Change to EU VAT laws affect sellers of digital services starting Jan. 1, 2015.

Starting on Jan. 1, 2015, all telecommunications, broadcasting and electronic services providers will be subject to value added tax (VAT) by the European Union (EU) member state where the customer belongs, rather than the place where the service provider is located. If the customer is a business, it belongs to the country where it is registered or the country where it has fixed premises receiving the service. On the other hand, if the customer is a consumer, he/she belongs to the country where he/she is registered or has his/her permanent address.

If you would like more details about this or any other aspect of international tax law, please do not hesitate to contact, Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Penalty for failure to file partnership returns is increased for inflation

Any partnership that fails to file a timely return or fails to provide the information required  by Code Sec. 6031 is liable for a monthly penalty equal to $195 times the number of persons who were partners during any part of the tax year, for each month or fraction of a month for which the failure continues. No penalty can be assessed if it is shown that the failure is due to reasonable cause.

New Law. Under the 2014 Achieving a Better Life Act (ABLE Act), for any return required  to be filed  in a calendar year beginning after 2014, the $195 dollar amount will be increased by the dollar amount multiplied by the cost-of-living adjustment determined under Code Sec. 1(f)(3) determined by substituting calendar year 2013 for calendar year 1992 in Code Sec. 1(f)(3)(B), and rounded down to the next multiple of $5. (Code Sec. 6698(e) as amended by 2014 ABLE Act §208(d)DivB) To view our YouTube video click here http://youtu.be/KfO0_kmz7qc

If you would like more details about this decision or any other aspect of the S corporation law, please do not hesitate to contact.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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IRS targets U.S. tax cheats by summoning records from shipping and financial service providers

International Taxes – A U.S. District Court has authorized IRS to serve “John Doe” summonses to eight entities in the shipping or financial services industry in order to identify the U.S. tax cheats that used an off-shore service provider (Sovereign Management & Legal Ltd., or simply, Sovereign) to establish, maintain, and/or conceal foreign accounts, assets, and entities. In particular, Federal Express Corporation, FedEx Ground Package System, DHL Express (DHL), and United Parcel Service Inc. (UPS) would be asked to disclose the correspondence records of Sovereign and its U.S. clients. Similarly, Western Union Financial Services Inc., the Federal Reserve Bank of New York (FRBNY), Clearing House Payments Company LLC (Clearing House), and HSBC Bank USA National Association (HSBC USA) would be asked to furnish banking information and/or fund transfer records of Sovereign and its U.S. clients.

Background on the IRS investigation. As a result of a Drug Enforcement Administration (DEA) investigation of online narcotics trafficking, IRS learned that Sovereign was involved in assisting U.S. clients evade their taxes.

According to the DOJ press release, Sovereign offers a variety of services to its clients, including, for example, the formation and administration of anonymous corporations and foundations in Panama and offshore entities, the maintenance and operation of offshore structures, mail forwarding, the availability of virtual offices, re-invoicing, and the provision of professional managers, who appoint themselves directors of the client's entity while the client retains ultimate control over the assets.

During the IRS investigation, one taxpayer made a voluntary disclosure of tax non-compliance to avoid prosecution and disclosed that Sovereign helped the taxpayer form an anonymous corporation in Panama to allow the taxpayer to control certain assets without appearing to own them. As part of the investigation, IRS further determined that Sovereign:

(1)  Used Federal Express, UPS and DHL to correspond with its U.S. clients;

(2)  Used Western Union to transmit funds to and from clients in the U.S.;

(3)  Used wire services operated by the FRBNY and Clearing House for financial transactions between Sovereign and its clients in the U.S.; and

(4)  Maintained correspondent bank accounts in Panama and Hong Kong through HSBC USA for financial transactions between Sovereign and its clients in the U.S.

The John Doe summonses. As background, IRS uses “John Doe” summonses to target individuals suspected of tax fraud, but whose identifies are not readily available and thus not specifically identified.

The John Doe summonses direct the eight entities to produce records that will assist the IRS in identifying U.S. taxpayers who, from 2005 through 2013, used Sovereign's services to establish, maintain, operate or control:

(1)  Any foreign financial account or other assets;

(2)  Any foreign corporation, company, trust, foundation or other legal entity; or

(3)  Any foreign or domestic financial account in the name of such foreign entity.

