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© 2014 KSM Business Services, Inc.
2014 Year-End Tax Seminar
November 19, 2014
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Session 1: Year-End Planning Considerations (8:00 a.m. - 10:00 a.m.)
▪ Basic Year-End Planning Techniques
Stephen Schnelker and Alex Szarenski
▪ Affordable Care Act (ACA) Update
William Graff
▪ Prepare Now to Successfully Survive a Sales Tax Audit
Tim Conrad
▪ Federal Tax Update
Jolaine Hill
Agenda
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Session 2: Technical Tax Topics (10:20 a.m. - noon)
▪ FATCA Update — Foreign Withholding RulesKatherine Malarsky
▪ Historic Rehabilitation Tax Credit — Safe Harbor
John Estridge
▪ Private Foundations — Plan to Avoid Self-Dealing and Taxable
Expenditures
Victoria Snyder
▪ Repair and Capitalization Regulations
Christopher Bradburn
Agenda
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Basic Year-End Planning Techniques
November 19, 2014
Stephen D. Schnelker, JD
Alex Szarenski, JD
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Net Investment Income Tax
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▪ 3.8% tax that applies to individuals, estates, and trusts on
net investment income above the threshold amount
▪ Net investment income tax (“NIIT”) is reported on Form
8960
▪ Threshold amount
▫ $250,000 – Married filing jointly or qualifying widow with
dependent child
▫ $125,000 – Married filing separately
▫ $200,000 – All other cases (single or head of household)
Net Investment Income Tax
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▪ The 3.8% tax is applied to the lesser of:
▫ Net investment income (“NII”), or
▫ The excess of “modified adjusted gross income” (“MAGI”)
less the applicable threshold amount
▪ MAGI is adjusted gross income increased by the foreign
earned income exclusion
Net Investment Income Tax
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▪ Interest, dividends, annuities, royalties, rents, and
substitute interest and dividends
▫ But not to the extent that this income is derived in the
ordinary course of an active trade or business
▪ Other gross income from passive activities under Sec. 469
▪ Net gain included in computing taxable income that is
attributable to a disposition of property
▫ But not to the extent such property was held and used in an
active trade or business
Net Investment Income
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▪ Qualified pension
▪ Profit sharing
▪ Stock-bonus plan
▪ Qualified annuity plan under Sec. 403
▪ Distribution from traditional or Roth IRA
▫ These distributions will be included in MAGI
Net Investment Income Does NOT Include
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▪ If MAGI is greater than the applicable threshold, then
multiple 3.8% by the lesser of:
▫ MAGI, less the threshold amount, or
▫ Net investment income
Net Investment Income Tax Calculation
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▪ John is single and has wage income of $180,000 and
$15,000 of dividends
▪ John’s MAGI is $195,000 ($180,000 + $15,000)
▪ Since $195,000 < $200,000, no NIIT
Example 1
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▪ John is single, has wage income of $180,000, and passive
partnership income of $90,000
▪ John’s MAGI is $270,000 ($180,000 + $90,000)
▪ John’s NIIT is 3.8% multiplied by the lesser of:
▫ $70,000 ($270,000 - $200,000), or
▫ $90,000 (NII)
▪ John’s NIIT is $2,660 (3.8% * $70,000)
Example 2
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▪ Trading partnerships
▫ A trading activity is a trade or business of a trader trading in
financial instruments or commodities
- Financial instruments: stocks and other equity interests,
evidences of indebtedness, options, forward or futures
contracts, notional principal contracts, any other derivatives, or
any evidence of an interest in any of these listed items
Potential Net Investment Income Trap
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▫ For regular tax purposes, a trading partnership is usually
nonpassive
▫ How to recognize a trading partnership
- Example: “The partnership is treated as conducting an activity of
trading personal property for the account of its partners.
Accordingly, the partnership activity is not passive pursuant to
Treasury Regulation Section 1.469-1T(e)(6).”
Trading Partnerships
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▪ For net investment income tax purposes, a trading
partnership is passive and subject to the 3.8% tax
▪ Trading partnerships will often have an additional footnote
for net investment income tax purposes
▫ Example: “Unless otherwise noted, the distributive share of
all items included on your Schedule K-1 is from trading in
financial instruments and commodities as defined in Treas.
Reg. 1.1411-5(a)(2). These amounts are all components of
net investment income as defined in Treas. Reg. 1.1411-4
and may be subject to net investment income tax pursuant to
IRC Section 1411.”
Trading Partnerships
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Grouping Elections
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▪ If a taxpayer “materially participates” in the activity, then the activity is nonpassive
▪ 7 tests for material participation
▫ More than 500 hours related to activity
▫ Substantially all participation by taxpayer
▫ More than 100 hours if no other individual participates more in activity
▫ Significant Participation Activities
▫ Material participation in five of last ten taxable years
▫ Material participation in personal service activity for three years
▫ Regular, continuous and substantial involvement under facts and circumstances
Why Group Activities?
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▪ Taxpayer must meet one of the seven tests on a per
activity basis to be afforded nonpassive treatment for such
activity
▪ By grouping related activities, taxpayer only has to meet
one of the tests in the aggregate to be afforded
nonpassive treatment for all activities grouped together
Why Group Activities?
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▪ General Rule – Treasury Regulation 1.469-4
▫ Two or more trade or business activities or rental activities
can be treated as a single activity if the activities constitute
an appropriate economic unit (“AEU”)
▫ Facts and circumstances determine AEU
- Similarities and differences of businesses
- Extent of common control
- Extent of common ownership
- Geographical location
- Interdependencies of businesses
Grouping Rules
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▪ Rental real estate activity may not be grouped with personal property rental activity
▪ Rental real estate activity may not be grouped with trade or business activity
▪ Exceptions to the grouping limitations rule▫ Rental real estate activity is inconsequential to trade or business
activity
▫ Trade or business activity is inconsequential to rental real estate activity
▫ Owners of trade or business activity have the same proportionate ownership in rental real estate activity:- The portion of the rental real estate activity being rented to the related
trade or business activity can be grouped.
▫ Personal property provided in connection with real property
Limitations of Grouping Activities
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▪ Once the activities are grouped generally the activities
cannot be regrouped in subsequent years
▪ Exceptions to regrouping limitations
▫ Inappropriate grouping
▫ Material change in facts and circumstances
- Must regroup activities
- Comply with disclosure requirement prescribed by
Commissioner of Internal Revenue Service
▫ Affordable Care Act
Consistency Requirements
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▪ New grouping reporting requirements
▫ Written statement attached to original filed income tax return
▫ Name, address, and EIN of entities in the group
▫ Declaration that the grouped activity constitutes an AEU for measure of gain or loss for Sec. 469
▪ Existing groups – addition of new activities
▫ Written statement attached to original filed income tax return
▫ Name, address, and EIN of entities in the group
▫ Declaration that the grouped activity constitutes an AEU for measure of gain or loss for Sec. 469
Grouping Under Rev. Proc. 2010-13
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▪ Regrouping of activities
▫ Written statement attached to original filed income tax return
▫ Name, address, and EIN of entities in the group
▫ Declaration that the grouped activity constitutes an AEU for
measure of gain or loss for Sec. 469
▫ Explanation of why the original regrouping is inappropriate or
the nature of the material change in facts and circumstances
that causes original grouping to be inappropriate
Regrouping under Rev. Proc. 2010-13
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▪ Final regulations allow taxpayers a Fresh Start for
grouping
▪ Regrouping is allowed in the first tax year, after December
31, 2013, that taxpayer is subject to the NIIT
▪ Taxpayers may have applied this regrouping regulation to
tax years beginning after December 31, 2012
▪ Once regrouping is complete, the grouping applies in all
subsequent years
Regrouping under Affordable Care Act
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Significant Participation Activities
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▪ Defined as a trade or business activity in which the
individual:
▫ participates for more than 100 hours during the year; and
▫ does not otherwise materially participate in such activity.
▪ General Rule – all SPA activities are considered
nonpassive if the individual’s aggregate participation in all
SPA activities exceeds 500 hours.
Significant Participation Activities
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▪ Recharacterization rule applies when the individual:
▫ has multiple SPA activities,
▫ the aggregate participation in all SPA activities is less than
500 hours, and
▫ the income from SPA activities exceeds the losses from SPA
activities.
▪ A ratable portion of the net passive income from the SPA
activities is treated as not from a passive activity.
