Recent Developments that May Affect Your Tax Situation, Part 2

This is Part 2 of 2.

2016 tax law changesRules for ABLE accounts are liberalized. For tax years beginning after December 31, 2014, States can create “Achieving a Better Life Experience” (ABLE) programs, which provide for a new type of tax-advantaged account for disabled persons to save for disability-related expenses. In new guidance, having determined that certain requirements set out in recently issued proposed regulations would impose substantial administrative and cost burdens, the IRS has eliminated or significantly modified these requirements.

Under the guidance, (1) ABLE programs aren’t required to establish safeguards to categorize distributions (including identifying amounts distributed for housing expenses); however, designated beneficiaries will still need to categorize distributions to determine their federal income tax obligations; (2) ABLE programs will not be required to request the taxpayer identification number of contributors to the ABLE account at the time when the contributions are made, if the program has a system in place to reject contributions that exceed the annual contribution limits; and (3) a certification under penalty of perjury that the individual (or the individual’s agent under a power of attorney or a parent or legal guardian of the individual) has a signed physician’s diagnosis, and that the signed diagnosis will be retained and provided to the ABLE program or the IRS upon request, is adequate to satisfy certification requirements.

In addition, the PATH Act eliminated the residency requirement for ABLE programs (i.e., that the accounts could only be located in the State of residence of the beneficiary). Now, individuals setting up ABLE programs can choose the State program that best suits their needs.

Affordable Care Act information reporting deadlines are extended. Under the Affordable Care Act, insurers, self-insuring employers, and certain other providers of minimum essential coverage must file information returns with the IRS and furnish certain information to individuals. Information reporting is also required for applicable large employers (ALEs). In guidance, the IRS has extended the due dates for certain 2015 information reporting requirements under the Affordable Care Act. The IRS has also provided guidance to individuals who, as a result of these extensions, might not receive a Form 1095-B or Form 1095-C allowing them to establish that they had minimum essential coverage by the time they filed their 2015 tax returns.

Innocent spouse relief. The IRS issued proposed regulations that would make a number of significant changes to the existing innocent spouse rules. In general, a joint filer may obtain relief: (1) where the taxpayer did not have actual or constructive knowledge of the understatement of tax on a return; or (2) if no longer married to the other joint filer, by limiting his liability to his allocable portion of any deficiency; or (3) if ineligible for relief under the above two provisions, where, in view of all the facts and circumstances, it would be inequitable to hold the joint filer liable for any unpaid tax or any deficiency. Under the proposed regulations, when a taxpayer makes a request for relief on Form 8857, Request for Innocent Spouse Relief, he would not be required to elect or request relief under a specific provision of Code Sec. 6015. The proposed regulations would also provide guidance on the judicial doctrine of res judicata (i.e., when a prior court proceeding will be binding on the spouse) and detailed rules on credits and refunds in innocent spouse cases.

Health coverage tax credit. The IRS provided guidance on claiming the health coverage tax credit (HCTC) for tax years 2014 and 2015, with particular emphasis on circumstances in which the taxpayer also qualifies for the Code Sec. 36B premium tax credit. Eligibility for the HCTC is limited to displaced workers receiving allowances under the Trade Adjustment Assistance program and Pension Benefit Guaranty Corporation pension recipients who are age 55 or older. For months in tax years beginning in 2014 or 2015, an individual enrolled in a qualified health plan who is both an eligible individual for purposes of the HCTC and the premium tax credit in a month may claim either credit for the month. But once the HCTC election is made for an eligible coverage month, the individual is ineligible to claim the premium tax credit for the same coverage in that coverage month and for all subsequent months in the tax year for which the individual is eligible for the HCTC.

De minimis expensing safe harbor under capitalization regulations is increased. As an alternative to the general capitalization rule, regulations permit businesses to elect to expense their outlays for “de minimis” business expenses. The election is allowed where the amount paid for the property doesn’t exceed $5,000 per invoice (or per item as substantiated by the invoice) if the taxpayer has an applicable financial statement (AFS), but a $500 limit applies where the taxpayer does not have an AFS. In new guidance, the IRS has increased, from $500 to $2,500, the de minimis safe harbor limit for taxpayers that don’t have an AFS. The increase applies for costs incurred during tax years beginning on or after January 1, 2016, but use of the new limit won’t be challenged by the IRS in tax years prior to 2016.

Deduction safe harbor for remodeling costs of retail and restaurant businesses. Taxpayers are generally allowed to deduct all the ordinary and necessary expenses paid or incurred in carrying on any trade or business, including repair and maintenance costs, but must generally capitalize amounts paid to acquire, produce, or improve property. Determining how these rules apply to the various components of a remodelling project can be a complex and difficult undertaking. In new guidance, the IRS has provided a safe harbor method that taxpayers engaged in the trade or business of operating a retail establishment or a restaurant may use to determine whether costs paid or incurred to refresh or remodel a qualified building are deductible or must be capitalized. Under the safe harbor, a qualified taxpayer treats 75% of its qualified costs paid as deductible and 25% as expenses that must be capitalized.

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About cozbycpa

Heather L. Cozby is a CPA on the South Shore and Cape Cod. The managing partner of Cozby & Company, LLC, Heather has the resources and experience necessary to provide quality professional services on a timely basis and at a reasonable cost. She specializes in tax planning & preparation; audit, review & compilation services; management advisory services; bookkeeping; and accounting. Her unique niche is in working with homeowners’ associations and condominium trusts, advising with rental real estate, and providing outsourced financial consulting for mid-sized companies. She is more entrepreneurial than most accountants, and offers the best of both worlds - providing the services of a larger firm while retaining the ability to connect with her clients on a personal level.
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