Is your worker an independent contractor or employee?

The question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the stakes can be very high. If a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer's share of FICA taxes on the wages plus FUTA tax, and often provide the worker with fringe benefits it makes available to other employees. There may be state tax obligations as well. These obligations don't apply for a worker who is an independent contractor. The business sends the independent contractor a Form 1099-MISC for the year showing what he or she was paid (if it amounts to $600 or more), and that's it.

Who is an “employee?” There is no uniform definition of the term.

Under the common-law rules (so-called because they originate from court cases rather than from a statute), an individual generally is an employee if the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Otherwise, he is an independent contractor.

Some employers that have misclassified workers as independent contractors are relieved from employment tax liabilities under Section 530 of the 1978 Revenue Act (not the Internal Revenue Code). In brief, Section 530 protection applies only if the employer: filed all federal returns consistent with its treatment of a worker as an independent contractor; treated all similarly situated workers as independent contractors; and had a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer's industry has traditionally treated similar workers as independent contractors. Section 530 doesn't apply to certain types of technical services workers.

Individuals who are “statutory employees,” (that is, specifically identified by the Internal Revenue Code as being employees) are treated as employees for social security tax purposes even if they aren't subject to an employer's direction and control (that is, even if the individuals wouldn't be treated as employees under the common-law rules). These individuals are agent drivers and commission drivers, life insurance salespeople, home workers, and full-time traveling or city salespeople who meet a number of tests. Statutory employees may or may not be employees for non-FICA purposes. Corporate officers are statutory employees for all purposes.

Individuals who are statutory independent contractors (that is, specifically identified by the Internal Revenue Code as being non-employees) aren't employees for purposes of wage withholding, FICA, or FUTA and the income tax rules in general. These individuals are qualified real estate agents and certain direct sellers.

Some categories of individuals are subject to special rules because of their occupations or identities. For example, corporate directors aren't employees of a corporation in their capacity as directors, and partners of an enterprise organized as a partnership are treated as self-employed persons.

Under certain circumstances, you can ask IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee.

If you'd like to discuss with me how these complex rules apply to your business, to make sure that none of your workers are misclassified, please call to set up an appointment to discuss this or any other aspect of your taxes. If you found this Tax Tip helpful, please share it through your social media platforms.

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IRS guidance on how illegal drug businesses should compute cost of goods sold

Federal, State, Local and International Taxes - In Chief Counsel Advice (CCA), IRS has: 1) concluded that persons that traffic in Schedule I and Schedule II controlled substances (e.g., marijuana) can currently deduct cost of goods sold (COGS) but must determine COGS by using rules that existed before the enactment of Code Sec. 263A to determine inventoriable costs; and 2) drawn conclusions on the proper way for IRS to treat drug traffickers that deduct otherwise inventoriable costs from gross income.

Background. Congress has created a regime to curtail the unlawful manufacture, distribution, and abuse of dangerous drugs (“controlled substances”). Congress assigned each controlled substance to one of five lists (Schedule I through Schedule V). Marijuana is a Schedule I controlled substance.

Though any marijuana business is illegal under federal law, it remains obligated to pay federal income tax on its taxable income because Code Sec. 61(a) does not differentiate between income derived from legal sources and income derived from illegal sources. Code Sec. 61(a)(3) provides that gross income includes net gains derived from dealings in property. Gains derived from dealings in property means gross receipts less COGS; COGS is the term given to the adjusted basis of merchandise sold during the tax year. (Reg. § 1.61-3(a))

However, under Code Sec. 280E, a taxpayer may not deduct any amount for a trade or business where the trade or business (or the activities which comprise the trade or business) consists of trafficking in Schedule I or Schedule II controlled substances.

On the other hand, the Senate Report that accompanied the '82 legislation that enacted Code Sec. 280E provided that “to preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.” (S Rept No. 97-494) The Supreme Court has held that the Sixteenth Amendment, which authorized the income tax, precludes taxing the return of capital. (Doyle v. Mitchell Bros Co, (S Ct 1918) 3 AFTR 2979)

When Code Sec. 280E was enacted, taxpayers using an inventory method were subject to the inventory-costing regs under Code Sec. 471. Specifically, resellers were subject to Reg. § 1.471-3(b), and producers were subject to Reg. § 1.471-3(c) and Reg. § 1.471-11 (“full-absorption regs”).

