September 2013 – Significant Developments
New Final Repair Regulations. In mid-September the IRS issued Final Regulations designed to give guidance on how to draw the line tax-wise between currently deductible repairs and maintenance expenses that have to be capitalized. One of the most important aspects of the regulations involves the de minimis exception to required capitalization for certain types of expenses. As a general rule of thumb, the cost of an asset that has a useful life of a year or less can be currently deducted. That would cover costs associated with repairs and supplies. But, for expenses on assets that have a useful life of more than a year, those costs typically have to be capitalized. Under the proposed IRS rules, there was a de minimis exception from capitalization that only applied to taxpayer that had undergone an audit on their financial statements. Under the Final rules, however, there are two sets of de minimis rules. For taxpayers with “applicable financial statements,” the taxpayer can expense fixed assets where the cost of the asset is $5,000 or less. Under the second de minimis rule, any taxpayer can currently deduct the costs associated with the purchase of a fixed asset that don’t exceed $200. If a higher number clearly reflects income, that higher number can be used if the taxpayer is under audit and the IRS agrees. Of course, the de minimis rules are meaningless if the taxpayer has unused I.R.C. §179 depreciation that remains available. And, nothing has changed concerning the ability to amend a return for the open tax years to either make or revoke an I.R.C. §179 election. You can do either of those through this year. Don’t get confused by the misinformation that has been pedaled around about that. The Final regulations also provide for an annual election that can be made for buildings costing $1 million or less that allows the taxpayer to deduct up to the lesser of $10,000 of maintenance or repair costs or two percent of the adjusted tax basis of the building. The election applies if the taxpayer has average annual gross receipts of $10 million or less during the three preceding tax years. Taxpayer can also elect to capitalize the costs of certain materials and supplies if the costs are associated with rotable, temporary or standby emergency spare parts.
Projected 2014 Inflation-Adjusted Amounts. Every fall, the IRS issues the inflation-adjusted figures for the upcoming tax year. While they haven’t done so yet, some tax services do their own computations of what they think the inflation-adjusted amounts will be for 2014. These predictions are usually very accurate. Here’s what the predictions are for 2014:
- Unified estate and gift tax exclusion and GSTT exemption: $5,340,000
- Present interest gift tax exclusion: $14,000
- Gift tax exclusion for gifts to non-citizen spouses: $145,000
- Foreign earned income exclusion: $99,200
Filing With The Tax Court. Because of the partial government shutdown, the U.S. Tax Court has announced how filing deadlines will be handled. For deadlines imposed by the Tax Court, filing deadlines are five days from whenever the shut-down ends. If that date falls on a weekend or legal holiday in D.C., then the deadline is the next working day. The Tax Court says that petitioning deadlines don’t change. That means that the I.R.C. §7520 mailbox rule still applies.
Oil Spill Prevention and Countermeasure (SPCC) Rule. The EPA subjects a farm to regulation and potential penalties if the farm stores oil or oil products in excess of 1,320 gallons (in total) of all aboveground containers, or more than 42,000 gallons in completely buried containers. The EPA had set a deadline of May 10, 2013 for farms to establish SPCC plans. That deadline was moved to September 23, 2013 in terms of the EPA’s ability to enforce the deadline. Legislation has been proposed to exempt most farms from the SPCC rule, but has not yet passed. Most recently, some in Congress have informed the EPA of a plan to enact legislation to exempt the majority of farms from the regulation and that EPA should not try to retroactively enforce the rule on farms. So, farmers potentially subject to the rule are left in limbo. If no plan is in place and a spill occurs that results in a discharge into the “navigable waters of the United States” or adjoining shorelines, the fines begin at $1,500 and can exceed $55,000 (depending on the size of the farm). Also, if a farm isn’t in compliance with the EPA regulation, that non-compliance can void insurance coverage for the farm. So, stay tuned for further developments on this issue.
Health Care Developments. Recently, IRS regulations were issued that deal with the I.R.C. §45R tax credit. That’s a credit available for “small” employers with 25 or fewer full-time equivalent employees who earn less than $50,000 annually. For tax years beginning on or after January 1, 2014, the employer must pay at least half of the premium cost of a “qualified health plan” purchased through a Small Business Health Options Program (SHOP) operated by a health insurance exchange. The maximum credit is 50 percent of the premium payments that an employer makes. There is a phase-out. The credit phases out if the employer has between 10 and 25 employees, and as average wages exceed $25,000. Also, the credit is only available to an employer for two years. There are anit-abuse rules in the regulations and extra complexity for seasonal workers, the computations of the average salary determination and how FTEs are to be computed. We are working on a small-business checklist for purposes of the health care law. That will be available as an additional handout at the tax schools this fall and will be posted on the CALT website.
Other Developments. In September, the IRS released the special use valuation interest rates for deaths in 2013. Unfortunately, there still isn’t a final Form 706 posted to the IRS website. So, for estate tax returns that are either due or will be due soon, an extension will have to be filed.