Significant Participation Activities
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▪ Individual owns three SPA activities and participates for
125 hours per activity during the year (375 hours in
aggregate). The income and loss associated with each
activity during the year is:
▫ $400 from X, ($300) from Y, and $600 from Z
▪ The following portion of X and Z’s income is
recharacterized to nonpassive income:
▫ X - $280 ($400 * $700/$1,000)
▫ Z - $420 ($600 * $700/$1,000)
SPA Recharacterization Example
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Additional 0.9% Medicare Surtax
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▪ Applies to an individual if the combination of an individual’s wages, railroad retirement compensation, and self-employment income exceed the applicable threshold
▪ Thresholds
▫ $250,000 – Married filing jointly
▫ $125,000 – Married filing separately
▫ $200,000 – Single, head of household, qualifying widow
▪ If filing a joint return, a spouse’s income is also included
Additional 0.9% Medicare Surtax
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Charitable Donations
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▪ Cash donations of $250 or more
▪ Letter must:▫ Be written,
▫ Include:- Amount of cash contributed
- Whether any goods or services were received from the organization for your contribution, and
- A description and good faith estimate of the value of any goods or services received (if any).
▫ Be received by the taxpayer on or before the earlier of:- The date the taxpayer’s tax return is filed, or
- The due date of the taxpayer’s tax return
▪ If the letter does not contain the date of the contribution, then a bank record or receipt verifying the date is required
Acknowledgement Letters
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▪ Donations less than $250
▫ Receipt from organization showing the name of organization,
date, location, and reasonably detailed description of
property
▪ Donations of at least $250 but not more than $500
▫ Must have acknowledgement letter from organization
including a description of the property donated
Non-Cash Donations
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▪ Donations over $500 but not over $5,000▫ Written acknowledgement letter
▫ Records establishing:- How the taxpayer got the property
- Approximate date acquired the property
- Cost or basis and any adjustments to basis (not required for publicly traded securities)
▪ Donations over $5,000▫ Written requirements above
▫ Qualified written appraisal of the donated property from a qualified appraiser
▫ Cannot deduct appraisal fees as charitable contribution but can deduct on Sch. A as itemized deduction subject to 2% limitation
Non-Cash Donations
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▪ Organization must provide Form 1098-C to taxpayer within
30 days of the sale of a donated vehicle
▫ Form 1098-C shows the gross proceeds from the sale
▪ Exceptions – Form 1098-C must be provided within 30
days of donation
▫ Organization makes significant intervening use of, or material
improvement to, the vehicle before the sale
▫ Organization will give the vehicle to, or sell it for a price well
below FMV to, a needy individual to further the organization’s
exempt purpose
Donating a Car or Boat
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▪ Donor advised fund is a fund or account in which the
donor can advise the fund how to distribute or invest
amounts held in the fund
▪ Donor can deduct full amount contributed (subject to
normal limitations) if:
▫ Organization that sponsors the fund is NOT a war veterans’
organization, a fraternal society, or a nonprofit cemetery
company, and
▫ Written acknowledgement from the sponsoring organization
that it has exclusive legal control over the assets contributed
Donor Advised Funds
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Other Year-End Items to Consider
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▪ There are 62 federal tax provisions expired December 31,
2013.
▪ EXPIRE Act of 2014
▫ Proposed by Senate
▫ Generally extends provisions two (2) years
▪ Jobs for America Act
▫ Proposed by House of Representatives
▫ Generally extends provisions indefinitely
Proposed Extender Bills
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▪ A deduction for obsolete inventory must be taken in the
year the inventory becomes obsolete.
▫ Discarding obsolete inventory is evidentiary of abandonment.
▪ Obsolete merchandise in inventory should be revalued in
the first year in which it became obsolete, damaged, or
unusable.
Obsolete Inventory
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▪ Automatic accounting method changes are made by filing
Form 3115 with timely filed federal income tax return.
▪ Non-automatic accounting method changes must be made
by filing Form 3115 by the last day of the tax year of
change.
▫ Non-automatic changes are generally changes not listed in
the instructions of Form 3115.
Non-Automatic Accounting Method Changes
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▪ Payment of wages and bonuses by an S-Corporation to
shareholders must be made before December 31 in order
to deduct.
▫ This is in contrast to other S-Corporation transactions which
allow for a 2.5 month buffer for payment of certain accrual
items.
S-Corp Shareholder Payments
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▪ Standard year-end practices should include:
▫ Reviewing payroll accruals.
- Including commissions, bonuses, and vacation time.
▫ Review receivable accounts.
- Determine if any receivables can be deducted as bad debts.
Year-End Reviews
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▪ Capital losses can be taken to offset capital gains for the
taxable year.
▫ Taxpayers with net realized capital gains for the year, should
consider harvesting capital losses before year end.
▪ Capital gains can be harvested before year end to provide
offsets for net capital losses.
▫ This strategy is especially useful if the capital gains being
harvested and offset are short-term capital gains.
▫ However, careful consideration regarding the future benefit of
a capital loss carryover is required.
Harvesting Capital Gains/Losses
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▪ 401(k) Contributions - $18,000 (up from $17,500)
▪ IRA Contributions - $5,500
▪ IRA Catch-Up Contributions - $1,000
▪ OASDI Taxable Wage Base - $118,500 (up from $117,000)
▪ Gift Tax Annual Exclusion - $14,000
▪ Estate and Gift Tax Basic Exclusion - $5,430,000 (up from
$5,340,000)
▪ Business Standard Mileage Rate – not available yet
COLA Adjusted Amounts for 2015
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Thank You
Stephen D. Schnelker, JD
P 317.452.1914
Alex Szarenski, JD
P 317.452.1910
46 ksmcpa.com
Affordable Care Act
November 19, 2014
William Graff, JD, LL.M.
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▪ Discuss the individual mandate and the forms/filings
▪ Discuss Employer filing requirements for tax year 2015,
file 2016
▪ Judicial Activity
Outline
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▪ For coverage starting in 2015, the Open Enrollment Period
is November 15, 2014 – February 15, 2015
▫ Between the 1st and 15th days of the month, your
coverage starts the first day of the next month.
▫ Between the 16th and the last day of the month, your
coverage starts the first day of the second following
month. So if you enroll on January 16, your coverage starts
on March 1.
Open Enrollment Period
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▪ Forms/Instructions for Individual Mandate
▪ Forms/Instructions for Premium Tax Credit
▪ Forms/instructions for Health Coverage Exemption
▪ Self-employed Health Insurance Deduction and the
Premium Assistance Credit
Individual
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▪ Beginning in 2014, individuals are required to have
minimum essential health insurance coverage unless they
meet certain exemption criteria.
▫ See slide below on Form 8965
▪ Individuals who are not eligible for an exemption and who
do not have the required health insurance coverage will be
subject to the individual shared responsibility penalty when
they file their 2014 income tax return.
Individual
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▪ Individuals who do not qualify for an exemption or maintain the required minimum essential health coverage may be liable for an individual shared responsibility penalty beginning in 2014. For a tax year, the penalty is the lesser of (1) the sum of the monthly penalty amount [ greater of $95 or 1%] or (2) the sum of the monthly national average bronze level plan premiums for the shared responsibility family.
▫ Monthly National Average Bronze Plan Premium = $204
▫ Max Monthly National Average Bronze Plan Premium = $1,020 for family with five or more members
Individual
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▪ The IRS published draft instructions for From 8962
(Premium Tax Credit) and Form 8965 (Health Coverage
Exemptions)
▫ Form 8962: Taxpayers file Form 8962 if they received
advance payments of the premium tax credit or are claiming
the premium tax credit for coverage in a qualified health plan
purchased through a state health insurance marketplace.
▫ Individuals claiming the premium credit must file a federal
income tax return for the year.
Individual Mandate Draft Instructions
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▪ General rule: If the advance payment to a taxpayer for a
taxable year exceeds the credit allowed, the tax imposed
shall be increased by the amount of such excess.
▪ Limitation on repayment:
§ 36B Advance Repayment Limitations
Poverty Line Individual Limit Family Limit
Less than 200% $300 $600
200% > 300% $750 $1,500
300% > 400% $1,250 $2,500
400% or more N/A N/A
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▪ Form 8965: is filed by individuals who qualify for an
exemption from the shared responsibility penalty. The
instructions for Form 8965 also explain how to calculate
the individual shared responsibility payment for any month
in which the taxpayer or dependent(s) did not have
qualifying health coverage or qualify for an exemption.
▪ Both Forms 8962 and 8965 are filed with the individual's
income tax return. The draft instructions are available at
apps.irs.gov/app/picklist/list/draftTaxForms.html.
Individual Mandate Draft Instructions
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▪ Health insurance marketplaces are required to report
certain information annually to the IRS and to individuals
about the family members who enroll in qualified health
plans through a marketplace.
▪ Individuals will use the information to claim a premium
assistance credit and to reconcile advance credit
payments received on their individual income tax return.
▪ The information is required to be reported to the IRS and
individuals on Form 1095-A by January 31, 2015 for the
2014 coverage year.
IRS Releases Draft Instructions for Health
Insurance Marketplace Statement
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▪ The IRS recognizes that an individual eligible for both the
self-employed health insurance deduction under IRC Sec.
162(l) and the premium assistance credit under IRC Sec.
36B may have a difficult time calculating these amounts
because of the circular nature of their relationship.
▪ Rev. Proc. 2014-41 provides an optional method for
taxpayers to calculate both amounts and circumvent the
circular calculation.