Four years after enacting Code Sec. 280E, Congress added the uniform capitalization rules of Code Sec. 263A to the Code. Under Code Sec. 263A(a), resellers and producers of merchandise are required to treat as inventoriable costs the direct costs of property purchased or produced, respectively, and a proper share of those indirect costs that are allocable to that property. Flush language at the end of Code Sec. 263A(a)(2) provides, “Any cost which (but for this subsection) could not be taken into account in computing taxable income for any tax year shall not be treated as a cost described in this paragraph.”

“Additional Code Sec. 263A costs” are the costs, other than interest, that were not capitalized under the taxpayer's method of accounting immediately prior to the effective date of Code Sec. 263A, but that are required to be capitalized under Code Sec. 263A. (Reg. § 1.263A-1(d)(3))

In general, taxpayers are required to use an inventory method. Those taxpayers will capitalize inventoriable costs when incurred and will remove these costs from inventory when units of merchandise are sold. Stated differently, the taxpayer will compute COGS as an adjustment to gross receipts. On the other hand, when not required to use an inventory method, a taxpayer might be permitted to use the cash method. Under the modified cash method as described in Rev Proc 2001-10, 2001-1 CB 272 and Rev Proc 2002-28, 2002-1 CB 815, certain small businesses, e.g., resellers, don't have to use an inventory method; when a unit of merchandise is sold, the reseller will account for that cost as a deduction from gross income in the tax year that the unit is sold or the payment is received, whichever is later. Similarly, a cash-method farmer will deduct production expenses from gross income in the tax year paid and, thus, will have no basis in the merchandise that it eventually sells. (Reg. § 1.61-4(a))

Code Sec. 446(b) provides that if no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income must be made under such method as, in the opinion of IRS, does clearly reflect income.

Issues. (1) How does a taxpayer trafficking in a Schedule I or Schedule II controlled substance determine COGS for the purposes of Code Sec. 280E? (2) How should IRS treat the deductions of a taxpayer who traffics in a Schedule I or Schedule II controlled substance and who deducts currently from gross income otherwise inventoriable costs?

Issue 1—IRS limits costs includible in inventoriable costs. IRS noted that, when Code Sec. 280E was enacted in 1982, “inventoriable cost” meant a cost that was capitalized to inventories under Code Sec. 471 (under regs that existed before the enactment of Code Sec. 263A). Thus, a marijuana reseller using an inventory method would have capitalized the invoice price of the marijuana purchased, less trade or other discounts, plus transportation or other necessary charges incurred in acquiring possession of the marijuana. Similarly, a marijuana producer using an inventory method would have capitalized direct material costs (marijuana seeds or plants), direct labor costs (e.g., planting; cultivating; harvesting; sorting), Category 1 indirect costs (Reg. § 1.471-11(c)(2)(i)), and possibly Category 3 indirect costs (Reg. § 1.471-11(c)(2)(iii)).

Code Sec. 263A increased the types of costs that are inventoriable compared to the rules under Code Sec. 471. As a result, a reseller also is required to capitalize purchasing, handling, and storage expenses. In addition, both resellers and producers are required to capitalize a portion of their service costs, such as the costs associated with their payroll, legal, personnel functions.

Code Sec. 263A is a timing provision. It does not change the character of any expense from nondeductible to deductible, or vice versa.

Read together, Code Sec. 280E and the flush language at the end of Code Sec. 263A(a)(2) prevent a taxpayer trafficking in a Schedule I or Schedule II controlled substance from obtaining a tax benefit by capitalizing disallowed deductions. Congress did not repeal or amend Code Sec. 280E when it enacted Code Sec. 263A.

If a taxpayer subject to Code Sec. 280E were allowed to capitalize additional Code Sec. 263A costs as defined in Reg. § 1.263A-1(d)(3), Code Sec. 263A would cease being a provision that affects merely timing and would become a provision that transforms non-deductible expenses into capitalizable costs. Thus, IRS concluded that a taxpayer trafficking in a Schedule I or Schedule II controlled substance is entitled to determine inventoriable costs using the applicable inventory-costing regs under Code Sec. 471 as they existed when Code Sec. 280E was enacted.