Through this process, IRS expects to identify Sovereign's U.S. clients who may be avoiding or evading taxes.

U.S. continues to target undeclared foreign assets. In a DOJ press release, Deputy Assistant Attorney General Hubbert stated that “[t]his summons action is but the latest step in the Department of Justice's efforts to identify and hold fully accountable U.S. taxpayers who have sidestepped their tax obligations by hiding money overseas.” “The world is getting smaller for tax cheats, and we will work with our partners at the IRS to vigorously enforce the nation's tax laws against those who seek to avoid paying their fair share.”

“This action demonstrates our Office's commitment to pursuing tax evaders who use offshore service providers to avoid their U.S. tax obligations,” said U.S. Attorney Bharara. “By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who conceal their foreign assets in order to dodge their legal responsibility to pay taxes.”

“The IRS remains committed to continuing our priority efforts to stop offshore tax evasion wherever it is found,” said Commissioner Koskinen. “We have made tremendous progress in this area, working cooperatively with other agencies. The John Doe summons remains an important tool in our efforts to find international tax evaders and those who help them.”

“The DEA has a longstanding commitment to sharing information with our federal, state, and local partners,” said Special Agent in Charge Anthony D. Williams. “Issuance of these summonses exemplifies how outstanding investigative results can be derived from a culture of interagency cooperation.”

The case is being handled by the U.S. Attorney's Office for the Southern District of New York Tax and Bankruptcy Unit.

We're here to help! For no obligation free consultation contact us today!

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Computer software costs

Do you buy or lease computer software for use in your business? Do you develop computer software for use in your business, or for sale or lease to others? Then you should be aware of the complex rules that apply to determine the tax treatment of the expenses of buying, leasing or developing computer software.

Purchased software. Generally, the way to account for the cost of purchased software is to amortize (ratably deduct) the cost over the three-year period beginning with the month in which you placed the software in service.

However, software that (1) is readily available for purchase by the public, (2) is subject to a nonexclusive license and (3) hasn't been substantially modified (non-customized software), and (4) is placed in service in tax years beginning before 2014 qualifies as “section 179 property,” and is thus eligible for the Code Sec. 179 elective expensing deduction that is generally available only for machinery and equipment. For tax years that begin in 2012 or 2013, the deduction is limited to $500,000. The limit is reduced by the cost of other section 179 property for which the election is made. Also, the election is phased out for taxpayers placing more than $2,000,000 of section 179 property into service during tax years beginning in 2012 or 2013. Non-customized software that is acquired and placed in service before Jan. 1, 2014 is also eligible for a 50%-of-cost depreciation deduction in the year that the software was placed in service (bonus depreciation). The bonus depreciation for an item of software is reduced to take into account any portion of the item's cost for which a Code Sec. 179 election is made, and regular depreciation deductions are reduced to take into account both the bonus depreciation and any Code Sec. 179 election.

There are two other exceptions to the three-year amortization rule. One exception requires that, if you buy the software as part of a hardware purchase in which the price of the software isn't separately stated, you must treat the cost of the software as part of the cost of the hardware. Thus, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. The other exception requires that if you buy the software as part of your purchase of all or a substantial part of a business, the software must be amortized over 15 years (unless the software is non-customized software).

Leased software. You must deduct the amounts you pay to rent leased software in the tax year in which paid, if you are a cash-method taxpayer, or the tax year for which the rentals are accrued, if you are an accrual-method taxpayer. Generally, however, deductions aren't permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

Software you develop. Costs for developing computer software may be accounted for using any of the following methods:

(1) amortizing the costs over a three-year period beginning with the month that the software was placed in service;

(2) deducting the costs in the tax year in which the costs are paid (if you are a cash-method taxpayer) or in the tax year in which the costs are accrued (if you are an accrual-method taxpayer), but only if all of your costs of developing the software are deducted this way;

(3) amortizing the costs over a five-year period beginning with the completion of the development, but only if all of your costs of developing software are amortized this way;

(4) amortizing the costs over a period longer than five years, but only if the costs are Code Sec. 174 “research or experimental expenditures.”