Self-employed Health Insurance Deduction
and the Premium Assistance Credit
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▪ SHOP
▪ PCORI
▪ Forms/Instructions for Minimum Essential Coverage
Reporting
▪ Forms/Instructions for Applicable Large Employer
Reporting
EMPLOYERS
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▪ SHOPs are designed to reduce the burden and costs of small employers providing health insurance coverage for their employees. Through a SHOP, small employers have choices for plans that have typically only been available to large employers.
▪ The SHOP provides small employers a choice of QHPs to offer their employees. Similar to the individual marketplace, plans in the SHOP are presented in a way that employers and employees can easily compare plan benefits and costs so that an appropriate plan can be selected.
The Small Business Health Options
Program (SHOP)
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▪ A fee is imposed on the issuer of specified health
insurance policies and the sponsor of certain self-insured
group health plans under IRC Secs. 4375 and 4376 to
help fund the PCORI.
▪ The adjusted applicable dollar amount to be multiplied by
the average number of covered lives for purposes of
determining the fee for policy and plan years that end on
or after October 1, 2014, and before October 1, 2015, has
been released in IRS Notice 2014-56.
▫ Adjusted applicable dollar amount is $2.08
Patient-Centered Outcomes Research
Institute (PCORI)
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▪ 1094-B,1095-B,1094-B and 1095-C are not required to be
filed for tax year ended 2014.
▪ In preparation for the first required filing (filing in 2016 for
2015), reporting entities may voluntarily file in 2015 for
2014.
Reminder
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▪ Providers of minimum essential coverage are required to report certain information regarding that coverage to the IRS and the individual on an annual basis.
▪ The purpose of the reporting requirement is to help the IRS enforce the individual mandate.
▪ Reporting entities will generally use Form 1095-B and the related transmittal, Form 1094-B, to meet their filing requirements.
▪ The IRS has released draft instructions for Forms 1094-B and 1095-B available at www.irs.gov/pub/irs-dft/i109495b--dft.pdf.
IRS Releases Draft Instructions for
Minimum Essential Coverage Reporting
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▪ Applicable large employers are required to annually report certain information about the health care coverage offered to their employees during a calendar year.
▪ The information helps the IRS enforce the employer mandate and to identify individuals ineligible for the premium assistance credit.
▪ Form 1095-C and the related transmittal, Form 1094-C, will be used to meet these reporting requirements.
▪ The IRS has released draft instructions for Forms 1094-C and 1095-C, available at www.irs.gov/pub/irs-dft/i109495c--dft.pdf.
IRS Releases Draft Instructions for
Applicable Large Employer Reporting
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▪ Hobby Lobby
▪ King v. Burwell
Court Cases
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▪ On June 30, 2014, the Supreme Court determined that the
mandate for certain contraceptive services to be provided as
part of a group health insurance plan violated the exercise of
religious freedom of closely held for-profit corporations (see
Sebelius v. Hobby Lobby Stores, Inc., et. al.; S.C. No. 13-354).
▪ In a split decision, the Court ruled that the mandate placed a
substantial burden on such employers under the Religious
Freedom Restoration Act of 1993 (RFRA). Furthermore, the
Court ruled that such benefits could be provided by another
means that would not violate the company owners' rights to the
exercise of their religious freedom.
Supreme Court Decision in Hobby Lobby
Case
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▪ The U.S. Supreme Court agreed to resolve the conflict on
whether premium tax credits under the Affordable Care Act
(ACA) are available in states that have a Health Insurance
Marketplace run by the federal government (King v.
Burwell, No. 14-114, cert. granted 11/7/14).
▪ On the same day in July of this year, two circuit courts
came to opposite conclusions on whether premium tax
credits available under IRC Sec. 36B should be allowed by
individuals in federally facilitated marketplaces or limited to
state-run exchange buyers.
Supreme Court to Review Issue of ACA
Marketplace Subsidies
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▪ Currently, only 14 states have established their own
marketplace; the federal government has established a
marketplace for 36 states.
▪ If the subsidies or tax credits are limited to state-run
exchanges, many individuals will see an increase in their
health insurance premiums and employers in states
without the availability of premium tax credits would not be
subject to the employer shared responsibility penalty.
▪ Therefore, the Supreme Court's decision may ultimately
determine the viability of the ACA.
Supreme Court to Review Issue of ACA
Marketplace Subsidies
68 ksmcpa.com
Prepare Now to Survive
a Sales Tax Audit
November 19, 2014
Tim Conrad, JD
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Comparison of Indiana’s Revenue Sources
39.06%
52.64%
8.30%
1997
46.99%
41.11%
11.90%
2013
Sales Tax
Income Tax
Other
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Sales Tax Overview
▪ A tax on retail sales of tangible personal property (TPP) & certain services
▪ Joint and several liability for seller & buyer
▪ Officer responsibility
▪ General rules:▫ For sales of TPP/enumerated services – Collect tax
or receive an exemption certificate
▫ For purchases of TPP/enumerated services –Either pay sales tax, remit use tax, or apply an exemption
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Why Target Sales Tax?
Sales Tax State Income Tax
High noncompliance rate – audits
generally result in an assessment
Lower noncompliance rate – audits
often result in a no-change result
Can go after seller or buyer Can only go after taxpayer
Errors multiplied by sales tax rate Errors often apportioned, offset by
losses, etc.
Certain industries are easy targets Harder for states to identify
noncompliance
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▪ The ability to provide documentation is the best
defense in an audit
▪ Understand exemptions and how they relate to
your business
▪ Try to partner with auditors to achieve common
sense outcomes
Once Selected for Audit
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1. Have a use tax accrual system in place
2. Understand what you are selling
3. Review your nexus exposure
4. Collect properly completed exemption
certificates at the time of the transaction
5. Apply exemptions correctly
Top Five Things To Do Before You Are
Selected for Audit
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▪ Use tax – A complementary tax imposed on
untaxed transactions if the underlying property
is used, stored, or consumed in-state
▫ E.g. laptop purchased online
▪ Many businesses fail to build an accrual system
▪ Keep detailed schedules of items with use tax
accrued
#1 Have a Use Tax Accrual System in
Place
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▪ You need to understand the sales tax
consequences of what you are selling
▪ Remember that different states may take
different positions
▪ Risk of aggressive positions
▪ Difficult to go back and collect tax from
customers
#2 Understand What You Are Selling
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▪ Sales: “Our IT solution services deliver value to your bottom-line. We’re synergizing the cloud by repurposing big data!”
▪ General Counsel: “We’re granting a non-transferable software license. Wherefore, I will write that into the aforementioned contract.”
▪ Finance: “I’ll invoice them $100,000 for ‘1st
Installment – IT Contract’ right after I golf with Kevin Sullivan.”
Get on the Same Page
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▪ Nexus – Generally, sufficient physical presence
required before a state can require a company to
collect sales tax
▪ Sales tax nexus is different than income tax nexus
▪ Very easy to create
▪ Ignoring can lead to serious liabilities
▫ Unlimited statute of limitations
▫ Out-of-pocket costs that could have been passed on to
customers
#3 Review Your Nexus Exposure
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▪ If you are selling taxable TPP, either collect tax
or collect an exemption certificate
▪ Exemption certificates are the most important
documentation in most audits
▪ Ensure that they are filled out properly and
signed
▪ Much more difficult to go back and collect
exemption certificates
#4 Collect Properly Completed Exemption
Certificates at the Time of the Transaction
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▪ States often have exemptions for
manufacturing, transportation, R&D, etc.
▪ Understand the scope of the exemption and
apply to your business’s facts
▪ Example – Indiana’s “double direct” test for
manufacturers only applies if:
▫ Product is directly used by manufacturer
▫ In the direct production, manufacture, etc. of TPP
#5 Apply Exemptions Correctly
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▪ Sales tax is a common target on audit
▪ There are recurring issues that we see
companies struggle with
▪ Gaining knowledge and building systems today
will reduce future exposure
Takeaways
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Federal Tax Update
November 19, 2014
Jolaine L. Hill, CPA
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▪ Rev. Proc. 2014-55
▪ Removes requirement to file election (Form 8891) to defer reporting of income earned by a Canadian retirement plan prior to the distribution of that income for eligible individuals. Election is treated as made as of the first year in which the individual would have been entitled to it.
▪ Election remains in effect until the year in which a final distribution is made from the plan unless the election is revoked with the consent of the Commissioner.
▪ If a prior election exists and the individual would like it revoked, Commissioner consent is required.