Issue 2—IRS should allow similar deductions to cash method traffickers. IRS noted that, in the case of a cash-method taxpayer, the obligation to pay an income tax on gains derived from the sale of a controlled substance creates a tension between a) the accepted interpretation of “income” under the Sixteenth Amendment and b) Code Sec. 280E, which disallows all deductions of a trade or business trafficking in a Schedule I or Schedule II controlled substance. Applied literally, Code Sec. 280E severely penalizes taxpayers that traffic in a Schedule I or Schedule II controlled substance but don't use an inventory method for the controlled substance. When Code Sec. 280E is applied in the case of a producer trafficking in a Schedule I or Schedule II controlled substance, and all deductions from gross income are disallowed, the producer's taxable income will be significantly higher than what it would have been if the producer had used a permissible inventory method and recouped its production costs through COGS.

The CCA then concluded that, in these circumstances, the cash method does not clearly reflect income because of the operation of Code Sec. 280E. It said that it has the authority under Code Sec. 446(b) to require a taxpayer to change from a method of accounting that does not clearly reflect income to a method that does clearly reflect income. As a result, if a producer or reseller of a Schedule I or Schedule II controlled substance is deducting from gross income the types of costs that would be inventoriable if that taxpayer were properly using an inventory method under Code Sec. 471, it is an appropriate exercise of authority for IRS to require that taxpayer to use an inventory method, to use the applicable inventory-costing regime (as discussed under Issue 1, above), and to change from the cash method to the accrual method.

However, the CCA said, if the taxpayer is not required to use an inventory method (for example, small taxpayers properly using the modified cash method under Rev Proc 2001-10 or Rev Proc 2002-28 or farmers), it is not an appropriate exercise of authority for IRS to require that taxpayer to use an inventory method. Instead, IRS should permit that taxpayer to continue recovering, as a return of capital deductible from gross income, the same types of costs that are properly recoverable by a taxpayer both trafficking in a Schedule I or Schedule II controlled substance and using an inventory method under Code Sec. 471.

References: For the disallowance of deductions or credits for illegal drug trafficking, see FTC 2d/FIN ¶  L-2632  ; United States Tax Reporter ¶  280E4  ; TaxDesk ¶  304,815  ; TG ¶  16455.

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Hiding Money or Income Offshore Among the “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

Federal, State, Local and International Taxes - The Internal Revenue Service today said avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

"The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore,” said IRS Commissioner John Koskinen. “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 50,000 disclosures and we have collected more than $7 billion from this initiative alone.  The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

The IRS remains committed to our priority efforts to stop offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.

Through the years, offshore accounts have been used to lure taxpayers into scams and schemes.

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shut down scams and prosecute the criminals behind them.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced.

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Tax Audits

IRS will audit hundreds of thousands of individual tax returns this year. Although that represents but a small percentage of all returns filed, this is little consolation if your return is among those selected for audit. But with proper preparation and planning, you should fare well.

The purpose of the audit is to verify items reported on a tax return. The easiest way to survive a tax audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation—invoices, bills, cancelled checks, receipts or other proof—for all items to be reported on your tax return. Keep all your records in one place and hold on to your calculations.

The government normally has three years within which to conduct an audit, and often the audit won't begin until a year or more after you file your return. So don't trust your memory. Leave a good trail. If you have to go back to your records later, you should be able to backtrack all of the entries on your return.

The scope of an audit depends on the complexity of the return being examined. A return reflecting business or real estate income and expenses is likely to take longer to audit than a return reflecting only salary income. You can facilitate matters by having the necessary records arranged in an orderly and systematic fashion for presentation to the IRS agent. The typical IRS agent is experienced and knows his job. Trying to outsmart the agent or sidestepping questions is likely to create friction and raise suspicions in the agent's mind.

Representation. Even if you prepared your own return, it is often advisable to have a tax professional represent you at an audit. Your representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. More importantly, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow deduction of a certain type of expense) even though courts and other authority have expressed a contrary opinion on the issue. Because the representative knows and can point to the proper authority, the IRS agent may be forced to throw in the towel.

If you are facing a tax audit or simply want to improve your recordkeeping, my office stands ready to assist you. Please call to set up an appointment to discuss this or any other aspect of your taxes. If you found this Tax Tip helpful, please share it through your social media platforms.

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IRS allows taxpayer to re-elect the foreign earned income exclusion

International Taxes – In a Private Letter Ruling (PLR), IRS has granted a taxpayer, who has resided outside the U.S. since Year 1, the permission to re-elect the foreign earned income exclusion under Code Sec. 911(a) for Year 4 and subsequent years. The taxpayer had changed employers and moved from Country A to Country B in Year 3. However, unlike Country A, Country B has no personal income tax.