You should also be aware that if following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change by following prescribed procedures.

Please give us a call if you have any questions. We would be pleased to assist you in applying the tax rules for treating computer software costs in the way that is most advantageous for you.

 AB Tax Accounting

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Year-end gifts to family members

The first $14,000 of gifts ($28,000 for married couples who split gifts) made by a donor to each donee in calendar year 2014 is excluded from the amount of the donor's taxable gifts. (The exclusion remains at $14,000 for calendar year 2015.) These exclusions can save both transfer tax for the donor and family income taxes. A gift that qualifies for the exclusion is free of gift tax. Estate tax can be saved because both the value of the gift on the date of transfer and post-transfer appreciation (if any) in the value of the gift won't be included in the donor's estate. Family income tax savings can be realized where income-earning property is given to family members in lower income tax brackets.

Planners should remind individual clients that they have to act no later than Dec. 31 to take complete advantage of their 2014 annual exclusions. Unused annual exclusions can't be carried over and are forever lost.

A gift to a noncharitable donee that is made by check is complete on the earlier of:

... the date on which the donor has so parted with “dominion and control” under local law as to leave in the donor no power to change its disposition, or

... the date on which the donee deposits the check (or cashes the check against available funds of the donee) or presents the check for payment, if it is established that:

(1) the check was paid by the drawee bank when first presented to the drawee bank for payment;

(2) the donor was alive when the check was paid by the drawee bank;

(3) the donor intended to make a gift;

(4) delivery of the check by the donor was unconditional; and

(5) the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.

 AB Tax Accounting Recommendation: If a gift is made by check near the end of 2014 and the donor wants to take advantage of the exclusion this year, the donee should be urged to deposit the check before year-end, so that there's no doubt as to when the gift was made

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you don't miss out on any resuscitated tax saving opportunities.

We're here to help! For no obligation free consultation contact us today!

AB Tax Accounting

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Minnesota Supreme Court Upholds Tax on Sale of Partially Customized Software

Sales tax generally applies to the sale of “prewritten” or “canned” software. However, the majority of states that tax prewritten software do not tax the customization of prewritten software. Application of this distinction between prewritten and customized software can create considerable difficulties for taxpayers and taxing authorities (such as determining the degree of alteration required to be considered customized software), and it continues to be subject to controversy.

The Minnesota Supreme Court recently wrestled with some of these issues in LumiData, Inc. v. Commissioner of Revenue, No. A14-0254 (Sept. 14, 2014). Minnesota law provides that customized portions of prewritten computer software are exempt only if the taxpayer separately states its customization charges in customer invoices. LumiData significantly customized its software for each of its customers; however, it failed to separately state customization charges in customer invoices. Accordingly, the court held that the taxpayer could not qualify for the exemption.

The court also rejected LumiData's argument that the sales should have been treated “in substance” as a sale of customized software, because the company failed to produce sufficient credible evidence to support its position. The court added that after the company's initial customization for a customer, the altered software then became incorporated into subsequent versions of the software, making each subsequent version more like prewritten software than customized software.

This case not only illustrates some of the difficulties inherent in applying the distinction between prewritten and customized software, but it also reiterates the importance of providing thorough and credible documentary evidence in support of any claim for a tax exemption.

Background.

 

LumiData provides software that organizes and analyzes sales information at retailers' cash registers. For instance, the software can help determine the effectiveness of a particular sales promotion or track the volume of sales during certain time periods.

LumiData significantly customizes the software for each customer's particular needs. However, each new version of the software incorporates the functionality of all prior versions of the software.

Between 2005 and 2008, LumiData did not pay Minnesota sales tax on its software revenue. The Minnesota Commissioner of Revenue audited the company and concluded that its software sales were subject to sales tax as prewritten computer software under Minn. Stat. § 297A.61(17) because the company did not separately state customization charges on customer invoices.

The tax court proceedings.

 

On appeal to the tax court, LumiData argued that it only sold customized software and presented testimony that many of its customers refused to purchase the software without customization. The company also submitted a history of changes to the software and a checklist of customization requirements for its customers. LumiData also argued that its software should be treated as customized software in a “substance-over-form” argument because the cost of enhancement to the software often exceeded the price it actually charged for the software. Finally, the company asserted that it had reasonable cause for failing to pay sales tax because it allegedly relied on advice from its accountant that the software sales were tax exempt.