Canadian Retirement Plans Annual
Reporting
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▪ Generally effective for taxable years beginning on or after January 1, 1996
▪ Form 8891 no longer required as of December 31, 2014
▪ Form 3520 no longer required effective for taxable years beginning on or after January 1, 2003
▪ Custodians no longer required to file Form 3520-A effective for taxable years beginning on or after January 1, 2003
▪ Does not affect reporting requirements under 6038D or any other provision of US Law, including FinCEN Form 114 (FBAR)
Canadian Retirement Plans Annual
Reporting
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▪ Distributions of income not previously taxed in the US
must be included in gross income in the year in which the
distribution is made
Canadian Retirement Plans Annual
Reporting
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▪ Frank Aragona Trust, Paul Aragona, Executive Trustee v. Commissioner, 142 TC No. 9
▪ Facts:
▫ Trusts own real estate properties and is involved in holding real estate and developing real estate
▫ 3 of the 6 trustees, including Paul Aragona, work for an LLC that is wholly owned by the Trust
▫ The LLC manages the Trust’s rental real estate properties
▫ Trust conducted some rental real estate activities directly, some through wholly owned entities and some through entities where the Trust owned a majority interest
Trusts and Real Estate Professional PAL
Rules
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▪ Issue: Can a trust be a “qualifying taxpayer” to qualify as a real estate professional for Code Sec. 469(c)(7) – real estate professional passive activity loss rules?
▪ Code Sec. 469(c)(7) tests
▫ ½ of the “personal services” performed in trades or businesses by the taxpayer during the tax year is performed in real property trades or businesses in which the taxpayer materially participates and
▫ The taxpayer performs more than 750 hours of “services” during the year in real property trades or businesses in which the taxpayer materially participates
Trusts and Real Estate Professional PAL
Rules
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▪ Analysis:
▫ IRS argued that an individual must perform the service and cited legislative history indicating that the rule applies to individuals and closely held C-Corporations
▫ Court examined relationship between trustee and trust, language used in other similar code sections to specifically limit the applicability to “natural persons”, and found legislative history unconvincing
▪ Conclusion: Services rendered by trustee (an individual) to a trade or business as part of their trustee duties can be considered work performed by an individual in connection with a trade or business, satisfying the requirements of Code Sec. 469(c)(7)
Trusts and Real Estate Professional PAL
Rules
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▪ CCA 201427016
▪ Rental activities are per se passive
▪ Real estate professionals who perform enough hours in all real estate activities can qualify for an exception
▫ Perform more than ½ of all personal services in real property trades or businesses in which taxpayer materially participates
▫ Perform more than 750 hours of service in real property trades or businesses in which taxpayer materially participates
▪ Unless an election is made to treat all rental real estate interests as one activity, the taxpayer must also materially participate in each individual rental activity by satisfying one of seven tests from Reg §1.469-5T(a)
Real Estate Professional: Aggregating
Activities
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▪ CCA 201436049
▪ Facts
▫ LLC is a management company who serves as investment
manager for managed funds, which are a family of
investment partnerships
▫ Managed funds carry on extensive trading and investing
activities
▫ Managed funds pay quarterly management fees to LLC
▫ Members of LLC provide wide range of professional services
for LLC
Payments Made to Members of LLCs
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▪ Issue: to what extent is distributive income to members of
an LLC self-employment earnings
▪ A limited partner’s interest is akin to that of a passive
investor. Passive investors do not take part in the conduct
of the activity. Rev. Rul. 69-184 states that a partner who
devotes his time to the conduct of the partnership’s
business or who provides services to the partnership is a
self-employed individual, not an employee.
Payments Made to Members of LLCs
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▪ Analysis: each of the members worked for the firm full
time, provided investment related services, and received
distributive shares of firm income, including ordinary
income based on management fees and units held
Conclusion: amounts earned by the members of the LLC
were self-employment compensation
Payments Made to Members of LLCs
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▪ IRS Advice Memorandum AM-2014-003
▪ Code Sec. 465 At-Risk rules limit loss deduction to the
extent that taxpayer is economically or actually at risk
▫ Includes the taxpayer’s share of any qualified nonrecourse
financing secured by real property used in the activity
▫ Not at risk with respect to any partnership liability to the
extent the partner would be entitled to contributions from
other partners if required to pay the partnership’s creditor
At-Risk Amount for LLC Member
Guarantees
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▪ In an LLC, all members have limited liability with respect to LLC debt. Unless there is a co-guarantor or similar agreements, an LLC member guaranteeing debt becomes personally liable for that debt, assuming:▫ No right to contribution or reimbursement from other members
▫ Member not otherwise protected against loss
▫ Guarantee is bona fide and enforceable by creditors under local law
▪ Debt that would otherwise be qualified nonrecourse debt ceases to be qualified if guaranteed by a member of an LLC treated as a partnership▫ If the debt no longer qualifies as qualified nonrecourse debt, it is no longer
included for non-guaranteeing members, which may affect at-risk amount
▪ If the LLC is a single member disregarded entity, the member’s at-risk amount is not generally affected by guarantees if the debt is qualified nonrecourse financing
At-Risk Amount for LLC Member
Guarantees
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▪ Alvin L. Bobrow v Commissioner, TC Memo 2014-21
▫ Series of transfers from/to IRAs
▫ Tax Court ruled one rollover per year rule applies to all of a taxpayer’s IRAs, not each IRA separately
▪ IRS Publication 590 allows for one tax-free rollover from a traditional IRA per year on an IRA-by-IRA basis
▪ Subsequent developments
▫ Revised IRS Publication 590-A issues
▫ Announcement 2014-32 states that Bobrow interpretation applies for distributions that occur on or after January 1, 2015
IRA Rollover Rules
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▪ Clark v. Rameker, 2014-1 USTC ¶ 50,317
▪ Issue: Petitioner in Chapter 7 bankruptcy sought to
exclude approximately $300,000 in an inherited IRA from
the bankruptcy estate using the “retirement funds”
exception
▪ Inherited IRAs are not protected as retirement funds in
bankruptcy
Inherited IRAs and Bankruptcy
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▪ Three characteristics that are lacking:
▫ Holder of an inherited IRA may never invest additional funds
▫ Holder of an inherited IRA is required to withdraw money
from such accounts, regardless of how far the individual is
from retirement
▫ Holder of an inherited IRA may withdraw the entire balance
of the account at any time, for any purpose, without penalty
Inherited IRAs and Bankruptcy
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▪ Rev Proc 2014-11
▪ Applies to tax-exempt organizations whose tax-exempt status has been automatically revoked for failure to file required annual returns for three consecutive years and had not previously had tax-exempt status revoked
▪ If filing for reinstatement within 15 months of the later of revocation letter or organization name posted on IRS website as revoked:▫ For small organizations (eligible to file 990-EZ or 990-N): submit
application and user fee, including reasonable cause statement (for at least one of three years at issue). If 990-EZ was required, must paper file returns. No failure to file penalty will be assessed if application is approved. For 990-N filers, no return is required if the application is approved.
Automatic Revocation of Tax-Exempt
Status: Retroactive Reinstatement
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▫ For other than small organizations: submit application and user fee, including reasonable cause statement (for at least one of three years at issue), and paper files annual returns for the years in question. No failure to file penalty will be assessed assuming application is approved
▪ If more than 15 months after revocation:▫ Complete application and submit with user fee
▫ File required returns
▫ Reasonable cause must be established for all years
▪ Reinstatement from Post-mark date – application and user fee required only
▪ Subsequent Automatic Revocations – may follow same steps as above, with the exception of 990-EZ/990-N filers who must use one of the other options mentioned above
Automatic Revocation of Tax-Exempt
Status: Retroactive Reinstatement
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▪ Rev Proc 2014-40
▪ Form 1023-EZ
▪ Available for certain US organizations with assets of $250,000
or less and annual gross receipts of $50,000 or less
▪ Section 2 of the Rev Proc lists 25 types of organizations not
eligible
▪ If a Form 1023 has already been submitted, the service will
reject the form 1023-EZ and refund any user fee that was paid
with it
▪ Determination is usually effective as of the date of formation
Streamlined Application for Exempt Status
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▪ US v Quality Stores, Inc., et al., 2014-1, USTC ¶ 50,228
▪ Severance payments were made to terminated employees under one of two plans:
▫ Pre-Petition Severance Plan – based severance pay on job grade and management level
▫ Post-Petition Severance Plan – designed to encourage employees to defer job searches and dedicate efforts and attention to the company by assuring them that they would receive severance pay if their jobs were eliminated
▪ Initially withheld income and FICA tax, then asked for a refund of the FICA
FICA and Severance Payments
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▪ Traditional Supplemental Unemployment Benefit (SUB)
payments are linked to the receipt of state unemployment
benefits and are exempt from income tax withholding as
well as FICA taxation
▪ SUB payments made to terminated employees are
remuneration for employment and subject to income tax
withholding
▪ The Supreme Court did not separately address this FICA
withholding issue since they determined that the SUB
payments were wages for income tax withholding
FICA and Severance Payments
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▪ Prop Reg Sec 1.752-2, 1.752-4 and 1.752-5
▪ In general, an increase in a partner’s share of the
partnership liabilities is viewed as a contribution of money
by the partner to the partnership
▪ Conversely, a decrease is considered to be a distribution
of money to the partner by the partnership
Prop Regs Relating to Uncertain
Partnership Liabilities
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▪ Proposed Regs would
▫ Provide guidance as to when and to what extent a partner is considered to bear economic risk when there is overlapping economic risk of loss.