Background. Code Sec. 911 allows qualified individuals, who meet requirements as to residency or physical presence in a foreign country, to exclude from gross income all or a portion of their foreign earned income and also to exclude or deduct certain amounts related to foreign housing costs. To qualify, a qualified individual must make an election.

According to Reg. § 1.911-7(a)(1), the election applies to the taxable year for which it is made and for all subsequent years, unless revoked by the taxpayer. A taxpayer may revoke an election to exclude foreign earned income, by filing a statement revoking any previously made elections, under Reg. § 1.911-7(b)(1).

Code Sec. 911(e)(2) provides, however, that once such election is revoked, it may not be made again by the taxpayer until the sixth tax year after the year in which the revocation was made, unless IRS consents to the reelection. According to Reg. § 1.911-7(b)(2), if an individual revokes an election under Reg. § 1.911-7(b)(1) and desires to re-elect the same exclusion within the next five years, the individual must obtain permission by requesting a ruling.

IRS may permit the taxpayer to re-elect the foreign earned income exclusion before the sixth year, after considering any facts and circumstances that may be relevant to the determination. Reg. § 1.911-7(b)(2) provides that relevant facts and circumstances may include the following: (i) a period of U.S. residence, (ii) a move from one foreign country to another foreign country with differing tax rates, (iii) a substantial change in tax laws of the foreign country of residence or physical presence, and/or a (iv) change of employer.

Facts. Taxpayer is a U.S. citizen who has resided outside of the U.S. since Year 1. Taxpayer made a Code Sec. 911(a) election but revoked the election in Year 2.

In Year 3, Taxpayer changed employers and moved from Country A to Country B. Country B, unlike Country A, has no personal income tax.

Taxpayer requested permission to re-elect Code Sec. 911 with respect to Year 4 and subsequent tax years.

Conclusion. IRS has granted the taxpayer permission to re-elect Code Sec. 911 exclusion for Year 4 and all subsequent years.

IRS expresses no opinions on whether the taxpayer satisfies the requirements of Code Sec. 911.

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Germany and Austria start new initiative for an EU financial transactions tax

Federal, State, Local and International Taxes -The finance ministers of Germany and Austria have devised a new plan for the introduction of an European Union (EU) financial transactions tax (FTT), according to a recent press release from the Austrian Ministry of Finance. Despite recent deadlocks among European countries over an FTT, the new plan calls for the imposition of an FTT on equity transactions starting in 2016 and other financial transactions (except government bonds) starting in 2017.

Background. The global financial and economic crisis in 2008 resulted in widespread calls for the introduction of an additional tax on the financial sector, as the financial sector played a major role in causing the crisis. In this regard, several EU Member States have already taken divergent action in the area of financial sector taxation.

On Sept. 28, 2011, the EC formally adopted a proposal for an FTT within the EU. It would be levied on all transactions between financial institutions that involve financial instruments where at least one party to the transaction is located in the EU. However, it was unclear whether all EU Member States would support this proposal.

Under the proposal, unveiled by EC president Jose Manuel Barroso, the FTT would be imposed on the exchange of shares and bonds at a rate not lower than 0.1 percent and on derivative contracts, at a rate not lower than 0.01 percent. EU Member States could elect to impose the FTT at higher rates.

An accompanying press release indicated that the FTT could generate 57 billion euros per year, if applied across all 28 EU countries. The proposal was originally slated to come into effect on Jan. 1, 2014. It has since been postponed to Jan. 1, 2016.

Efforts to establish an EU-wide FTT have floundered over the types of transactions to tax and the rate of such a tax, according to Reuters. For instance, various countries attempted to win exemptions for the type of securities that would hit their financial institutions particularly hard. Great Britain, which has long opposed the FTT, was fearful that such a tax would drive financial business away from London - home of Europe's biggest financial sector.

Joint letter from Austria and France. In addition to the recent press release from the Austrian Ministry of Finance noted above, Reuters has reported that Austria's finance minister, along with France's finance minister, have issued a joint letter to their counterparts in other countries to seek a new approach to the FTT. The letter from France's Michel Sapin and Austria's Hans-Joerg Schelling, claimed to be seen by Reuters, stated as follows:

We suggest resuming the work on a different footing to the approach that led to the negotiations hitting a wall in 2014.

This fresh direction would be based on the assumption that the tax should have the widest possible base and low rates.

The French and Austrian finance ministers would like the EU finance ministers who are meeting in Brussels next week to consider this new approach, according to Reuters.

