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OOPS! BUT IT’S ONLY 800,000

Today, the Centers for Medicare and Medicaid Services (“CMS”) announced that approximately 800,000 taxpayers who received health care coverage through the Healthcare.gov were sent wrong information on their Forms 1095-A.  The “second lowest cost Silver plan” benchmark amount is wrong.  The CMS urges people receiving 1095-A to wait until the first week of March to file their returns.  If you received an erroneous Form 1095-A, you should get a corrected replacement by then.

Then, in its blog on its website, the CMS goes on to explain why this is no big deal:

  1. It’s only 800,000 wrong forms.
  2. Only 10% of tax filers with Marketplace coverage in 2014 are affected.
  3. Only 20% of the tax filers with Marketplace coverage in 2014 and who used tax credits to lower their premium cost were affected.
  4. Only 50,000 tax filers (less than 0.05% of total tax filers) have filed their returns at blog time.
  5. Less than 1% of total tax filers are affected.
  6. You can go on the Healthcare.gov website and see if your 1095-A is one of the wrong ones.
  7. The CMS will call everybody and make them feel better.

Makes you feel all warm and cuddly, doesn’t it?

VKM

 

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IRS Makes it Easier for Small Businesses to Apply Tangible Property Regulations to 2014 and Future Years

 

On the afternoon of Friday, February 13, 2015, the Internal Revenue Service (“IRS”) made it easier for small business owners to comply with the final tangible property “repair” regulations (“Regulations”).   Revenue Procedure 2015-20 allows small businesses to change a method of accounting under the Regulations on a prospective basis for the first taxable year beginning on or after January 1, 2014.

This modification means that, effectively, small business taxpayers making these specific changes in methods of accounting in the Regulations for the first tax year that begins on or after January 1, 2014, may elect to make the change on a cut-off basis, with any Section 481(a) adjustment only taking into account amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014, the effective date of the Regulations.  Generally, this means that small businesses properly applying the Regulations in 2014 and electing these simplified procedures should have no Section 481(a) adjustments.

Also, the IRS is waiving the requirement to complete and file a Form 3115, Application for Change in Accounting Method, for small business taxpayers that choose to use this simplified procedure for 2014.

Revenue Procedure 2015-20 defines a “small business taxpayer” as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three tax years.  These tests are applied to each separate and distinct trade or business of the taxpayer.

These changes drastically will reduce 2014 income tax compliance efforts and costs for small business taxpayers.  Nevertheless, there may be some times that filing a Form 3115 may be beneficial.  For example, the Regulations allow taxpayers to write off parts of buildings that have had significant improvements installed in prior years, in a situation generally referred to as a “late partial disposition election,” but only if the taxpayer files a Form 3115 in the year of the change in accounting method.

We will be discussing the Regulations with our clients owning businesses and rental activities, both small and large.  Please contact your HM&M tax advisor with questions.

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Tangible Property Regulations Complicate Tax Return Filing

New Tangible Property Regulations May Require More Time and Expense to File 2014 Income Tax Returns of Many Taxpayers

The Internal Revenue Service recently issued final tangible property “repair” regulations and disposition regulations (“Regulations”).   These broad Regulations will likely impact most taxpayers in all industries.   These Regulations generally apply to taxable years beginning on or after January 1, 2014.  Long-time tax practitioners say that the required changes have the most radical effect on preparing tax returns since the Tax Reform Act of 1986.

Failure to comply with the Regulations and guidance may result in underpayment and accuracy-related penalties and interest.   Tax savings opportunities may also be available.

Some of the major provisions in the Regulations include the following method changes and elections:

  • Definition of the repaired or improved asset (i.e. Unit of Property)
  • Repair and maintenance versus improvements to property
  • Timing of deductions for materials and supplies
  • Basic capitalization/expensing threshold (i.e., de minimis expensing safe harbor)
  • Election to follow book capitalization of tax deductible repair and maintenance costs
  • Partial disposition provisions

Representatives from the Internal Revenue Service and Treasury have stated that they expect most taxpayers having a business or rental activities to file a Form 3115, Application for Change in Accounting Method. Some of these changes may result in catch-up deductions.  The requirement to change will not only affect business entities, but they may affect individuals having sole proprietorships reported on Schedule C, rental and/or royalty income reported on Schedule E, and farm or ranch operations reported on Schedule F.

