Although 2015 is now well underway, memories of those tax developments that took place in 2014 should not be swept clean. Although 2014 tax developments may now be "history," clearly many remain relevant to present circumstances. Certain developments announced in 2014 only first became effective in 2015; others directly impact 2014 tax year returns now being prepared. Although not pretending to be a complete list of these developments, this month's column attempts to highlight some of the more significant changes in terms of both 2014 return preparation and 2015 planning considerations.
INDIVIDUAL TAX EXTENDERS
The Tax Increase Prevention Act of 2014, signed into law on December 19, renewed the so-called individual extenders through 2014. They include the optional state and local sales tax deduction; the above-the-line qualified higher education deduction; the $250 maximum above-the-line teachers' classroom expense deduction; the mortgage debt exclusion on cancellation of indebtedness on a principal residence; the mortgage insurance premium deduction; the exclusion of up to $100,000 for charitable distributions from IRAs by those individuals 70-Â½ and older; transit benefits parity between parking and mass transit; and the special rules for the contribution of real property for conservation purposes.
Because of late passage of the American Taxpayer Relief Act of 2012 on Jan. 2, 2013 (containing the prior extenders package), that law provided two additional forms of relief for charitable distributions from IRAs by taxpayers age 70-Â½ or older to qualify for the $100,000 above-the-line exclusion:
- A taxpayer could elect to have a qualified charitable distribution made in January 2013 treated as having been made on Dec. 31, 2012; and,
- Any portion of a distribution from an IRA made in December 2012 could be treated as a qualified charitable distribution to the extent that such portion was transferred during January 2013 to a qualified charity.
Despite the Tax Increase Prevention Act of 2014 not being passed by the Senate until December 16 and signed by President Obama on December 19, no grace period has been provided by Congress this time around.
The IRS did provide post year-end administrative relief, however, in connection with the retroactive reinstatement of the parity between parking and mass-transit exclusions, which changed from $250/$130 per month to an even $250/$250 per month. Notice 2015-2, similar to ATRA relief in Notice 2013-8, provides a special administrative procedure for employers to use in filing Form 941, Employer's Quarterly Federal Tax Return, for the fourth quarter of 2014 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2014, and in filing Forms W-2, Wage and Tax Statement.
The Achieving a Better Life Experience, or ABLE, Act ("Division B" of the Tax Increase Prevention Act of 2014) creates tax-favored savings accounts for individuals with disabilities for tax years beginning after Dec. 31, 2014. Contributions must be in cash, and the aggregate annual contribution amount cannot exceed the annual gift tax exclusion amount ($14,000 for 2015). Since the limit is tied to an annual amount, a full annual contribution may be made whenever within the year the ABLE account is first established. Many state legislatures are expected to act quickly to adopt ABLE accounts; others, however, may drag their heels or even ultimately opt out.
529 plans. The ABLE Act also authorizes investment direction for Code Sec. 529 (qualified tuition program) plans by an account contributor or designated beneficiary up to two times each year. The change is effective for tax years beginning after Dec. 31, 2014.
Inflation-adjusted penalties. The Tax Increase Prevention Act of 2014 indexes for inflation a number of civil penalties, applicable to individuals, business and preparers. This treatment is effective for returns required to be filed after Dec. 31, 2014.
AFFORDABLE CARE ACT
The Affordable Care Act continues to occupy a great deal of space within the overall body of guidance issued by the IRS (and the Labor Department) during 2014. The individual shared responsibility provision took effect on Jan. 1, 2014, and is a focal point of concern for individual filers during the current 2015 tax filing season. Another key provision, the employer shared responsibility, was delayed, with transitional relief, as was employer reporting under Code Sec. 6605.
Employer shared responsibility. Applicable large employers are required to make a shared responsibility payment if they do not provide minimum essential coverage, among other criteria (the "employer mandate"). In 2014, the IRS, along with the Department of Labor and Health and Human Services, provided transition relief.
Transition relief. For 2015, employers with at least 50 but fewer than 100 full-time employees, including full-time equivalent employees, are eligible for transition relief. The IRS imposed a number of requirements that employers must satisfy before they may be eligible for the transition relief: limited workforce size, maintenance of workforce, maintenance of previously offered coverage, and certification.
