Part of a constantly changing tax law these days appears to encompass a greater number of new or revised tax elections. Many of the newer elections are driven by the Internal Revenue Service's recognition that taxpayers may need a certain degree of flexibility in coping with new requirements. But the IRS also continues to provide relief within the traditional confines of strict guidelines and limited concessions.
The emergence of a number of elections applicable for the first time for the 2013 tax year requires special consideration as tax filing season gets underway. This article reviews some of the more high-profile options now available due to recent IRS activity.
UNDER THE FINAL REPAIR REGS
The IRS issued long-awaited comprehensive final regs during 2013 on the treatment of payments to acquire, produce or improve tangible property, otherwise known as the "repair" regulations. Certain elections were made available under these regulations. A companion set of proposed regulations were also issued.
De minimis safe harbor election. Generally, taxpayers must capitalize amounts paid to acquire or produce a unit of real or personal property, including the related transaction costs. However, the final regulations provide an exception for certain de minimis expenses. The applicable ceiling for de minimis expenses is $500 per invoice (or per item substantiated by invoice) for a taxpayer without an applicable financial statement, or AFS; and a $5,000 invoice/item limit for a taxpayer with an AFS. In both cases, the taxpayer must also have accounting procedures in place at the beginning of the tax year. This carve-out in the final regulations also applies a taxpayer's de minimis safe harbor election to all eligible materials and supplies, other than certain rotable, temporary, and standby emergency spare parts.
Small-business improvements election. A taxpayer whose average annual gross receipts for the three preceding tax years is less than or equal to $10 million may elect under Reg. §1.263(a)-3(h) not to capitalize improvements made to an eligible building with an unadjusted basis of $1 million or less if the total amount paid during the tax year for repairs, maintenance, improvements, and similar activities performed on the building property does not exceed the lesser of 2 percent of the unadjusted basis of the eligible building property, or $10,000.
In the case of an S corporation or a partnership, the election is made by the S corporation or by the partnership, and not by the shareholders or partners. Once made, the election cannot be revoked.
Election to capitalize repair and maintenance costs. Rather than forcing a taxpayer to go through the resource-intensive determination of whether a trade or business expenditure is a currently deductible repair or a capitalized improvement, Reg. §1.263(a)-3(d) allows a taxpayer to make an annual election to capitalize and depreciate as a separate asset any expenditure for repair and maintenance if the taxpayer capitalized the expenditure on its books and records regularly used in computing income for its trade or business (certain rotable or temporary spare parts are excepted). The election is made by attaching a statement to a timely filed original federal tax return (including extensions) for the tax year in which the taxpayer pays or incurs (accrual basis) the repair expenses that are capitalized pursuant to the election. A transition rule applies to tax years beginning on or after Jan. 1, 2012, and ending on or before Sept. 19, 2013.
Partial disposition election. A taxpayer may elect to recognize gain or loss on the disposition of a portion of an asset (Proposed Reg. §1.168-8(d), which may be relied on for tax years beginning on or after Jan. 1, 2012). In the case of a building, an asset is defined as the entire building, including its structural components. The election is made by reporting the gain, loss or other deduction on the taxpayer's timely filed (including extensions) original federal tax return for the tax year of the disposition of the portion of the asset, and, if the asset is properly included in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56, by classifying the replacement portion of the asset under the same asset class as the disposed portion of the asset in the tax year in which the replacement portion is placed in service by the taxpayer.
UNDER THE FINAL NII REGS
Final regulations were issued late in 2013 under Code Sec. 1411. These regulations govern the 3.8 percent net investment income tax first imposed in 2013. Within these rules, several election opportunities were fine-tuned.
Passive activity regrouping election. Under the Code Sec. 469 passive activity rules, deductions from passive trade or business activities, to the extent that they exceed income from all passive activities (exclusive of portfolio income), may not be deducted against other income. Regulations provide that if a taxpayer's original grouping was clearly inappropriate (or a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate), the taxpayer must regroup the activities. NII proposed reliance regulations from 2012 provided taxpayers with the opportunity to regroup their activities in the first tax year beginning after Dec. 31, 2012. The IRS retained the regrouping provision in the final regulations. A regrouping may occur only during the first tax year beginning after Dec. 31, 2012, in which the taxpayer meets the applicable income NII modified adjusted gross income threshold and has NII.
The regrouping election for NII purposes must also be followed for Code Sec. 469 purposes. It may not be amended thereafter and therefore requires careful thought. However, it also offers taxpayers a chance to get out of a Code Sec. 469 grouping that has proved to be disadvantageous for Sec. 469 purposes.
Dual-status individuals. The final regulations provide that a dual-status individual who makes a Code Sec. 6013(h) election with their spouse may also do so for NII purposes. The effect of such an election is to include the combined income of the U.S. citizen or resident spouse and the dual-status spouse in the computation of NII and subject the income of both spouses to the $250,000 NII threshold amount for taxpayers filing a joint return. Likewise, the effect of an election under Section 6013(g) is to include the combined income of the U.S. citizen or resident spouse and the nonresident spouse in the computation of NII and to apply the $250,000 threshold amount for a taxpayer making a joint return.
Section 1.1411-10(g) CFC and QEF election. Individuals, estates and trusts may make a so-called Section 1.1411-10(g) election to include Code Sections 951 and 1293 inclusions in connection with controlled foreign corporations or qualified electing funds in net investment income. The final regulations provide that the Section 1.1411-10(g) election is made on an entity-by-entity basis. The final regulations also provide that a Section 1.1411-10(g) election may be made with respect to interests in CFCs or QEFs held indirectly through certain domestic entities, such as domestic partnerships or S corporations, if the domestic entity does not make a Section 1.1411-10(g) election.