- Partner must maintain commercially reasonable net worth and provide commercially reasonable documentation of such
- Payment obligation term must not end prior to the term of the liability
- Payment obligation must be reduced by any reimbursement from another partner or the partnership
▫ Clarify a number of issues arising from a partner making a nonrecourse loan to the partnership when the partner is related to another partner in the partnership – partner’s share of profits would be based on partner’s liquidation value percentage
Prop Regs Relating to Uncertain
Partnership Liabilities
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▪ Hot assets – unrealized receivables and inventory items
▪ Code Sec. 751(b)
▫ Code Sec.751 enacted to prevent the use of a partnership to
convert potential ordinary income into capital gain
▫ Under Code Sec. 751(b), a partnership’s distribution to a partner is
taxable if the distribution changes the partner’s interest in the
partnership’s hot assets
▪ Proposed regs adopt hypothetical sale approach and would
require a revaluation if partnership distributes money or other
property to a partner for an interest in a partnership that owns
Code Sec. 751 property immediately after the distribution
Proposed Regs – Hot Assets
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Updated Foreign Withholding Rules
November 19, 2014
Katherine Malarsky, CPA
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One of the primary goals of FATCA includes requiring:
Foreign Financial institutions (FFI’s) and certain Non-Financial Foreign Entities (NFFE’s) to report specified information to U.S. tax authorities in order to avoid new withholding rules on U.S. source income.
• FFI’s include banks, hedge funds, pension funds, insurance companies that have policies with a cash value (generally life), etc.
The main method of enforcing this goal is additional withholding rules imposed on U.S. persons (individuals or entities) making payments of U.S. source income to an FFI or NFFE.
FATCA Complexity
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Impact on U.S. Payors Making
Payments to Foreign Payees
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▪ There are different withholding rates based on the type of transactions involved. ▫ 30% withholding under §1441 (Individuals) and §1442 (Corporations) on
FDAP income
▫ Highest statutory rate (currently 39.6%) for §1446 withholding on foreign partner’s share of U.S. sourced income
▫ 30% withholding under §1471 on payments to nonparticipating FFI’s
▫ 30% withholding under §1472 on payments to passive NFFE that does not report its substantial U.S. owners
▪ Major goal with withholding – collect U.S. tax owed on U.S. source income earned by foreign persons that is not effectively connected with a U.S. trade or business. ▫ Once the money leaves the U.S., it becomes difficult to collect.
▫ This is the government’s method of collecting money up front!
What is Withholding?
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▪ New FATCA rule- generally a withholding agent is required
to withhold 30% on a withholdable payment made to a
foreign entity.
▫ Withholdable payment – a payment of U.S. source income
that is fixed or determinable, annual, or periodic income or
gross proceeds from the sale or disposition of property that
can produce U.S. source interest or dividend income.
Need to be able to determine (and document!) if you are
paying a foreign or U.S. entity
What are the FATCA Withholding Rules?
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▪ The person making the payment is considered to be the withholding agent and could be personally liable for any tax required to be withheld, independent of the tax liability of the foreign person for whom the payment is made.
▪ You are a withholding agent if you are a U.S. or foreign person that has control of any item of income of a foreign person that is subject to withholding. A withholding agent may be (but is not limited to):
▫ Individual (making payments with regards to a trade or business activity)
▫ Corporation
▫ Partnership
▫ Trust
▫ Foreign partnership
Who or What is the Withholding Agent?
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▪ Withholding is required at the time you make a payment of
U.S. source income to a foreign person/entity.
▪ A payment is made if that foreign person/entity realizes
income (whether there is an actual transfer of cash or
other property).
▪ This includes intercompany transactions!
When to Withhold
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▪ New accounts with new vendors, suppliers, and service providers if the accounts are established after 6/30/14,
▪ New obligations with old vendors (i.e. new contracts, new statements of works, or accounts) that originated after 6/30/14, or
▪ Preexisting arrangements that are materially modified after 6/30/14.
▪ Exempted payments include: Grandfathered obligations (obligations outstanding on 7/1/14) and “specified nonfinancial payments”
Which Payments Apply for FATCA
Purposes?
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U.S. Person versus Foreign Person
U.S. Person Sec. 7701(a)(1)-(5),(30)
Yes
U.S. Citizen or ResidentDomestic CorporationDomestic PartnershipDomestic Estate/Trust
Non-Resident AlienForeign CorporationForeign PartnershipForeign Estate/Trust
No
U.S. Taxes Worldwide Income
U.S. Generally Taxes U.S. Source Income
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▪ In the past:
▫ When paying a foreign individual or entity, should have had a W-8BEN on file to document their “foreign” status.
- W-8BEN was a 1 page form
▫ If paying a U.S. individual, should have a W-9 on file.
▪ FATCA created the FORM W-8BEN-E
▫ When paying a foreign ENTITY, need to have Form W-8BEN-E on file.
▫ This form is now 8 pages long; need to document foreign status AND FATCA status.
▫ All W-8BEN’s that were previously completed for entities must be replaced/updated.
What Do I Need to Do to Document the
Status of My Payees for FATCA?
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W-8 BEN-E Example
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How Do I Determine the FATCA Status?
Is the payment to an FFI or NFFE?
Is the FFI a participating FFI, nonparticipating FFI, or deemed compliant FFI?
Has the NFFE reported its
substantial U.S. owners directly to
the IRS or provided me with that information?
FFI NFFE
Passive
Document status, but FATCA
withholding is not required.
Active
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▪ Excepted NFFE’s: Publicly traded companies and their affiliates, certain entities organized in U.S. territories, active NFFE’s, and certain non-financial entities (holding companies, treasury centers, not-for profit organizations, etc.)▫ Active NFFE: entity must have less than 50% of its gross income
for the preceding calendar year is passive income and less than 50% of its assets for the preceding calendar year are passive assets.
▪ Passive NFFE: an NFFE that isn’t excepted or active. ▫ Direct Reporting NFFE: Passive NFFE that elects to report certain
information about its direct or indirect substantial U.S. owners to the IRS on Form 8966 instead of providing it to the withholding agents (which will then have to provide it to the IRS). It will then be treated as an excepted NFFE.
Categories of NFFE’s
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▪ Exempt FFI’s: Most governmental entities, most non-profit organizations, certain
small or local financial institution, certain retirement entities.
▪ Participating FFI: These are FFI’s that have registered with the IRS online or through
filing Form 8957 and appear on the official FFI list with a valid identification number.
▪ Nonparticipating FFI: These are FFI’s that do not register with the IRS and are
subject to a 30% withholding tax on all withholdable payments from U.S. sources.
▪ Deemed Compliant FFI: These are entities that are excluded from the definition of
FFI’s, including certain holding companies that are engaged in non-financial
business, foreign startup entities (first 24 months of organization), non-financial
entities that are liquidating or emerging from bankruptcy, etc.
▫ Deemed compliant FFI’s must still apply to the IRS for deemed compliant status,
obtain an identification number, and certify every three years that it meets the
requirements for such treatment.
Categories of FFI’s
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▪ The treatment of an FFI in a jurisdiction with an intergovernmental agreement (IGA) in effect may differ from the standard registration process.
▪ There are 2 types of IGA countries:
▫ Model 1 – FFI’s in these jurisdictions will report information on U.S. account holders directly to their national tax authorities, who will in turn report to the IRS. Need to register as a deemed compliant FFI.
▫ Model 2 – FFI’s will report information directly to the IRS, rather than their local jurisdictions. Need to register as a participating FFI.
What About All These Country
Agreements?
122 ksmcpa.com
FATCA – IGA Countries and AgreementsModel 1Australia ItalyBelgium JamaicaBrazil Luxembourg
British Virgin Islands MaltaCanada MexicoCayman Islands Netherlands
Czech Republic New ZealandDenmark Norway
Finland PolandFrance South AfricaGermany SpainIreland SwedenIsrael UK
Model 2
Austria
Bermuda
Chile
Japan
Switzerland
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▪ A foreign insurance company that has made a §953(d) election and is registered as an insurance company with a state will be considered to be a U.S. person and does not need to register for FATCA purposes as a foreign entity.
▪ If it has made a §953(d) election but is not registered with a state and does not have any cash value policies or annuity contracts, it will be considered a U.S. person and does not need to register for FATCA purposes as a foreign entity.
▫ If the insurance company does have cash value insurance or annuity contracts, they do not need to turn over the account names for any policy or contract that has an aggregate balance or value that is $50,000 or less. They may still need to register as an FFI.
Insurance Companies
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▪ If you have an existing form W-8BEN that you have not
updated, you can still rely on it to determine if the payee is
foreign or not. However, you need to also determine their
FATCA status. In order to do that, you need detailed
documentary evidence (articles of incorporation, letters for
foreign government agency websites, opinions from
attorneys, etc.).
