbursement is considered a qualified transportation fringe benefit [IRC 132(f)]. The annual limit per employee is $20 per month (maximum $240 during the year); this amount is not indexed for inflation. The excess must be included in income. Unlike other qualified transportation fringe benefits that can be provided to an employee simultaneously, qualified bicycle commuting cannot be used in conjunction with any other qualified transportation fringe benefit. The reimbursement period is the 15-month period beginning with the first day of the calendar year. This means the employer has until March 31st of the following year to reimburse its employees. Use of electronic media. Revenue Ruling and INFO provide guidance on use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringe benefits. Generally, if the cards can be used only to pay transit expenses, the value of the card is excluded from the employee s income and substantiation of their use by the employee is not required. However, if the cards may be used to purchase items in addition to transit passes, the employer must establish a bona fide reimbursement arrangement and require substantiation. Furthermore, if the arrangement provides for advances and relies on employee certification provided before the expense is incurred, the transit passes are taxable. Frequent Flyer Miles Frequent flyer miles are nontaxable. However, this does not apply to frequent flyer miles or other in-kind promotional benefits (benefits earned through rental cars or hotels) converted to cash (through employer reimbursement) or awarded as an incentive award. If the IRS reverses its position in the future and holds that the benefits are taxable, it will not apply to prior years. (Announcement ) Qualified Moving Expense Reimbursements An employee may exclude from income any qualified moving expense reimbursement. [IRC 3401(a)(19), 132(a)(6) and (g)] Qualified moving expense reimbursements are amounts received (directly or indirectly) from the employer as payment for expenses that would be deductible moving expenses if paid by the employee. These include: 1) Moving household goods and personal effects from the former home to the new home and 2) Travel (including lodging) from the former home to the new home [but not including meals IRC 217(b)(1)]. Auto expenses can be calculated at the reimbursement rate set by the IRS (23.5 per mile for 2014) in lieu of actual gas and oil expenses. Reimbursements in excess of the standard mileage allowance for moving [for example, an excess of 32.5 per mile ( ) if the employer uses the 2014 standard mileage allowance for business of 56 per mile] are taxable. Only reimbursements made under an accountable plan may be excluded from income. Note: Nonqualified reimbursements must be included in an employee s wages. Qualified Retirement Planning Services Qualified retirement planning services are excludable from employees gross wages [IRC 132(a)(7) and (m)]. Qualified retirement planning services is defined as any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan. Qualified employer plans include annuity plans, governmental plans, 403(b) annuity contracts, simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLEs). Note: The provision is not meant to include related services such as tax preparation, accounting, legal or brokerage services. Dependent and Child Care IRC 129 and 45F Under a Section 129 dependent care plan, employees can exclude from gross income up to $5,000 ($2,500 MFS) of employer-provided dependent care assistance as a tax-free fringe benefit. The excludable amount is not subject to FICA, FUTA or federal income tax withholding. The cost of the benefit may be paid through employer contributions to the plan, salary reductions under a cafeteria plan or a combination of the two methods. The exclusion may not exceed the earned income of the employee or, if less, the earned income of his spouse. The plan must only cover the same type of expenses that qualify for the dependent care tax credit, which is computed on Form 2441, Child and Dependent Care Expenses. General requirements: 1) Plan must be in writing and for exclusive benefit of employees. 2) Plan must provide reasonable notification of the availability and terms of the program to eligible employees. 3) Employer must provide each employee, by the following January 31, with written statement of amounts spent for dependent care assistance under the plan. Employer may report this amount (or the amount deferred by the employee if the plan was amended to include a grace period), on the employee s Form W-2 in box 10. 4) Plan may not discriminate in favor of highly compensated. Credit for Employer-Provided Child Care The Section 45F tax credit is available for employers who provide child care for their employees. The tax credit is equal to the sum of 25% of the qualified child care expenditures plus 10% of the qualified child care resource and referral expenditures. Maximum credit is limited to $150,000 each year and is subject K Tax Year Small Business Quickfinder Handbook