The tax court rejected all of the company's arguments and found that the software was taxable prewritten computer software because the software was a “substantial preexisting platform,” rather than software “designed and developed to the specifications of each customer.”

The tax court also rejected the company's substance-over-form argument, reasoning that its sales were structured as “license agreements” rather than “customization agreements.” The tax court also disregarded testimony that the cost of customization would exceed the amount the taxpayer charged its customers because the testimony in this regard was not sufficiently detailed and the company had not submitted any documentation to support the testimony.

Finally, the tax court rejected the taxpayer's argument that it had reasonable cause for failing to file returns because the taxpayer “never formally sought its accountant's opinion” as to whether the software sales were taxable, and the accountant “never reviewed the licensing agreements.” The taxpayer appealed.

The Supreme Court focuses on failure to separately state charges.

The Minnesota Supreme Court began its legal analysis by pointing out that all “gross receipts are presumed subject to tax, and the burden of proving that a sale is not subject to tax is on the seller.” The court noted that sales of prewritten software are subject to sales tax under Minnesota law (Minn. Stat. § 297.61(3)(f)), but that portions of prewritten software are only exempt from sales tax based on customization of the software if there is a “reasonable, separately stated charge for such modification or enhancement.” Minn. Stat. § 297A.61(17).

Applying the statute to LumiData's sales, the court held that the sales were sales of partially prewritten and partially customized software. The court emphasized that although the software was initially customized significantly for each purchaser, new versions of the software incorporated those customizations. Although not entirely clear, the court apparently concluded that by incorporating customizations into subsequent software versions, the company effectively converted those customizations into prewritten software.

The court provided no legal support for its reasoning on this point. This ruling seems problematic. If applied broadly, it would allow exemptions only for initial software customizations, and would then effectively convert that customized portion of the software into prewritten software.

Nonetheless, the court held that LumiData could not qualify for the exemption in any event because it failed to separately state customization charges in customer invoices. The Supreme Court emphasized the tax court's finding that “none of the licenses in the record contained a separate charge for customization,” and concluded that the failure to separately state customization charges meant that the sales were taxable sales of prewritten software.

The Supreme Court also rejected the customization checklists as evidence regarding the scope of customization because there was “no documentary evidence whatsoever to verify the magnitude of its alleged custom programming costs,” such as “time records for development work” or the “hourly rate for software development or customization work.”

The Court's decision also reiterates the axiom that where there is any doubt, exemptions are construed against the taxpayer and in favor of the taxing authorities. As in this case, a taxpayer's failure to produce strong documentary evidence in support of its claim will almost certainly result in a rejection of its exemption claim on appeal.

Substance-over-form argument rejected on lack of credible evidence.

 

The Minnesota Supreme Court also upheld the tax court's rejection of the company's “substance-over-form” argument. Although it acknowledged that, under “proper circumstances,” the court would “disregard a transaction's form in favor of its economic substance,” it declined to apply the principle here due to lack of documentary evidence presented to the tax court.

LumiData argued that its software sales should be treated in substance as sales of customized software based on oral testimony from its employees that “the cost of customizing [the software] exceeded the software's sales price.” However, the tax court found that the evidence was “entitled to little if any weight,” and the Minnesota Supreme Court upheld that finding because the employee testimony was “general, conclusory, and not corroborated by documentary evidence.” The court deferred to the tax court on this point because the tax court “is in the best position to evaluate the credibility of witnesses.”

Near the end of its substance-over-form analysis, the court seemed to cast doubt on its willingness to apply a substance-over-form analysis in statutory interpretation cases. The court refused to look beyond the statutory requirement to separately state customization charges, stating: “We will not ignore the plain language of the law under the guise of pursuing its spirit.”

This suggests that the court may not be willing in reality to apply a substance-over-form analysis in statutory interpretation cases, except perhaps in very rare circumstances. The court did not attempt to reconcile this statement with its earlier statement that it would apply the substance-over-form doctrine in appropriate circumstances. Nor did the court indicate when it would be appropriate to apply such an analysis.