▫ Now is the time to start getting new W-8BEN-E’s in place!
▫ The W-8BEN-E should be in place BEFORE payments are
made!
Using Existing Forms
125 ksmcpa.com
When Do I Need to Withhold?
Making Payments to FFI’s
▪ If making a payment to a participating FFI or a deemed compliant FFI, you need to have received the W-8BEN-E (which includes their GIIN number and indicates their status). For participating FFI’s, check on the official list published by the Treasury to confirm their status.
▪ If making a payment to a nonparticipating FFI, withhold 30% and remit it to the IRS.
Making Payments to NFFE’s▪ If making a payment to an active
NFFE, excepted NFFE, or direct reporting NFFE, you need to receive the W-8BEN-E (which indicates their status).
▪ If making a payment to a passive NFFE, you need to have received the W-8BEN-E (which includes their GIIN number and a listing of their substantial U.S. owners). If the substantial U.S. owners are not listed, you must withhold 30% and remit it to the IRS.
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▪ The IRS issued Notice 2014-33 which basically said that
they are not going to be super harsh immediately on
enforcing these rules – they want to see that a
“reasonable effort” has been made to identify the payees.
▪ The IRS is viewing calendar years 2014 and 2015 as a
transition period.
▪ Should work on gathering this data as quickly as possible!
It is important to begin obtaining W-8BEN-E forms NOW to
document FATCA withholding exemptions.
What Do I Really Need to Do Right Now to
Comply With FATCA?
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▪ Other than the exemptions we have discussed already,
there are currently no other exemptions from FATCA
withholding.
▫ Treaties and other statutory exemptions do not apply!
▪ Once we document the applicable FATCA exemption, then
we will need to apply the long standing withholding rules
under §§1441-1446.
▫ There are treaty and statutory exemptions that DO apply to
§§1441-1446 withholding rules that would still be claimed on
the Form W-8 (whichever form in the series applies).
Withholding Exemptions
128 ksmcpa.com
Impact on U.S. Taxpayers That Have
Foreign Subsidiaries
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▪ If there is an NFFE or FFI within your consolidated group, they need to make sure that they become compliant with FATCA.
▪ FFI’s need to register and get on the monthly IRS list.
▫ If they are in a Model 1 country, they must do so by the end of the year.
▫ If they are in a Model 2 country or a country with no agreement, they need to get registered as soon as possible.
▪ Passive NFFE’s need to determine if they are going to be direct reporting NFFE’s (and report their substantial U.S. owners directly) or if they are going to include that information on their W-8BEN-E and provide it to their banks for reporting.
▫ They must still register and get a GIIN number.
Impact of Foreign Subsidiaries
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▪ FFI’s and passive NFFE’s must register on the FATCA
Registration Website and obtain a Global Intermediary
Number (GIIN) from the IRS.
▫ As a part of registration, FFI’s must also sign an FFI
agreement, where the FFI agrees to report the IRS
information related to U.S. account holders.
▪ The IRS will publish a list of registered and approved FFI’s
and their GIIN’s every month.
▫ Note – NFFE’s will NOT be included on this list!
What is the General Process for FFI’s and
Passive NFFE’s to Become Compliant?
132 ksmcpa.com
Historic Rehabilitation Tax Credit
Safe Harbor
November 19, 2014
John Estridge, CPA
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▪ Tax Credit Industry Background
▪ Historic Boardwalk Case
▪ Safe Harbor – Revenue Procedure 2014-12
▪ Key Takeaways
Agenda
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▪ Common Federal Tax Credits
▫ Historic Rehabilitation Tax Credit (HRTC) - §47
▫ New Market Tax Credit - §45D
▪ Common State Tax Credits - Indiana
▫ CReED Credit
- Community Revitalization Enhancement District
▫ Dinosaur/Dino Credit
- Industrial Recovery Tax Credit
Tax Credit Industry Background
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▪ Historic Rehabilitation Tax Credit
▫ First appearance: 1978
▫ Congressional incentive to rehabilitate historic buildings
- National Register of Historic Places
▫ Credit equals 20% of Qualified Rehabilitation Expenditures
(QREs)
Tax Credit Industry Background
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▪ The Economics
▫ Real estate developers and government entities typically
don’t need/want tax credits
▫ Investors with perennial net income typically do need/want
tax credits (banks, insurance companies, etc.)
▪ Can Tax Credits be Sold?
▫ No!
▫ They are allocated to bona fide partners of partnerships
Tax Credit Industry Background
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▪ What went wrong?
▫ From 1978 to 2007, partnership syndication of tax credits
received little attention from the IRS
▫ Investors and practitioners let their guard down
- Risk elimination
- “Sale of tax credits” language became commonplace
▪ IRS Response
▫ March 2007 – Historic Boardwalk
▫ January 2008 – Virginia Historic
Tax Credit Industry Background
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▪ Historic Boardwalk Hall in Atlantic City, New Jersey
▫ Site of Miss America Pageant
▪ Players
▫ New Jersey Sports and Exposition Authority (NJSEA)
▫ Pitney Bowes Corporation
Historic Boardwalk
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▪ Bad Facts:
▫ Offering memorandum
▫ Capital contribution amount of Pitney Bowes
▫ Capital contribution timing
▫ “Participating” preferred interest
▫ NJSEA guarantees
▫ Guaranteed investment contract
Historic Boardwalk
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▪ Good Facts:
Historic Boardwalk
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▪ IRS Arguments:
▫ Sham partnership under the economic substance doctrine
▫ Pitney Bowes was not a “bona fide partner”
▪ Tax Court – IRS Loses
▪ Court of Appeals (Third Circuit) – IRS Wins
Historic Boardwalk
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▪ Key Phrases
▫ IRS:
- Pitney Bowes had “no meaningful stake in the success or failure of the enterprise,” i.e., it had no “meaningful downside risk” and no “upside potential” with respect to Boardwalk Hall.
▫ Judges:
- “You can’t sell tax credits right?”
- “One could say, looking at this, that all risk from the transaction has effectively been taken out.”
- “Why should the ax fall here?”
- IRS: “This particular case is particularly egregious.”
Historic Boardwalk
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▪ Key Phrases
▫ Judges:
- “Virginia Historic’s determination that the limited partner
investors did not face the ‘entrepreneurial risks of partnership
operations,’ [is] …highly relevant to the question of
whether…[Pitney Bowes] had a true interest in profit and
loss….”
- “The answer to that question turns on an assessment of risk
participation.”
Historic Boardwalk
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▪ Aftermath
▫ Transactions stopped and the industry anxiously awaited
further guidance from the IRS
- August 2012 –Third Circuit issued 85-page opinion reversing
the Tax Court decision
- October 2012 – IRS releases field memo applying its Historic
Boardwalk arguments to a generalized set of facts
- December 30, 2013 – IRS issues Safe Harbor
- Rev. Proc. 2014-12
Historic Boardwalk
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▪ IRS will not challenge partnership allocations if
arrangements abide by the safe harbor
▪ Applies only to HRTC deals closed on or after 12/30/13
▪ No safe harbor available for deals involving state credits
(Indiana: CReED, Dino)
▪ Several categories of safe harbor requirements
Safe Harbor - Revenue Procedure 2014-12
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▪ Partners’ Partnership Interests
▫ Developer’s Minimum Interest: 1%
▫ Investor’s Minimum Interest: 5%
- 99/1 Pre-Flip; 5/95 Post-Flip
Safe Harbor - Revenue Procedure 2014-12
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▪ Investor Minimum Contribution
▫ At least 20% of total expected contribution before property is
placed in service
▫ At least 75% of total expected contribution must be fixed in
amount before property is placed in service
Safe Harbor - Revenue Procedure 2014-12
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▪ Exit Strategy
▫ Neither the developer nor the partnership may have a call
option to acquire the investor’s interest, even at FMV
▫ Investor may not have a put option to sell its interest at a
price greater than the FMV
Safe Harbor - Revenue Procedure 2014-12
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▪ Guarantees
▫ Permissible vs. Impermissible guarantees
▫ Impermissible to guarantee:
- the investor’s ability to claim the credits, cash equivalent of the
credits, or repayment of capital contributions due to inability to
claim the credits
- the investor’s exit at anything other than FMV
- Payment of any investor costs associated with an IRS challenge
Safe Harbor - Revenue Procedure 2014-12
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▪ Planning in a Post-Historic Boardwalk World
▫ Investors are seeking:
- Tax opinions of structures’ compliance with safe harbor
- Third party appraisals of master leases as “market”
▫ Some investors are willing to operate outside of the safe
harbor, desiring prior economic arrangements
Key Takeaways
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▪ Documentation and emails
▫ “Allocating tax credits” instead of “selling tax credits”
▪ All partners of the partnership must be “bona fide”
▫ Meaningful downside risk
▫ Meaningful upside potential
▫ Share in the entrepreneurial risks of partnership operations
Key Takeaways
153 ksmcpa.com
Private Foundations:
Self-Dealing and Taxable Expenditures
November 19, 2014
Victoria Snyder, CPA
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▪ Self-dealing consists of the following acts between a
disqualified person and the foundation:
▫ Sale/exchange/leasing of property
▫ Lending of money or other extension of credit
▫ Furnishing of goods, services or facilities
▫ Payment of compensation (or payment or reimbursement of
expenses) by the foundation to a disqualified person
▫ Transfer to, or use by or for the benefit of, a disqualified
person of the income or assets of the foundation
▫ Agree to pay money or property to a government official
Self-Dealing (Section 4941)
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▪ Disqualified persons
▫ Substantial contributor
▫ Foundation manager
▫ Person who owns more than 20% of an organization that is a substantial contributor
▫ Family members of an individual who is a substantial contributor, a foundation manager or a 20% owner
- Spouse (can be same-sex if legally married under state law)
- Ancestor
- Child, grandchild, great-grandchild
- Spouse of child, grandchild, great-grandchild
Self-Dealing – Key Definitions
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▪ Substantial Contributor
▫ Any person whose contributions or bequests total more than
$5,000 and are more than 2% of the total contributions and
bequests received by the foundation through the close of its
tax year. In the case of a trust, the term “substantial
contributor” also means the creator of the trust.