The election must be made no later than the first taxable year beginning after Dec. 31, 2013, in which a person both has a Section 951 or Section 1293 inclusion under the regular income tax rules and is subject to Section 1411. The initial election can be made on an original or an amended return, provided that the year of the election and all years affected by the election are not closed by the period of limitations under Section 6501. The Section 1.1411-10(g) election generally should be made by individuals, estates and trusts on Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts. Domestic partnerships, S corporations, and common trust funds should make the election on attachments to their relevant partnership or income tax returns.
LATE S CORP ELECTIONS
Rev. Proc. 2013-30 introduced exclusive simplified methods to request late S corp elections, which consolidated and expanded earlier guidance. Generally effective since Sept. 3, 2013, the simplified methods are also available to taxpayers requesting relief for late Electing Small Business Trust, or ESBT, elections, Qualified Subchapter S Trust, or QSST, elections, Qualified Subchapter S Subsidiary, or QSub, elections, and certain late corporate classification elections. Under Rev. Proc. 2013-30, the requesting entity may request relief for a late election by properly completing the election form and attaching supporting documents as applicable.
SEC. 336(E) ELECTIONS
The IRS issued final regulations (TD 9619) under Code Sec. 336(e) during 2013 allowing taxpayers to elect to treat the sale, exchange or distribution of at least 80 percent (by vote and value) of a corporation's stock (a qualified stock disposition or QSD) as a deemed disposition of the corporation's underlying assets. The final regulations generally tracked proposed regs issued in 2008, with some modifications. They apply to a QSD (80 percent of the stock) on or after May 15, 2013, but with no transition or binding contact rule.
Among its strengths, the final regulations ease the treatment of disallowed losses in the proposed regs. The final regs permit the write-off of the target's losses in the deemed asset disposition, to offset the target's built-in gains. However, any excess losses are permanently disallowed. Also notable among the changes to the proposed regulations, the final regulations permit a Code Sec. 336(e) election for the sale of S corp stock. Further, the final regulations do not permit an election to be made in a non-taxable transfer of target stock, or in a transaction where the seller or the target is a foreign corporation. However, the IRS is studying these areas.
HOME OFFICE DEDUCTION ELECTION
Rev. Proc. 2013-13 introduced a simplified method election for figuring the home office deduction, effective for tax years beginning on or after Jan. 1, 2013. It is available as an alternative to the calculation, allocation and substantiation of actual expenses. In most cases, the deduction under the simplified method is computed by multiplying $5 by the square footage of the home used for a qualified business use, limited by a 300-square-foot ceiling. Area adjustments may be required if the business was conducted as a qualified joint venture with a spouse, the area used by the business was shared with another qualified business use, the home was used for the business for only part of the year, or the area used by the business changed during the year. The election is made simply by using the simplified method to figure the deduction on a timely filed, original federal income tax return. An election for a taxable year, once made, is irrevocable.
SEC. 179 ELECTION
The IRS chief counsel concluded in Info 2013-0016 that an S corporation was not a component member of a Code Sec. 1563 controlled group. Accordingly, the S corporation could make a Code Sec. 179 election up to the maximum election amount without counting the amount taken by the group against the maximum amount. Code Sec. 179(d)(6)(A) treats all component members of a controlled group as one taxpayer, thus permitting only one election under Code Sec. 179 for the group. However, the chief counsel determined that an S corporation is not a component member and could make a separate election for the maximum amount.
FILM PRODUCTION COSTS ELECTION
The Tax Court in Staples, TC Memo. 2013-262 denied a deduction under Code Sec. 181 because the taxpayer failed to make a valid election to deduct film production costs. The court found that the taxpayer had not made a deemed election by simply filing Schedule C. Substantial compliance requires an election statement at a minimum. An election statement should include the name of the production, the date that the costs were first incurred, the amount of production costs, the amount of qualified compensation costs, and that aggregate costs will not exceed $15 million. A taxpayer must have commenced principal photography to be eligible to make an election.
MID-YEAR CAFETERIA PLAN ELECTIONS
The IRS in Notice 2014-1 addressed the impact that the Supreme Court's Windsor decision on same-sex marriage had on Code Sec. 125 cafeteria plans, covering mid-year election changes, flexible spending accounts, and health savings accounts. Under Notice 2014-1, a cafeteria plan may treat a participant who was married to a same-sex spouse as of June 26, 2013 (the date of the Windsor decision), as if the participant experienced a change in legal marital status for purposes of Reg. §1.125-4(c), the IRS explained. The participant may revoke an existing election and make a new election reflecting their change in legal marital status. A participant who marries a same-sex spouse after June 26, 2013, may make a mid-year election change due to a change in legal marital status.
AUTO ENROLLMENT
The IRS responded "Yes" in 2013 to a FAQ on its Web site concerning whether an employee's election not to participate in the retirement plan's automatic contribution arrangement could expire. A plan can specifically state that an employee's affirmative election not to participate in the automatic contribution arrangement expires either annually or upon some stated event, the IRS explained. It can then require the employee to make a new affirmative election before automatically enrolling them in the plan's automatic contribution arrangement.
CONCLUSION
A growing number of elections are available to taxpayers and their advisors during the 2014 tax filing season. There are over 250 "hits" alone when the word "election" is searched within current Code Sections 1-1563 (Subtitle A). Each year brings with it a new or revised batch. Those that emerged in 2013 may be especially worthwhile to consider because of particularly broad application.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