18 [IRC 170(h)]. The allowable deduction is generally the amount by which the FMV of the property drops as a result of the easement. To qualify, easement rights must be granted in perpetuity and must be granted to a qualified organization such as a governmental unit or local land trust. The easement must also be granted for a qualified conservation purpose, such as: 1) Preservation of land areas, 2) Protection of natural habitat, 3) Preservation of historically important areas or structures or 4) Preservation of open space. Under Regulation Section 1.170A-14, preservation of open space includes easements granted for the scenic enjoyment of the general public. Physical access to the property does not necessarily need to be granted, and the entire property does not need to be visible. For these reasons, a taxpayer with a view may realize tax benefits from granting a conservation easement without sacrificing enjoyment of owning the property. Special rules for qualified conservation contributions: Expired Provision Alert: The extended 15-year carryover period and the increased deduction limit (50%-of-AGI for individuals and 100% for farmers and ranchers individual or corporate) are not available For after This section is included in the event the rules are extended. Before 2014, qualified conservation contributions that are not deductible in the year made because of the applicable percentageof-income limitation on total contribution deductions have a 15-year carryover period (rather than the usual five-year carryover period). For individual taxpayers, a conservation contribution is taken into account for purposes of the 50%-of-AGI-limitation base (100% in the case of farmers and ranchers) only after taking into account all other contributions (which are subject to the five-year carryover period), saving this contribution for deduction in later years (Notice ). The special 100% limit also applies to corporate farmers and ranchers for whom it is especially beneficial, as deductibility of donations by corporations is generally limited to 10% of taxable income. [IRC 170(b)(1)(E) and (b)(2)(b)] Abandonment or Worthlessness of Investment Property Ordinary vs. Capital Loss Sale of investment property at a loss is generally subject to capital loss limits. However, if nondepreciable investment property is abandoned or becomes worthless, the transaction may be eligible for deduction as an ordinary loss. (Reg ) Under the Regulations, ordinary loss treatment for worthless or abandoned property applies to transactions that do not constitute a sale or exchange, even if the property is a capital asset. Establishing abandonment. A taxpayer must show intent to abandon an asset and must overtly act to abandon it. Under Regulation Section (b), the loss must be evidenced by closed and completed transactions, fixed by identifiable events, and,... actually sustained during the taxable year. For example, a taxpayer who deeded property to the taxing authorities was found to have abandoned the property. [Jamison, 8 TC 173 (1947)] Dispositions must be carefully structured to achieve the desired tax effects. For example, a loss on investment property that is properly abandoned is treated as an ordinary loss. However, if the same property is sold for $1, the loss is subject to capital loss limits. Where to report. An individual s deduction for abandonment or worthlessness of investment property is taken as a miscellaneous itemized deduction on Schedule A of Form 1040, subject to the 2%-of-adjusted gross income (AGI) floor. The loss is reported on Schedule A rather than another form (such as, Form 4797) because it is a Section 165(a) deduction. That Code section falls under Part VI of Subchapter B of the Code, which covers itemized deductions for individuals and corporations. Such deductions (unless another Code section, regulation or ruling, etc., requires they be reported elsewhere on the return) are reported on Schedule A. Abandoned/worthless securities. While losses under Section 165 generally are ordinary, Section 165(g) provides that a capital loss results when a security that is a capital asset becomes worthless during the tax year. The worthless security is treated as if it was sold on the last day of the tax year. Some taxpayers have claimed ordinary losses under Section 165(a) for abandoned securities, arguing that Section 165(g) applies only when a security becomes worthless, not when it is abandoned. However, the IRS position is that, if the abandoned security is a capital asset, the loss is treated as a capital (not ordinary) loss on the last day of the tax year the same as a worthless security. To abandon a security, a taxpayer must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security. [Reg (i)] Note: See Revenue Ruling for information about worthlessness or abandonment of partnership interests with liabilities versus without liabilities. Costs of abandoned business restructuring. Generally, costs incurred in investigating and pursuing mutually exclusive business restructurings (recapitalization, divestiture of business divisions, etc.) must be capitalized as part of the cost of the completed transaction. However, if such costs relate to a transaction that is not completed, they can be deducted under Section 165 at the time the transaction is abandoned. Asset Acquisitions Form 8594; see also IRC 1060 Form 8594, Asset Acquisition Statement Under Section 1060, is filed by both the seller and the buyer of a group of assets that constitutes an applicable asset acquisition. An applicable asset acquisition is any direct or indirect transfer of a group of assets that constitutes a trade or business in the hands of either the seller or the buyer, and the purchaser s basis in the assets is determined