Reuters reported that one EU official stated in December that the FTT was like the Loch Ness Monster. “Everyone's talking about it, but no one's ever seen it.”

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Top Tax Facts about Exemptions and Dependents

Income Tax Service For Individuals - Nearly everyone can claim an exemption on their tax return. It usually lowers your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

1. E-file your tax return.  Filing electronically is the easiest way to file a complete and accurate tax return.

2. Exemptions cut income.  There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $3,950 for each exemption you claim on your 2014 tax return.

3. Personal exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:

• had no gross income,
• is not filing a tax return, and
• was not the dependent of another taxpayer.

4. Exemptions for dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

5. Report health care coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:

• Have qualifying health insurance, called minimum essential coverage, or
• Have an exemption from this coverage requirement, or
• Make a shared responsibility payment when you file your 2014 tax return.

6. Some people don’t qualify.  You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

7. Dependents may have to file.  A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like the amount of their income, whether they are married and if they owe certain taxes.

8. No exemption on dependent’s return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person is your dependent.

9. Exemption phase-out.  The $3,950 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income.

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What's new on Form 1040 for tax year 2014–Part II

IRS has electronically released final tax forms and instructions for the 2014 tax year, including Forms 1040, 1040-A, and 1040-EZ, along with some related schedules. They reflect key health coverage changes that first went into effect in 2014, including the premium assistance credit and the penalty for failing to have coverage, and other changes.

FORM 1040—SCHEDULE A, ITEMIZED DEDUCTIONS

Line 1. Medical and dental expenses. The 2014 standard mileage rate for medically-related use of an auto is 23.5¢ per mile.

Line 21. Unreimbursed employee expenses. The 2014 standard mileage rate for business travel is 56¢ per mile.

Line 29. Limit on itemized deductions. Itemized deductions for taxpayers with adjusted gross incomes in excess of the “applicable amount” ($305,050 for joint filers or a surviving spouse, $279,650 for a head of household, $254,200 for a single individual who isn't a surviving spouse, and $152,525 for marrieds filing separately) may be reduced.

FORM 1040—SCHEDULE B, INTEREST AND ORDINARY DIVIDENDS

Line 1. Interest. Accrued interest on Series EE U.S. savings bonds issued in '84 is taxable.

Line 3. Excludable interest on Series EE or Series I U.S. savings bonds. The exclusion for education related savings bond interest phases out at higher income levels. For 2014, the phaseout begins at modified AGI above $76,000 ($113,950 on a joint return).

FORM 1040—SCHEDULE C, PROFIT OR LOSS FROM BUSINESS

Part II. Expenses. Line 9. Car and truck expenses. The 2014 standard mileage rate for business travel is 56¢ per mile.

Part II. Expenses. Line 13. Depreciation and section 179 expense. See entries for Form 4562, see below.

FORM 4562, DEPRECIATION AND AMORTIZATION

Part I. Election to expense certain tangible property under Sec. 179. For tax years beginning in 2014, the maximum section 179 expense deduction is $500,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2 million.

Part II. Special depreciation allowance. For qualified property acquired and placed in service after 2011 and before Jan. 1, 2015 (before Jan. 1, 2016 for certain longer-lived and transportation property), a 50% bonus first-year depreciation allowance applies under Code Sec. 168(k).

Part V. Listed property. First-year luxury auto depreciation deduction limits for vehicles first placed in service in 2014 are $3,160 for autos and $3,460 for light trucks or vans. The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is “qualified property” under the 50% bonus first-year depreciation rules of Code Sec. 168(k)and which isn't subject to a taxpayer election to decline bonus depreciation.

FORM 1040—SCHEDULE D, CAPITAL GAINS AND LOSSES

Form 1099-B. Form 1099-B has been redesigned so that the information is reported in boxes that are numbered to match the corresponding line and column on Form 8949 (Sales and other Dispositions of Capital Assets). (Form 8949 is used to report the sale or exchange of a capital asset not reported on another form or schedule. One of the functions of Schedule D is to figure the overall gain or loss from transactions reported on Form 8949.) A new box has also been added at the top of Form 1099-B to tell the taxpayer which box to check when completing Form 8949. These changes are designed to make it easier to complete Form 8949.

Form 1040—SCHEDULE E, SUPPLEMENTAL INCOME AND LOSS

Standard mileage rate. The 2014 standard mileage rate for miles driven in connection with the taxpayer's rental activities is 56¢ per mile.