Court finds there can be no reliance on advice neither sought nor obtained.

 

Finally, the court also deferred to the tax court's findings of fact regarding whether LumiData had “reasonable cause” to believe that it was not required to file tax returns or to believe that no tax was due. If the company had been able to establish reasonable cause, no penalty would have been due. Minn. Stat. § 270C.34(1).

LumiData argued that it had reasonably relied on its accountant's advice that the sales of its software were not subject to sales tax. However, the tax court found “no evidence” that the company actually sought an opinion from its accountant. In fact, the accountant specifically testified that, “had she known that [the company] was not filing tax returns, she would have advised it to do so.”

If you would like more details about this decision or any other aspect of the new law, please do not hesitate to call.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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AB Tax Accounting Special Analysis: Individual Tax Breaks Retroactively Extended by the Tax Increase Prevention Act of 2014

Virtual CFO Services - The Act extends a host of individual tax provisions, including the above-the-line deductions for higher education expenses and educators' expenses, deductions for state and local sales tax and mortgage insurance premiums, the exclusion for discharged home mortgage debt, parity in excludible transportation benefits, and the allowance of tax-free charitable transfers from a taxpayer's IRA.

Above-the-Line Deduction for Educator Expenses Extended

Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom.

Under pre-Act law, the educator expense deduction didn't apply for expenses paid or incurred in tax years after 2013.

New law. TIPA retroactively extends the educator expense deduction one year so that it applies to expenses paid or incurred in tax years through 2014

Exclusion for Discharged Home Mortgage Debt Extended

Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income.

Under pre-Act law, this exclusion didn't apply to any debt discharged after Dec. 31, 2013.

New law. TIPA extends this exclusion for one year so that it applies to home mortgage debt discharged before Jan. 1, 2015.  

Increase in Excludible Employer-Provided Mass Transit and Parking Benefits Extended

Under pre-Act law, for 2014, an employee may exclude from gross income up to: (1) $250 per month for qualified parking, and (2) $130 a month for transit passes and commuter transportation in a commuter highway vehicle (including van pools). However, notwithstanding the applicable statutory limits on the exclusion of qualified transportation fringes (as adjusted for inflation), for any month beginning before Jan. 1, 2014, a parity provision required that the monthly dollar limitation for transit passes and transportation in a commuter highway vehicle had to be applied as if it were the same as the dollar limitation for that month for employer-provided parking ($245 for 2013).

New law. TIPA extends for one year the parity provision, through 2014. Thus, for 2014, it increases the monthly exclusion for employer-provided transit and vanpool benefits to $250—the same as for the exclusion for employer-provided parking benefits.

Mortgage Insurance Premiums as Deductible Qualified Residence Interest Extended

Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI). The amount allowable as a deduction is phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeds $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction isn't allowed if the taxpayer's AGI exceeds $110,000 ($55,000 in the case of married individual filing a separate return).

Under pre-Act law, this provision only applied to premiums paid or accrued before Jan. 1, 2014 (and not properly allocable to any period after that date).

New law. TIPA retroactively extends this provision for one year so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2015 (and not properly allocable to any period after 2014.

State and Local Sales Tax Deduction Extended

Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes.

Under pre-Act law, this choice was unavailable for tax years beginning after Dec. 31, 2013.

New law. TIPA retroactively extends this provision for one year so that itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years beginning before Jan. 1, 2015.  

Liberalized Rules for Qualified Conservation Contributions Extended

A taxpayer's aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation.

Under pre-Act law, these rules didn't apply to any contribution made in a tax year beginning after Dec. 31, 2013, and contributions made thereafter were to be subject to the otherwise applicable 30% limit for capital gain property (50% limit for qualified farmers and ranchers).

New law. TIPA retroactively extends for one year the 50% and 100% limitations on qualified conservation contributions of appreciated real property so that they apply to contributions made in tax years beginning before Jan. 1, 2015.  