▫ The term “person” includes individuals, trusts, estates,
partnerships, associations, corporations, and other exempt
organizations.
Self-Dealing – Key Definitions
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▪ Foundation Manager
▫ A foundation manager is an officer, director, or trustee of a
foundation, or an individual who has powers similar to those.
The term may also include employees of the foundation who
have the authority or responsibility with respect to a
particular act (or failure to act).
Self-Dealing – Key Definitions
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▪ Exceptions to self-dealing include:▫ Lending of money by disqualified person to the foundation without
interest or other charge and proceeds of the loan are usedexclusively for purposes specified in Section 501(c)(3)
▫ Furnishing of goods, services, or facilities by a disqualified person to the foundation if furnished without charge and used exclusivelyfor purposes specified in Section 501(c)(3)
▫ Furnishing of goods, services, or facilities by the foundation to a disqualified person if such furnishing is made on a basis no more favorable than that on which such goods, services or facilities are made available to the general public
▫ Payment of compensation (and the payment or reimbursement of expenses) by the foundation to a disqualified person for personal services if the amounts are reasonable and necessary in carrying out the exempt purpose and amounts are not excessive
Self-Dealing – Exceptions
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▪ The following activities can be a problem:
▫ Distributions related to charitable golf outings
▫ Distributions where membership benefits are received
▫ Other quid pro quo amounts received
▫ The foundation satisfying personal pledges of a disqualified
person
▫ Dinner Events?
Self-Dealing – Common Traps
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▪ How to avoid potential self-dealing issues
▫ Make the contribution personally (i.e., non-foundation assets)
▫ Do not accept any return benefits
▫ “How would this look if it was reported in the local
newspaper?”
Self-Dealing – Avoid It!
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▪ Tax On The Disqualified Person
▫ The initial tax is 10% of the amount involved each year until
“corrected”
▫ If not corrected, could be an additional 200% tax
▪ Tax on Foundation Manager
▫ Tax is 5% of amount involved, not to exceed $20,000
▫ Could be additional 50% tax imposed if the foundation
manager doesn’t correct, not to exceed $20,000
▫ Tax is a joint and several liability among foundation
managers
Self-Dealing – Taxes Imposed
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501(c)(3)
Private foundation
Operating
Exempt operating
Nonoperating
Public charity
509(a)(1) 509(a)(2)
509(a)(3) 509(a)(4)
An Overview of §501(c)(3) Entities
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▪ Important issue whenever there is an amount paid to an organization other than a Section 509(a)(1), 509(a)(2) or certain 509(a)(3) organization
▫ “Good” section 509(a)(3) organization (expenditure responsibility not required)
- Type I
- Type II
- Type III functionally integrated
▫ “Bad” Section 509(a)(3) organization (expenditure responsibility required)
- Type III nonfunctionally integrated
- Control issues
Taxable Expenditures (Section 4945)
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▪ New for 2013, the IRS has assigned codes and foundations
must indicate the status of each grantee
▪ NC - Non-charity – not a section §501(c)(3) entity
▪ PF - Private non-operating foundation
▪ POF - Private operating foundation, other than EOF
▪ EOF - Exempt operating foundation
▪ PC - Public charity – §509(a)(1) or (2)
▪ SO-DP - Type I, type II, type III functionally integrated
supporting organization where disqualified person controls the
supporting organization or the organization the supporting
organization supports – §§ 509(a)(3) and 4942(g)(4)
Identify Grantee Status
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▪ SO I - Type I supporting organization other than SO-DP –§§509(a)(3) and 509(a)(3)(B)(i)
▪ SO II - Type II supporting organization other than SO-DP –§§ 509(a)(3) and 509(a)(3)(B)(ii)
▪ SO III FI - Functionally integrated type III supporting organization other than SO-DP – §§509(a)(3), 509(a)(3)(B)(iii), and 4943(f)(5)(B)
▪ SO III NFI - Non-functionally integrated type III supporting organization – §§509(a)(3), 509(a)(3)(B)(iii), and 4943(f)(5)(B)
▪ TPS - Testing for public safety organization – §509(a)(4)
Identify Grantee Status
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▪ Civic leagues
▪ Labor organizations
▪ Business leagues, chambers of commerce
▪ Social clubs
▪ Fraternal societies that operate under the lodge system
Groups that aren’t 501(c)(3) organizations
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▪ Regulations §1.509(a)-4, Notice 2006-109, and Rev. Proc. 2011-33 provide guidance on determining whether a grantee is a type I, type II, type III functionally integrated, or type III nonfunctionally integrated supporting organization.
▪ Resources
▫ IRS Publication 78
▫ Exempt Organization Select Check: apps.irs.gov/app/eos -–see if donations to group are tax-deductible
▫ GuideStar: www.guidestar.org – lists data on nonprofits, including Form 990 filings
▫ BNA Portfolio 456 and Family Foundation Handbook
Determining the Status
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170 ksmcpa.com
171 ksmcpa.com
172 ksmcpa.com
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▪ Expenditure responsibility:
▫ Pre-grant inquiry complete enough to give reasonable
person assurance grantee will use grant for proper purpose
▫ Need written and signed agreement before grant is made
▫ Grant spent solely for purpose which it was made
▫ Acquire and retain full and complete reports from grantee on
how funds were spent
▫ Make full and detailed reports with respect to expenditures to
the IRS
Taxable Expenditures – Detail Required
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▪ Tax on Foundation:
▫ 20% initial tax on amount involved in each taxable
expenditure
▫ Could be additional tax of 100% of amount involved if not
timely corrected
Taxable Expenditures – Taxes Imposed
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▪ Tax on Foundation Managers:
▫ 5% initial tax on taxable expenditures if foundation agreed to
make expenditure knowingly
▫ Could be additional tax of 50% on each taxable expenditure
if foundation manager does not timely correct
▫ Maximum initial tax collectible is $10,000 and maximum
additional tax of $20,000 for foundation managers
▫ Joint and several liability among foundation managers
Taxable Expenditures – Taxes Imposed
177 ksmcpa.com
Final Tangible Property Regulations
November 19, 2014
Christopher Bradburn, CPA
178 ksmcpa.com
Final Tangible Property Regulations
▪ Repair and maintenance
regulations
▪ “Cradle to Grave”
application to tangible
property
▫ Acquisition
▫ Use, maintenance,
improvement
▫ Disposal
Asset Management
ACQUISITION
REPAIRS/ MAINTENANCE
IMPROVEMENT
DISPOSAL
179 ksmcpa.com
Final Tangible Property Regulations
▪ 10 year IRS project
▪ 2 sets of final regulations
▪ 2 revenue procedures
▪ Mandatory for tax years
beginning after January 1,
2014 BUT are
retrospective in
application
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▪ Materials & supplies (Reg. 1.162-3)
▪ Repairs and maintenance (Reg. 1.162-4)
▪ Capital expenditures (Reg. 1.263(a)-1)
▪ Amounts paid for acquisition or production of tangible
property (Reg. 1.263(a)-2)
▪ Amounts paid for improvement of tangible property (Reg.