FORM 1040—SCHEDULE F, PROFIT OR LOSS FROM FARMING

Part II. Farm Expenses—Cash and Accrual Method. Line 10. Car and truck expenses. The 2014 standard mileage rate for business travel is 56¢ per mile.

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Democrats introduce legislation to curb corporate tax inversions

Four Democratic lawmakers have introduced the “Stop Corporate Inversions Act of 2015,” which would tighten restrictions on corporate tax inversions. The proposed legislation is expected to save the U.S. nearly $34 billion in revenue, according to a recent estimate from the Joint Committee on Taxation. If enacted, the proposed legislation would be effective for any inversion transactions completed after May 8, 2014.

Background. In general, an inversion is a transaction in which a domestic corporation or partnership becomes foreign (i.e., an expatriated entity), without moving out of the U.S. in a practical sense. For example, a U.S. parent corporation of a multinational group may undertake a series of transactions to become a subsidiary of a foreign corporation, after which the foreign corporation is the parent of the multinational group. Furthermore, by restructuring to move the foreign subsidiaries out from under the U.S. ownership chain, U.S. taxpayers attempt to avoid the U.S. anti-deferral rules.

A corporate inversion occurs when a U.S. corporation moves to a foreign jurisdiction and becomes domiciled in the foreign country. Corporate inversions have received much attention, with legislators expressing concern over the loss of corporate tax revenue from U.S. corporations moving to lower tax jurisdictions.

In 2004, to discourage U.S. companies from entering into inversion transactions, Congress enacted Code Sec. 7874. However, since the provision was enacted in 2004, there have been approximately 40 corporate inversions, according to the press release accompanying the introduction of the Stop Corporate Inversions Act of 2015.

On Sept. 22, 2014, Treasury and IRS issued Notice 2014-52, 2014-42 IRB 712, to take targeted action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. Treasury and IRS viewed corporate inversions as motivated substantially in part by the ability to undertake certain post-transaction steps to reduce U.S. taxation. The Notice announced the intention to issue regulations under Code Sec. 304(b)(5)(B), Code Sec. 367, Code Sec. 956(e), Code Sec. 7701(l), and Code Sec. 7874. According to the Notice, such future anti-inversion guidance would apply prospectively from the date of issuance, but only to groups that completed their business combinations on or after Sept. 22, 2014.

Stop Corporate Inversions Act of 2015. On Jan. 20, 2015, Senate Minority Whip Dick Durbin (D-IL), House Ways and Means Committee Ranking Member Sander Levin (D-MI), Senator Jack Reed (D-RI), and Representative Lloyd Doggett (D-TX) introduced the Stop Corporate Inversions Act of 2015. The proposed legislation was originally introduced in May by Levin and three dozen other Democrats.

Under current law, a corporate inversion will not be respected for U.S. tax purposes if at least 80% of the new combined corporation (incorporated outside the U.S.) is owned by historic shareholders of the U.S. corporation (or, in the case of a partnership, interest owners of the partnership). Alternatively, if at least 60% (but less than 80%) of the combined foreign corporation is owned by historic shareholders of the U.S. corporation, the inversion itself will be respected, but the expatriated entity will be subject to certain adverse tax consequences (i.e., inversion gain). However, these anti-inversion rules do not apply if the expanded affiliated group that includes the combined corporation has substantial business activities in the foreign country where it is incorporated.

The proposed legislation includes the following amendments to Code Sec. 7874:

(1)  It would treat a combined foreign corporation as a domestic corporation if the historic shareholders of the U.S. corporation own more than 50% of the combined foreign corporation.

(2)  It would treat a combined foreign corporation as a domestic corporation if the affiliated group that includes the combined foreign corporation is managed and controlled in the U.S. and engages in significant domestic business activities in the U.S., regardless of the percentage ownership in the new combined foreign corporation.

(3)  It would repeal the 60% to 80% ownership test as well as the inversion gain applicable where there is 60% to 80% ownership.

(4)  It would maintain the foreign substantial business exception under Code Sec. 7874, by exempting the affiliated group if the combined foreign corporation has substantial business activities in the foreign country where the combined foreign corporation is incorporated.