Above-the-Line Deduction for Higher Education Expenses Extended

Eligible individuals can deduct higher education expenses—i.e., “qualified tuition and related expenses” of the taxpayer, his spouse, or dependents—as an adjustment to gross income to arrive at adjusted gross income. The maximum deduction is $4,000 for an individual whose AGI for the tax year doesn't exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for individuals who don't meet the above AGI limit, but whose adjusted gross income doesn't exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose adjusted gross income exceeds the relevant adjusted gross income limitations, for a married individual who does not file a joint return, or for an individual for whom a personal exemption deduction may be claimed by another taxpayer for the tax year.

Under pre-Act law, this deduction wasn't available for tax years beginning after Dec. 31, 2013.

New law. TIPA retroactively extends the qualified tuition deduction for one year so that it can be claimed for tax years beginning before Jan. 1, 2015.

Nontaxable IRA Transfers to Eligible Charities Extended

Taxpayers who are age 701/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. These distributions aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return.

Under pre-Act law, these rules didn't apply to distributions made in tax years beginning after Dec. 31, 2013.

New law. TIPA retroactively extends this provision for one year so that it's available for charitable IRA transfers made in tax years beginning before Jan. 1, 2015.  

AB Tax Accounting observation: Taxpayers who haven't yet taken their required minimum distribution (RMD) for 2014 still have time to make the most of this retroactively extended tax break. If any amount distributed directly from a taxpayer's IRA to an eligible charity during 2014 at least equals the amount of his RMD for the tax year, the taxpayer will not be required to take any other 2014 distribution from the IRA.

If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Capital Gain Treatment for Sale of Right to Build

CFO Services -The 11th Circuit Court of Appeals, reversing the Tax Court, determined the $5.75 million profit from the sale of a position in a real estate development lawsuit was capital gain instead of ordinary income. The 11th Circuit looked to the type and nature of the underlying right or property assigned or transferred in, determining the taxpayer did not have a future right to income that he already earned, but that he sold his right to finish the project and earn income. The court noted that selling a right to earn future undetermined income, as opposed to selling a right to earned income, is a critical feature of a capital asset. However, the 11th Circuit agreed with the Tax Court's finding that legal fees, supported only with a letter from the attorney indicating that certain fees were paid, were not deductible. In addition, they upheld the Tax Court's denial of a deduction for $600,000 for what was determined to be a substituted obligation for cancelled promissory notes.

If you would like more details about this decision or any other aspect of the new law, please do not hesitate to call.

Amare Berhie, Senior Tax Accountant

AB Tax Accounting

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Establishment of ABLE accounts in the 2014 ABLE Act

Virtual CFO Services -The tax laws have long encouraged Americans to save for college for their kids and to save for their retirement, but for families of those with disabilities there was no tax-advantaged way for them to save for those individuals. The recently enacted “Achieving a Better Life Experience (ABLE) Act of 2014” contains an important new provision which changes that. Allow me to take a few minutes to explain this exciting and long overdue change.

The new law, which applies for tax years beginning after December 31, 2014, allows for the creation of ABLE accounts, which are tax-free accounts that can be used to save for disability-related expenses.

Here are the key features of ABLE accounts: 

• ABLE accounts can be created by individuals to support themselves or by families to support their dependents.
• There is no federal taxation on funds held in an ABLE account. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren't deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses.
• No federal tax benefits are provided for those who contribute to an ABLE account.
• Money in an ABLE account can be withdrawn tax free if the money is used for disability-related expenses. Expenses qualify as disability related if they are for the benefit of an individual with a disability and are related to the disability. They include education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; and other IRS-approved expenses.
• Distributions used for nonqualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on that portion.
• Each disabled person is limited to one ABLE account and total annual contributions by all individuals to any one ABLE account can be made up to the gift tax exclusion amount ($14,000 in 2014 and 2015, which is adjusted annually for inflation). Aggregate contributions are subject to the State limit for education-related Section 529 accounts.
• ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual.
• Eligible individuals must be blind or disabled, and must have become so before turning 26, and must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. An individual doesn't need to receive SSI or SSDI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs. Alternatively, an individual can become eligible if a disability certificate for the individual is filed with IRS.
• ABLE accounts have no impact on Medicaid or SSI, although SSI payments are suspended while a beneficiary maintains excess resources in an ABLE account. More specifically, the first $100,000 in ABLE account balances is exempted from being counted toward the SSI program's $2,000 individual resource limit. However, account distributions for housing expenses are counted as income for SSI purposes. Assuming the individual has no other assets, if the balance of an individual's ABLE account exceeds $102,000, the individual is suspended, but not terminated, from eligibility for SSI benefits but remains eligible for Medicaid.
• Upon the death of an eligible individual, any amounts remaining in the account (after Medicaid reimbursements) will go to the deceased's estate or to a designated beneficiary and will be subject to income tax on investment earnings, but not to a penalty.
• Contributions to an ABLE account by a parent or grandparent of a designated beneficiary are protected in bankruptcy. In order to be protected, ABLE account contributions must be made more than 365 days prior to the bankruptcy filing.
• On a related note, the new legislation also changes the rules regarding investment direction for Section 529 qualified tuition programs, permitting investment direction by an account contributor or designated beneficiary up to two times per year. Under prior law, no investment direction was allowed, although Treasury guidance allowed such direction up to once per year. 