wholly by the amount paid for the assets. The purpose is to identify goodwill or going-concern value that could be attached to the sale price of the business. Differences in the buyer and seller amounts on Form 8594 can give the IRS incentive to examine the transaction and make its own allocations. To avoid drawing attention to the transaction, the buyer and the seller can agree in writing to specific allocations and prepare the Forms 8594 according to those allocations. The allocation is generally done under the rules of Section 338 and Regulation Section and is referred to as the residual method (discussed below). If a written agreement is entered into and that agreement differs from the residual method figures reported on Form 8594, the written purchase agreement will take precedence [Peco Foods, Inc., 112 AFTR 2d (11th Cir. 2013)]. As a practical matter, any taxpayer involved in an asset acquisition who has a cost segregation study done on cost allocation should do it before entering into a written agreement. The written agreement should match that cost segregation, and those figures should be used for Form 8594 reporting to avoid unwanted IRS questions. The taxpayer should be careful in assigning allocations, as the amounts agreed to become the tax bases of assets; changing allocations (for example, to assign more to a depreciable asset and less to land) could result in an accounting method change. Accounting method changes are discussed in Tab L. Form 8594 is not required to be filed if: 1) The acquisition is not an applicable asset acquisition (as defined above), 2) The group of assets that constitutes a trade or business is exchanged for like-kind property in a transaction to which Section 1031 applies (however, if Section 1031 does not apply to all the assets transferred, Form 8594 is required for the group of assets to which Section 1031 does not apply) or 3) A partnership interest is transferred. The buyer s and seller s Forms 8594 are filed with their tax returns for the year of the sale. If the amount allocated to any asset is increased or decreased after Form 8594 is filed, a new Form 8594 must be filed (by attaching it to the tax return for the year of the increase or decrease) reporting the adjustment Tax Year Small Business Quickfinder Handbook N-15

19 @ Strategy: A representative for the acquiring company who is familiar with IRS procedures should obtain a power of attorney from the company being acquired. Copies of tax records can then be obtained and examined for back taxes, interest, penalties or possible audit items. U Caution: Liabilities assumed by a purchaser are not necessarily limited to the amount of liabilities that are known at the Strategy: To diminish risks created by the successor liability laws, the acquiring company should acquire the target company with an asset purchase rather than a stock purchase, if possible. Installment Sales The installment method allows a taxpayer selling a business in exchange for a note to defer the recognition of gain until payment is actually received (IRC 453). The buyer would like the seller to finance the sale rather than obtain financing through a bank or other lending institution, which generally means strict loan qualification procedures and credit checks. The seller may want to spread the gain out over a number of years to minimize the effect of subjecting other income to higher ordinary income tax rates, such as Social Security benefits, investment income and retirement plan distributions. However, the seller takes on all the risk. The installment method does not apply to assets that produce ordinary income when sold. Only capital gains may be reported under the installment method. Any ordinary income as a result of the sale of a business asset must be reported as income in the year of sale, regardless of when payment is actually received. Ordinary income in a sales contract may be produced by: Inventory. Accounts receivable. Depreciation Strategy: The seller should obtain a sufficient down payment from the buyer to cover the tax liability on ordinary income in the year of the sale. Repossession. If the seller has to repossess the business, the seller will recognize gain to the extent payments received prior to the repossession exceed gain already reported under the installment method, limited to the initial gain on the sale minus the sum of (1) repossession costs and (2) gain on the sale reported as income before the repossession. The seller also could lose a substantial amount of the value of goodwill due to the buyer s negligence in operating the business. Such a risk should influence the negotiations between the buyer and seller in valuing the various assets in the original sales contract. Sale of business. If multiple assets are sold in a single sale (such as the sale of an entire business), the seller must determine whether the installment method can be used to report the sale of each asset. The buyer and seller must use the residual method to allocate the sale price. See Allocation using the Residual Method on Page N-16. Installment method reporting. Income from an installment sale is reported on Form 6252, Installment Sale Income. Dispositions of eligible property by an installment sale must be reported using the installment method unless the taxpayer makes an election not to use installment method reporting [IRC 453(d)]. Generally, such an election is