Comments from the sponsors. The sponsors of the proposed legislation made a number of comments concerning the proposed legislation. Senator Reed stated as follows:

Congress needs to close the inversion loophole to protect American taxpayers and businesses that pay their fair share for our national defense, our infrastructure, and the education of our workforce. Our bill would help put a stop to the corporate shell game that allows some companies to shift their address abroad for tax purposes while remaining in the U.S. and increasing the tax burden to American taxpayers. Middle-class families and small Main Street businesses don't have that option when it comes to paying taxes.

Large multinational corporations are exploiting the current system and this is a pragmatic, sensible solution to put a stop to the inversion trend. If Congress fails to act quickly on inversions it could seriously erode the corporate tax base and make improving the tax code that much harder.

Checkmark RIA observation: Of course, the proposed legislation must make its way through a Republican controlled Congress.

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

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What's new on Form 1040 for tax year 2014—Part I

IRS has electronically released final tax forms and instructions for the 2014 tax year, including Forms 1040, 1040-A, and 1040-EZ, along with some related schedules. They reflect key health coverage changes that first went into effect in 2014, including the premium assistance credit and the penalty for failing to have coverage, and other changes.

FORM 1040—NEW HEALTH-CARE-RELATED FORMS

Form 8965. Beginning in 2014, taxpayers must have health care coverage, have a health coverage exemption, or make a shared responsibility payment with their tax return. Form 8965 (Health Coverage Exemptions) is used to report a coverage exemption granted by the Marketplace (also called the “Exchange”) or to claim an IRS-granted coverage exemption on the tax return.

Form 1095-A. If the taxpayer, his spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace, he should receive Form(s) 1095-A (Health Insurance Marketplace Statement). This Form provides information needed to complete Form 8962 (Premium Tax Credit (PTC)), see below.

Form 8962. A taxpayer must complete Form 8962 and file it with his tax return if he received premium assistance through advance credit payments (whether or not the taxpayer is otherwise required to file a tax return) or if the taxpayer wants to claim the premium tax credit (PTC) when he files his return. Form 8962 is used to figure the amount of the taxpayer's PTC and reconcile it with any advance payment of the premium tax credit (APTC). See also the entry below for Line 46.

FORM 1040—U.S. INDIVIDUAL INCOME TAX RETURN—OTHER

GROSS INCOME

Adoption exclusion. For 2014, the maximum exclusion for employer-provided adoption assistance is $12,190 per eligible child.

Exclusion for Medicaid waiver payments. An individual care provider who received certain payments under a Medicaid waiver program for caring for someone who lives in the taxpayer's home with him may be able to exclude the payments from income.

ADJUSTED GROSS INCOME

Line 26. Moving expenses. The 2014 standard mileage rate for moving expenses is 23.5¢ per mile.

Line 32. IRA deduction. In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to the lesser of: (1) a statutory dollar limit, or (2) 100% of the compensation that's includible in his gross income for that year. For 2014, the statutory dollar limit is $5,500, plus an additional $1,000 for those age 50 or older. If the individual (or his spouse) is an active plan participant, the deduction phases out over a specified dollar range of modified AGI (MAGI). For 2014, a taxpayer may be able to take an IRA deduction if he was covered by a retirement plan and his 2014 MAGI is less than $70,000 ($116,000 if married filing jointly or qualifying widow(er)). If the taxpayer's spouse was covered by a retirement plan, but the taxpayer was not, he may be able to take an IRA deduction if his 2014 MAGI is less than $191,000.

TAX AND CREDITS

Line 40. Itemized deductions or standard deduction. For 2014, the standard deduction is $6,200 for single filers and for married persons filing separately, $12,400 for joint filers and qualifying widow(er)s, and $9,100 for heads of household.

Line 42. Exemptions. The amount for each exemption for 2014 is $3,950. Exemptions are reduced for taxpayers with adjusted gross incomes in excess of the “applicable amount” ($305,050 for joint filers or a surviving spouse, $279,650 for a head of household, $254,200 for a single individual who isn't a surviving spouse, and $152,525 for marrieds filing separately).

Line 45. Alternative minimum tax. Under Code Sec. 55(d), the AMT exemption amount for 2014 is $52,800 ($82,100 if married filing jointly or a qualifying widow(er); $41,050 if married filing separately).

IRS has added a worksheet to the instructions for line 45. A taxpayer who is not sure whether he needs to complete Form 6251, Alternative Minimum Tax – Individuals, can use this worksheet to see whether he should complete it.