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI

info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

Energy-related tax breaks extended in the 2014 Tax Increase Prevention Act

Virtual CFO Services - In the recently enacted “Tax Increase Prevention Act of 2014,” Congress has once again extended a package of expired or expiring individual, business, and energy provisions known as “extenders.” The extenders are a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. Congress has repeatedly temporarily extended the tax breaks for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” The new legislation retroactively extends the tax breaks, most of which expired at the end of 2013, through 2014, allowing businesses and individuals to claim them on their 2014 returns.

The list of extended provisions includes a host of energy-related tax breaks of importance to businesses and individuals. I'm writing to give you an overview of the key tax breaks that were extended by the new law. Please read our Complete Analysis or call our office for details of how the new changes may affect you or your business.

The energy provisions which are extended through 2014 include:

the credit for nonbusiness energy property;

the second generation biofuel producer credit (formerly cellulosic biofuels producer tax credit);

the incentives for biodiesel and renewable diesel;

the Indian country coal production tax credit;

the renewable electricity production credit, and the election to claim the energy credit in lieu of the renewable electricity production credit;

the credit for construction of energy efficient new homes;

second generation biofuels bonus depreciation;

the energy efficient commercial buildings deduction;

the special rule for sale or disposition to implement federal energy regulatory commission (FERC) or State electric restructuring policy for qualified electric utilities;

the incentives for alternative fuel and alternative fuel mixtures; and

the alternative fuel vehicle refueling property credit.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI

info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396

IRA Year- End Reminders

Tax Services - Whether you are still working or retired, you should periodically review your IRAs. Here are few things to remember.

Contribution limits

If you’re still working, review the 2014 IRA contribution and deduction limits to make sure you are taking full advantage of the opportunity to save for your retirement. You can make 2014 IRA contributions until April 15, 2015.

Excess contributions

If you exceed the 2014 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account.

Required minimum distributions

If you are age 70½ or older this year, you must take a 2014 required minimum distribution by December 31, 2014 (by April 1, 2015, if you turned 70½ in 2014). You can calculate the amount of your IRA required minimum distribution by using our Worksheets. You must calculate the required minimum distribution separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs. Remember that you face a 50% excise tax on any required minimum distribution that you fail to take on time.

AB Tax Accounting

Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI

Individual extenders in the 2014 Tax Increase Prevention Act

Income Tax Service For Individuals - Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2013, but now, in the recently enacted Tax Increase Prevention Act of 2014, the extenders have been revived and extended once again. The package generally renews the tax breaks for one year through the end of 2014, allowing businesses and individuals to claim them on their 2014 returns. The list of extended provisions includes several important tax breaks for individuals. I'm writing to give you an overview of these key tax breaks that were extended by the new law. Please call our office for details of how the new changes may affect you.

The extended provisions include:

... the $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom;

... the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income;

... parity for the exclusions for employer-provided mass transit and parking benefits;

... the deduction for mortgage insurance premiums deductible as qualified residence interest;

... the option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes;

... the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;

... the above-the-line deduction for qualified tuition and related expenses; and

... the provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70½ or older.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

AB Tax Accounting

http://youtu.be/EYJdQtbPZAI

info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396