1.263(a)-3)
▪ Dispositions of tangible property (Reg. 1.168(i)-8)
Final Tangible Property Regulations
181 ksmcpa.com
Acquisition
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▪ Reg. 1.263(a)-1(f)
▪ If elected, taxpayer must treat qualifying expenditures the
same for book and tax
▪ Establishes written policy, maximum amounts and
disclosure to IRS
De Minimis Safe Harbor
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▪ Accounting policy in place January 1st of each year
▫ Must be written
▫ Must treat as an expense for book purposes –
- Amounts paid for property costing less than threshold; and
- Amounts paid with useful life ≤ 12 months from date use begins
▪ Renew annually (allows flexibility)
▪ Make election annually on tax return to align tax with book
De Minimis Safe Harbor
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▪ Applicable financial statement
▫ IRS wants third party judge of materiality
▫ Audit, SEC filing, statement filed with federal or state
government, statement filed with state agency
- Licensing/bonding filings
De Minimis Safe Harbor
185 ksmcpa.com
De Minimis Safe Harbor
▪ With Policy and with AFS
▫ $5,000 maximum
expenditure under safe
harbor
▫ Per item or invoice
▪ With Policy and without
AFS
▫ $500 maximum
expenditure under safe
harbor
▫ Per item or invoice
186 ksmcpa.com
De Minimis Safe Harbor
▪ Without written Policy and
without AFS
▫ $200 maximum
expenditure under safe
harbor
▫ Per item or invoice
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▪ Exclusions to deduction under safe harbor
▫ Amounts paid for inventory
▫ Amounts paid for land
▫ Amounts paid for rotable, temporary or emergency spare
parts when taxpayer elects capitalization
▫ Amounts paid for rotable or temporary spare parts where
taxpayer elects optional method of accounting
De Minimis Safe Harbor
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▪ Consider establishing separate G/L accounts for
deductions of property under safe harbor
▪ Consider “structured invoicing” with vendors
▫ Separate invoicing for goods versus services
▪ Allocate indirect acquisition costs using reasonable
method before testing for per item/per invoice qualification
▪ Modify expenditure threshold to suit business
▪ Consider debt covenants, other metrics impacted by
deduction
De Minimis Safe Harbor – Planning Points
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▪ De minimis safe harbor does not apply to personal
property tax
▪ Deducted assets are assessable and taxable
▪ Recommendation
▫ Maintain separate fixed asset records that include all
deducted assets
▫ Remove fixed assets from records when abandoned
▪ Expect auditors to be trained to ask for deductions under
safe harbor
De Minimis Safe Harbor and Personal
Property Tax
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▪ Defined
▫ Component parts not acquired as a unit of property
▫ Fuel, lubricants, water & other items expected to be
consumed within 12 months of first use
▫ Unit of property with useful life of 12 months or less
measured from first use
▫ Unit of property acquired or produced with cost ≤ $200
Materials and Supplies
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▪ Special types
▫ Rotable spare parts – acquired for installation on UOP,
removed, repaired/improved, the reinstalled
▫ Temporary spare parts – items used temporarily that do no
require repair/improvement after use
▫ Emergency spare parts – parts acquired for a specific UOP,
set aside/stored to avoid operational time loss
Materials and Supplies
192 ksmcpa.com
Incidental Materials and Supplies
▫ Carried on hand
▫ No record of consumption
▫ No physical count
maintained
▪ Deduct at time of
expenditure
193 ksmcpa.com
Non-Incidental Materials and Supplies
▫ Other than incidental M/S
▫ Track consumption
▫ Maintain physical count
▪ Deducted when first used
not when acquired
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▪ Apply de minimis safe harbor before application of M/S
rules
▪ Review treatment of M/S
▫ Have non-incidental M/S been deducted early?
▫ Have rotable, temporary, or emergency spare parts been
deducted but still in use?
- Consider election to capitalize and depreciate (Reg. 1.162-3(d))
- Optional rule for rotable or temporary spare parts (Reg. 1.162-
3(e))
Materials and Supplies – Planning Points
195 ksmcpa.com
Repairs, Maintenance and
Improvement
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▪ Unit of property (“UOP”) is the asset to which tests for
repair, maintenance, and improvement are applied
▫ Larger the UOP, greater likelihood of expenditure being
repair/maintenance rather than improvement
▪ Functional interdependence concept
▫ Placing in service of one component is dependent upon
placing in service a separate component
▪ Discrete or major function concept
▫ Specific task or process within a series of tasks or processes
Unit of Property
197 ksmcpa.com
Unit of Property
▪ Buildings and their
structural components
▫ HVAC systems
▫ Plumbing systems
▫ Electrical systems
▫ Escalators
▫ Elevators
▫ Fire protection
▫ Security system
▫ Gas distribution
198 ksmcpa.com
Unit of Property
▪ Property other than
buildings and structural
components
▫ Functional
interdependence
▫ Plant property –
successive or sequentially
positioned equipment that
performs a process
199 ksmcpa.com
The Bar Test
▪ Betterment
▪ Adaptation to different use
▪ Restoration
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▪ Corrects a material condition existing before acquisition or
which arose during production, whether taxpayer was
aware of the condition or not
▪ Results in material addition, expansion, extension or
increase in capacity (buildings)
▪ Results in material increase in productivity, efficiency,
strength, quality or output (equipment)
▫ Prolonged life removed as element of test
Betterment
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▪ Primarily applied to buildings
▪ Convert entire building, or space within building, to
different use/purpose
▫ Pharmacy space converted for use as medical clinic
Adaptation
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▪ Replacement of component of UOP where loss is
deducted (abandonment)
▪ Replacement of component of UOP where adjusted basis
of component is included in gain/loss calculation
▪ Correction of damage to UOP where basis adjustment is
required due to casualty loss
Restoration
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▪ Returns UOP to ordinarily efficient operating condition if deteriorated to state of disrepair and no longer functional
▪ Results in rebuilding to like-new condition after end of class life
▫ Like new is new, rebuilt, remanufactured or similar status under a regulatory program, or return to original manufacturer specifications
▫ Comprehensive maintenance program is not “like new”
▪ Replacement of part or parts that are major component (discrete/critical function) or substantial structural part (physical proportion) of UOP
Restoration
204 ksmcpa.com
How Much is Major or Substantial?
▪ Major or Substantial
▫ 100% of cooling
components
▫ 100% of electrical wiring
▫ 100% of toilets
▫ 100% of restroom fixtures
in hotel
▫ 100 of 300 windows
▫ Replacing all public area
flooring in hotel (40%)
▪ Not Major or Substantial
▫ 33% of heating units
▫ 30% of combined
heating/cooling units
▫ 30% of wiring
▫ 30% of toilets
▫ 100 of 300 windows
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▪ Applies to taxpayers with –
▫ Average gross receipts for prior 3 years less than or equal to
$10 million; and
▫ Unadjusted basis of UOP of $1 million or less
▪ May deduct expenditures if total repairs, maintenance and
improvements are less than 2% of cost of UOP, or $10,000
▪ Elected on tax return
Safe Harbor for Small Taxpayers
206 ksmcpa.com
Routine Maintenance Safe Harbors
▪ Buildings and structural
components
▫ Reasonable expectation to
perform at least 2X during
10 year period from in
service date
▪ Property other than
buildings
▫ Maintains ordinarily
efficient operating
condition
▫ Reasonable expectation to
perform at least 2X during
class life, from in service
date
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▪ Indicators of routine character – recurring nature, industry
practice, manufacturer recommendation, direct experience
▪ Maintenance and repairs to rotable or temporary spare parts is
covered under safe harbor (unless optional method used)
▪ Use of part that is better (e.g. due to technology advances) in
absence of comparable part is not betterment
▪ Property older that class life is still eligible for safe harbor
▪ No safe harbor for expenditures related to use prior to taking
ownership
Routine Maintenance Safe Harbors
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▪ Insure communication between maintenance/plant
personnel and accounting personnel
▫ Update documentation
▫ Review and identify routine maintenance tasks
▪ Consider engineering analysis and documentation of
discrete and major functions of plant equipment
▪ Consider election to capitalize repairs and maintenance for
tax purposes
▫ Made annually, irrevocable
Planning Points
209 ksmcpa.com
Disposition
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▪ Facts and circumstances analysis
▫ UOP definition does not apply
▪ Building is specifically defined to include structural
components
▪ If item is properly classified as land improvement or
personal property, the item is the asset
▪ Improvements or additions are separate assets
Determination of Asset Disposed
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▪ Disposal of only a portion of asset
▪ Election to take partial disposition is made by reporting
gain/loss on timely filed tax return
▪ Special rule on Audit
▫ If audit results in capitalization of previously deducted repair,
taxpayer may make partial disposition election
Partial Disposition Defined
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▪ If asset accounted for in a multiple asset account, any
reasonable method, consistently applied to all assets in
the account, may be used
▫ Unable to determine from records
▫ A building is a multiple asset account
▪ If a restoration, may discount replacement asset cost to
placed in service year using Producer Price Index for
Finished Goods
Determination of Basis
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▪ Pro rata allocation of unadjusted depreciable basis of the
account, on ratio of disposed asset replacement cost
compared to total account replacement cost
▪ A study to determine cost of individual components
Determination of Basis
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▪ Risk-based analysis
▪ Review 2014 and prior years for compliance with tangible
property regulations
▫ Any deductions that should be capitalized?
▫ Any dispositions to write off?
▪ Consult with KSM advisor
Action Steps