irrevocable, but exceptions do exist. The IRS allowed a taxpayer to revoke the election out when the taxpayer acted as soon as he became aware that his accountant had mistakenly elected out of installment method reporting. The request was granted because the reason for revoking the election was not a desire to avoid tax but was based on the accountant s mistake. (Ltr. Rul ) Tax Treatment of Assets Included in Sale of a Business Applicable to Individuals and Pass-Through Entities Asset Buyer s Tax Treatment Seller s Tax Treatment Buildings and building components Land Equipment and vehicles Depreciable over 39 years. Nondeductible cost is capitalized and recovered when sold. $500,000 Depreciable generally over five or seven years unless other class life applies. For 2014, up to $25,000 may qualify for current expense deduction under Section 179. Long-term gain attributed to depreciation is unrecaptured Section 1250 gain. Maximum individual capital gain rate on unrecaptured Section 1250 gain is 25% for Long-term gain in excess of depreciation is a capital gain under Section Maximum individual capital gain rate on Section 1231 property is 20% for Long-term gain is Section 1231 gain. Maximum individual capital gain rate on Section 1231 property is 20% for Gain attributed to depreciation is ordinary income under Section Maximum individual ordinary income tax rate is 39.6% for Long-term gain in excess of depreciation is a capital gain under Section Maximum individual capital gain rate on Section 1231 property is 20% for Inventory Added to cost of goods deductible when sold to customers. Gain is ordinary income. Maximum individual ordinary income tax rate is 39.6% for Intangible assets such as goodwill, covenant not to compete, copyright, patent, customer list, employee contract, Amortizable over 15 years as Section 197 intangibles. Long-term gains on self-created intangibles are generally considered capital gains. Top individual capital gain rate is 20% (for 2014). Exception: Income from a covenant not to compete is generally ordinary income, not subject to SE tax, maximum rate of 39.6%. [Barrett, 58 TC 284 (1972), acq CB 1]. However, if a noncompete agreement cannot be clearly distinguished from a consulting agreement or other agreement entered into at the same time, payments under the noncompete agreement could be subject to SE tax. franchise, trademark or trade name Gain on acquired intangibles attributed to amortization is ordinary income under Section Maximum individual ordinary income tax rate is 39.6% for Long-term gain on acquired intangibles in excess of amortization is a capital gain under Section Maximum capital gain rate on Section 1231 property is 20% for Notes: A loss on the sale of any business asset is an ordinary loss under Section Ordinary losses are deductible against other ordinary income. Nonrecaptured Section 1231 losses (net Section 1231 losses deducted in the prior five years) are recaptured by treating an equal amount of subsequent year net Section 1231 gain as ordinary rather than long-term capital gain. A loss is not allowed on the disposition of a Section 197 intangible asset that was acquired in a transaction with other Section 197 intangibles that the taxpayer retains. The basis of the retained Section 197 intangibles are increased by the unrecognized loss. A short-term gain on the disposition of any business asset is subject to ordinary income tax rates. If a building component is portable and removable, it may be considered separate and qualify as equipment rather than as a part of the building. Examples include window air conditioners, movable partitions, movable shelving, window blinds, etc. Buyer should consider a cost segregation study to identify components. If the seller is a C corporation, capital gains and ordinary income are taxed at the same rate. A net capital loss is nondeductible and must be carried back three years and forward five years. [IRC 1212(a)(1)] 2014 Tax Year Small Business Quickfinder Handbook N-17

20 to capitalize and depreciate the costs or, if eligible, deduct the costs under the de minimis safe harbor. (See Capital Improvements vs. Deductible Repairs on Page J-7 for more information.) An optional method of accounting for rotable or temporary spare parts is also available see Reg (e). Start-up costs. See Organizational and Start-Up Costs on Page M-6. Taxes. See Taxes on Page O-22. Tools. The cost of tools with a useful life of less than one year is generally deductible when purchased, unless the Uniform Capitalization Rules on Page L-8 apply. Tools with a useful life of more than one year are depreciated. Tab J covers depreciation. Trademark and trade names. See Intangible Assets on Page O-17. Travel. Costs for transportation, lodging and meals are generally deductible if the expenses are reasonable and necessary, and if the trip is primarily for business. See Lodging and Meals and entertainment, both on Page O-3. See Tab 9 in the 1040 Quickfinder Handbook for more information. Truck and trailer tires. Revenue Procedure establishes the original tire capitalization method (OTCM). Under the method, the cost of original tires is depreciated as part of the vehicle and the cost of replacement tires is deducted as a current expense. A taxpayer must use the OTCM consistently for all its vehicles. Wages. See Salaries and Wages on Page O-21. U.S. Production Deduction IRC 199 Taxpayers can