US Senate postpones action until after November election.

US Senate Majority Leader Harry Reid confirmed in June that there will be no actions on the extender package in the Senate until after the midterm election in November.

Depreciation for small businesses: This means that the IRC Section 179 election for accelerated depreciation on business property acquired in 2014 will remain at a maximum of $25,000 for the time being. We won’t know about restoration to the old limits (or somewhere in between) until November at the earliest.

Ref: Regulation 1.67-4; TD 9664, 5/8/2014

Some trust/estate expenses are not fully deductible. On May 8, the IRS issued final regulations listing those administrative-type expenses which will be allowed as fully deductible on a trust or estate return.  Among those are:

1. Ownership costs: Such as property tax on non-rental real estate.

2. Tax preparation fees tied to the trust/estate: Examples given are fees to prepare estate returns, trust returns and the decedent’s final individual income tax returns (year of death).

3. Appraisal fees: Incurred to value trust/estate assets as of the decedent’s date of death (or the alternate valuation date) or subsequent valuations for any other valid trust/estate purpose.

4. Fiduciary expenses: For example, probate court fees/costs, fiduciary bond premiums and cost of certified copies of the decedent’s death certificate.

5. Investment advisory fees: If greater than those charged to an individual investor. Examples would include professional advisory fees tied to advice regarding the beneficiaries of retirement accounts or fees charged to create a listing of security values as of the date of death (or alternative valuation date).

For further information, please contact our office directly.

Source: Appeal of Mendoza; Cal St. Bd. of Equalization, Case No. 575960

In Mendoza, a taxpayer was notified by the IRS that Ohio wages had been reported under his Social Security Number. Mr. Mendoza had never worked in Ohio and was a full time California resident. He took NO STEPS to report his identity theft. Eventually, the CA Franchise Tax Board assessed taxes on those wages. He appealed and lost because he could not provide any evidence to show that he had reported and fought the identity theft.

If you suspect identity theft, you should immediately:

1. File a police report with your local jurisdiction.

2. File Form 3552, Identity Theft Affidavit, with the California FTB.

3. File Form 14039, Identity Theft Affidavit, with the IRS.

4. Seek assistance from a credit protection agency to “lock down” your credit and regularly monitor your credit reports.

Summary: It’s important to act quickly to limit future damage including tax assessments for income incorrectly reported under your Social Security number.

April 1, 2014: Potential great news for individuals in foreclosure or facing a short sale.

A bipartisan bill, the EXPIRE Act, was introduced by the Senate Finance Committee. One major feature of the bill is the restoration of the exclusion of up to $2 million of discharged principal residence indebtedness from gross income under Internal Revenue Code Section 108.

THIS IS NOT YET LAW, but it’s significant that a bipartisan bill includes this.

There has also been recent positive movement in this area by the California Franchise Tax Board in the case of short sale discharges. Clients can call the office at 800-924-1040 ext 12 if they have questions in this area.

Reference: Revenue Procedure 2013-30

The IRS just released updated and simplified procedures for late S corporation elections.  Over the last several years, we’ve seen an increase in corporations formed through paralegal services. Often times, the corporation feels that the paralegal has filed the S corporation election, Form 2553, with the IRS, but finds out a year later that nothing was mailed in.

Under this new Rev. Proc., in most circumstances, the IRS will allow a late filing election up to 3 years and 75 days from the original due date. The late filing does involve some detailed paperwork, but the process is straight-forward.  Please call us if you think that you need to make a late election. (Note: This new procedure supersedes all prior late filing procedures in this area).

Ref: Final Regulation Section 1.274-2

The IRS  just released final regulations dealing with reimbursed meals & entertainment in a business environment.  Here’s the changes in plain English:

Background: Most business meals and entertainment are only 50% deductible. However:

1. Employee submits to employer: When an employee submits meals to his/her employer, the reimbursement from the employer is not included in the employee’s income (if an accountable plan). The employee would then reduce his/her business meals/entertainment on Form 2106 by the full amount of the reimbursement.  Any amounts left over receive a 50% deduction on the employee’s return. Example: As an employee, you incur $4,000 in business meals with clients. You submit $3,500 to your employer for reimbursement, but forget to submit the other $500. Your meals deduction on your individual return would be $500 (and the IRS allows 50% = $250 as a deduction).

2. Independent contractor: IF the contract calls for the contractor to be reimbursed for meals and IF those meals are separately stated on the contractor invoice, then the contractor gets 100% deduction for the reimbursed meals.  The customer business would, therefore, get the 50% deduction.  Example: Software contractor is working away-from-home for 3 weeks and has $400 of meals which he can submit for reimbursement under the term of the contract. The customer pays him the $400 and includes it on the Form 1099. The contractor gets a deduction of $400 for the reimbursed meals. The customer’s deduction for that payment would be $400 * 50% = $200.

Please call or email with any questions and/or how to apply this final regulation to your business.

Reference: LB&I-4-0112-001

Internal Revenue Code Section 199 allows a special additional deduction for income derived from any lease, rental, license, sale, exchange or other disposition or qualifying production property manufactured, produced, grown, or extracted by the taxpayer in whole or significant part within the U.S.  This was expended to include qualified films or electricity produced by the taxpayer in the U.S.

Contracted Services: The IRS has now stressed that under Regulation 1.199-e(f)(1), the party qualifying for the deduction is the one where the “qualifying activity occurs.”  Thus, if ABX Corporation contracted with Abe’s Machine Shop to manufacture a product, Abe’s would get the domestic production activities deduction because it was Abe’s where the manufacturing occurred… even though it was ABX Corp who sold the finished product to the public.