A few common examples where an accounting method change is necessary include:

  1. A change of Unit of Property definition for applying the improvement standards
  2. Adopting the routine maintenance safe harbor
  3. Deducting repair and maintenance

There may be instances where business leaders believe they are already following the Regulations or adoption does not result in a current change to the timing of any deductions.  The IRS, however, has stated that the rules for Unit of Property and routine maintenance safe harbor, for example, did not previously exist and it is therefore not possible for taxpayers to comply with these rules without obtaining IRS consent via a Form 3115.

During the tax return preparation process, we will be conferring with you about the applicability of the Regulations to your businesses or rental activities.   Form 3115 is eight pages long and the form’s instructions are 20 pages long.  It is likely that additional time and expense may be necessary to comply with these new Regulations. The American Institute of Certified Public Accountants and other groups are in discussions with the IRS and advocating relief that will ease the burden for small businesses.  It is possible that the IRS may issue such relief.  However, the tax return filing deadlines are drawing near and small business owners will have to make decisions soon about compliance with the Regulations.

We will keep you informed of developments.  Please contact your HM&M tax advisor with questions.

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Frivolity Abounds

The Internal Revenue Service recently unveiled its annual “dirty dozen” of top tax scams for 2015.  The twelfth scam made public was frivolous tax arguments.  The IRS takes such frivolity seriously.

Last month, the IRS released its 2015 version of The Truth About Frivolous Tax Arguments.  The publication addressed forty-four such arguments.  Some are relatively well know and others are more obscure.  The courts have sided with the IRS time after time in every case.   The IRS levies and collects big fines.

Here are some examples of the frivolous arguments.

  1. The filing of a tax return is voluntary.
  2. Wages, tips, and other compensation received for personal services are not income.
  3. Federal Reserve Notes (i.e., greenbacks) are not income.
  4. Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment.
  5. The Internal Revenue Service is not an agency of the United States.
  6. A “corporation sole” (or ministerial trust) can be established and used for the purpose of avoiding federal income taxes.

I actually encountered a corporation sole a few years ago.  A corporation sole is actually a legitimate entity used in the course of protecting church property and is tax exempt.   A person who was not a client of mine came to me because he had gotten ordained online and claimed his airline pilot wages were tax free income of the corporation sole.   The IRS sent him a notice alerting him that he was in deep and hot water.  I referred him to a good tax attorney, who could help him plead the “dumb and dumber” argument.  (P.S., I don’t take airline pilot clients anymore; they have too much time to come up with crazy schemes in the pilots’ lounge with other pilots.)

Some of these arguments are about as old as the Internal Revenue Code.  Nut jobs still keep making them.  Some folks will never learn.

 

VKM

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65-Day Election for Trusts

Deadline Approaches for Distributions Eligible for 65-Day Election by Calendar-Yearend Complex Trusts and Estates:  March 6, 2015

The fiduciary of a complex trust or estate can elect annually to treat amounts paid or properly credited by the complex trust or estate to a beneficiary within the first 65 days following the close of the tax year as paid or credited on the last day of the immediately preceding tax year with respect to both the trust or estate and the beneficiary.  The election applies to part or all of distributions made in the first 65 days of the tax year.  The amount to which the election applies is limited to the greater of fiduciary accounting income or distributable net income, both of which must be reduced by amounts distributed during the year, excluding amounts covered by this election for the previous year.  While distributions must be made during the first 65 days of the year, the election is made when the Form 1041 income tax return is filed.

Administratively, this provision allows a fiduciary to determine the income of the complex trust or estate for the year just ended, while there is still time to make distributions that can be treated as having been made at the end of that year.  The election may also present an opportunity to minimize the combined income tax burden of the trust or estate and the beneficiaries.  Recently-increased income tax rates and the 3.8% net investment income tax make such planning even more important.  Also, when considering distributions and the 65-day election, the liquidity, 2014 taxable income, 2015 taxable income, and other contemplated future distributions must be considered for both the trust or estate and the beneficiaries.

Please contact your HM&M tax advisor soon for help in analyzing the possible benefits of a 65-day election for distributions made on or before March 6, 2015.