Line 46. Excess advance premium tax credit repayment. The premium tax credit helps pay premiums for health insurance purchased from the Health Insurance Marketplace. If advance payments for this credit were made for the taxpayer, his spouse, or his dependent, the taxpayer must complete Form 8962. If the advance premium credits were more than the taxpayer can claim, the taxpayer must enter the amount, if any, from Form 8962, line 29.

Line 54. Other credits. For 2014, the maximum adoption credit is $13,190 per eligible child for both non-special needs adoptions and special needs adoptions.

OTHER TAXES

Line 57. Self-employment tax. Maximum amount of self-employment income subject to FICA tax is $117,000; no ceiling on Medicare.

An individual may use the farm optional method only if (a) his gross farm income was not more than $7,200 or (b) his net farm profits were less than $5,198. Using this method, farm self-employment earnings equals the smaller of (1) two-thirds of gross farm income, or (2) $4,800.

An individual may use the nonfarm optional method only if (a) his net nonfarm profits were less than $5,198 and also less than 72.189% of his gross nonfarm income and (b) he had net earnings from self-employment of at least $400 in 2 of the prior 3 years. Individuals may compute their self-employment earnings as the smaller of two-thirds of gross nonfarm income or $4,800

A self-employed individual with both farm and nonfarm incomes is allowed to use both optional computation methods if the farm income qualifies for the farm optional method and the nonfarm income qualifies for the nonfarm optional method. If both optional methods are used to compute net earnings from self-employment, the maximum combined total net earnings from self-employment for any tax year can't be more than $4,800.

Line 61. Health care: individual responsibility. A taxpayer who had qualifying health care coverage (called minimum essential coverage) for every month of 2014 for himself, spouse (if filing jointly), and anyone the taxpayer could or did claim as a dependent, checks the box on this line and leave the entry space blank.

Line 62. Additional Medicare tax. IRS has issued final regs on the additional 0.9% Medicare tax on employee compensation and self-employment income above a threshold amount received in tax years beginning after Dec. 31, 2012. For most individuals, many provisions of the regs effectively first apply on Jan. 1, 2014 (the technical effective date is geared to calendar quarters beginning after Nov. 29, 2013 or certain actions taken on or after that date). The tax is calculated on Form 8959 (Additional Medicare Tax).

Line 62. 3.8% surtax on unearned income. IRS issued final and proposed regs on the new 3.8% surtax on net investment income (NII) that first went into effect in 2013. The surtax is 3.8% of the lesser of: (1) NII, or (2) the excess of MAGI over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). The voluminous final regs clarify many aspects of this new tax and are generally effective for tax years beginning after 2013. They explain, among other items, how NII is calculated, the individuals subject to or excepted from the tax, and the deductions taken into account in figuring the tax. The proposed regs (upon which taxpayers may rely) provide guidance on the computation of NII with respect to a number of specialized provisions and situations including various payments to partners and former partners. The tax is computed on form 8960 (Net Investment Tax of Individuals, Estates and Trusts).

PAYMENTS

Line 66. Earned income credit (EIC). The maximum credit is higher, and the AGI-based phase-out figures are revised.

Line 68. American Opportunity Credit from Form 8863, line 8. Choosing to include otherwise tax-free scholarships or fellowships (e.g., Pell grants) in the taxpayer's income can increase an education credit and lower the total tax or increase the taxpayer's refund.

Line 69. Net premium tax credit. A taxpayer may be eligible to claim the PTC if he, his spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace. Complete Form 8962 to determine the amount of the premium tax credit, if any.

Line 71. Excess social security and RRTA tax withheld. Maximum Social Security (OASDI) tax for 2014 is $7,254.00 (computed on the first $117,000 of wages) for purposes of credit for excess tax withheld.

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

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info@abataxaccounting.com

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

2015 Tax Filing Season Opens

The IRS announced the on-time opening of the 2015 filing season highlighting online services. The announcement also highlights the Affordable Care Act healthcare provisions included in the 2014 individual income tax return. The IRS expects more than four out of five returns will be filed electronically. They will begin accepting and process all tax returns on 1/20/15. The fastest way to obtain a refund is to e-file choosing direct deposit. Similar to last year, the IRS expects to issue 90% of these refunds within 21 days. Due to budget cuts paper returns are expected to take an additional week or more to process, and refunds are expected to be issued in seven weeks or more. Commissioner Koskinen strongly encourages taxpayers to visit www.irs.gov before calling as phone wait times are routinely topping 30 minutes. If you would like more details about these or any other aspect of the law, please do not hesitate to call.

AB Tax Accounting

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