deduct (for both regular tax and AMT) a percentage of their qualified domestic production activities income (IRC 199). C corporations, S corporations, LLCs, partnerships, sole proprietorships, cooperatives, estates and trusts may all claim this domestic producers deduction (DPD). U Caution: The DPD does not reduce self-employment (SE) earnings for SE tax. [IRC 1402(a)(16)] DPD DPGR MPGE QPAI QPP DPD Key Terms and Acronyms Domestic Producers Deduction Domestic Production Gross Receipts Manufactured, Produced, Grown or Extracted Qualified Production Activities Income Qualified Production Property The deduction equals 9% (6% if oil-related) of the lesser of the business (1) qualified production activities income (QPAI) or (2) taxable income (AGI for individual taxpayers) determined without regard to the DPD. QPAI equals the taxpayer s domestic production gross receipts (DPGR) for the year less cost of goods sold and other expenses properly allocable to DPGR. The DPD cannot exceed 50% of the taxpayer s W-2 wages that are properly allocable to DPGR for the tax year. What Is QPP? Definition. Section 199(c)(5) provides that the term QPP includes tangible personal property, computer software and sound recordings. [Reg (j)] The fact that property is personal or tangible under local law is not controlling. Property may be tangible personal property for Section 199 even if local law considers it a fixture (real property). Tangible personal property does not include land, buildings, inherently permanent structures or land improvements, oil and gas wells or infrastructure. Examples. Machinery, printing presses, transportation equipment, office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves and signs that are contained in or attached to a building are tangible property for the DPD. Furthermore, property that is in the nature of machinery, other than structural components of a building, is tangible personal property even though located outside a building. For example, a gasoline pump, hydraulic car lift or automatic vending machine, although attached to the ground outside, is tangible personal property. In Significant Part Requirement Taxpayers must manufacture, produce, grow or extract QPP in whole or in significant part within the U.S. A taxpayer manufactures QPP in significant part if the taxpayer meets one of two tests. [Reg (g)] Substantial in Nature Test Safe Harbor Test Based on all of the taxpayer s facts and circumstances, the manufacturing, production, growth or extraction activity performed by the taxpayer in the U.S. is substantial in nature. The taxpayer s direct labor and overhead for the manufacture, production, growth and extraction of the QPP within the U.S. account for 20% or more of the taxpayer s cost of goods sold, or in a transaction without cost of goods sold (such as a lease, rental or license) account for 20% or more of the taxpayer s unadjusted depreciable basis of the QPP. Taxpayers subject to the UNICAP rules: overhead includes all costs required to be capitalized under Section 263A except for direct materials and direct labor. Taxpayers not subject to UNICAP can compute overhead using any reasonable method, but overhead cannot include any costs that would not be required to be capitalized under Section 263A. Note: A taxpayer engaging in only packaging, repackaging, labeling and minor assembly operations must disregard the substantial in nature and safe harbor tests because these activities are not MPGE activities. [Reg (e)(2)] U.S. Defined In the U.S. Requirement The 50 states, District of Columbia, U.S. territorial waters and the seabeds and subsoils of any waters adjacent to U.S. territorial waters that the U.S. has exclusive exploration and exploitation rights over. [Reg (h)] Taxpayers with foreign activities must allocate gross receipts. Some taxpayers import partially manufactured items and then finish the process in the U.S. To the extent that the taxpayer s actions, given all of the facts and circumstances, are substantial, the gross receipts from the activity will qualify as DPGR. If the taxpayer manufactures a product in the U.S. and then exports it, all of the gross receipts will be DPGR, regardless of whether the taxpayer imports the property back into the U.S. for final disposition. [Reg (g)(5), Ex. 5] Note: The DPD is available for certain Puerto O Tax Year Small Business Quickfinder Handbook Rico activities in tax years beginning after 2005 and before Imports Exports What Is QPAI? Qualified production activities income (QPAI) is the taxpayer s domestic production gross receipts (DPGR) reduced by: 1) The cost of goods sold allocable to those receipts and 2) Other expenses, losses or deductions (other than the DPD itself) that are properly allocable to those receipts. Determining DPGR. DPGR is the taxpayer s gross receipts from the lease, rental, license, sale, exchange or other disposition of QPP that was manufactured, produced, grown or extracted in whole or in significant part within the U.S. Additional activities producing DPGR include: Qualified film production; Electricity, natural gas or potable water produced in the U.S.; Farming and processing of agricultural products and food; Construction performed in the U.S. and Engineering or architectural services performed in the U.S. for U.S. construction projects. Gross receipts from a related party rental, lease or license are excluded. [IRC 199(c)(7)]