Also under the transition relief, employers with 100 or more full-time employees, including full-time-equivalent employees, generally are only required to provide coverage to 70 percent, instead of 95 percent, of qualified employees in 2015. In the case of any non-calendar plan that begins in 2015, the transition relief is available for the part of the 2015 plan year that falls in 2016.
Small employers with fewer than 50 full-time employees, or a combination of full-time and part-time employees that is equivalent to fewer than 50 full-time employees, are permanently exempted by the Affordable Care Act from the employer mandate.
Full-time employment. An employee is a full-time employee if they work on average at least 30 hours a week. A part-time employee is an employee who is expected to work less than 30 hours a per week. Several bills were introduced in Congress in 2014 to increase the number of hours for full-time employment from 30 to 40 hours per week. More action on this limit is expected in 2015.
Employer/insurer reporting. Employer reporting under Code Sec. 6056 (and insurer reporting under Code Sec. 6055) is voluntary starting in 2015 for the 2014 plan year. Mandatory reporting begins in 2016 for the 2015 plan year. For insurance exchanges, mandatory reporting starts in 2015 for the 2014 plan year on Form 1095-A.
FIDUCIARY BUNDLED FEES
In July 2014, the IRS announced a postponed effective date for 2014 final regulations, issued in May 2014, on the portion of a fiduciary's bundled fee subject to the 2 percent floor on miscellaneous itemized deductions. Rather than being immediately effective for tax years that begin on or after May 9, 2014, the final regs are now effective for tax years beginning on or after Jan. 1, 2015. The IRS decided to delay the effective date to give fiduciaries additional time to design and implement program changes to determine the portion of a bundled fee attributable to costs that are subject to the 2 percent floor, versus costs that are not subject to the 2 percent floor.
Along with ACA matters, retirement-related issues arguably occupied an unusually high percentage of the IRS's time in 2014, no doubt in part because of a growing concern over "outliving retirement assets" in the face of fewer defined-benefit plans. In addition to giving the green light in 2014 on the use of longevity annuities and target-date funds, which revises retirement planning strategies in 2015 and going forward, the IRS also tweaked some rules with 2015 effective dates.
- myRA. The myRA is a no-fee investment vehicle subject to the annual limit on contributions to IRAs (currently $5,500 for 2015) and a maximum $15,000 account balance. Workers below a certain income level may participate in the myRA program until their account balance reaches $15,000 or they have participated for 30 years, whichever comes first. The Treasury issued its final rule setting forth the details of the myRA bond program in mid-December 2014 (RIN 1530-AA08). The next step in rolling out the myRA program is to get participating employers onboard under a pilot program.
- One IRA rollover per year limit. In response to the IRS-favorable holding in Bobrow, TC Memo. 2014-21, the IRS issued new proposed reliance regulations (NPRM REG-209459-78) and revised Publication 590, Individual Retirement Arrangements (IRAs), to provide that, effective Jan. 1, 2015, a taxpayer can make only one non-taxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained. Under transition relief, taxpayers could continue to claim more than one rollover per IRA with respect to distributions occurring before Jan. 1, 2015.
- Multiple allocations of distributions. Distributions from a 401(k), 403(b) or 457(b) account may now have the taxable and non-taxable portions of the distribution directed to separate accounts. These new rules, contained in Notice 2014-54 and NPRM REG-105739-11, allow retirement plan participants to allocate pretax and after-tax amounts among plan distributions made to multiple destinations, such as eligible retirement plans, IRAs, Roth IRAs, and the participant. The new allocation rules apply generally to distributions made on or after Jan. 1, 2015, although taxpayers can generally rely on and apply the proposed regulations to distributions made on or after Sept. 18, 2014.
In addition to attention paid during 2014 return preparation to the over 50 business tax extenders enacted within the Taxpayer Increase Prevention Act, final regulations and other developments also presented certain new opportunities and pitfalls to certain business entities and operations.
2015 repair regulation considerations. The repair regulations, which were issued in late 2013, took effect beginning in 2014. Taxpayers could apply the regulations to prior years, but most of the rules require elections or changes in accounting methods that can no longer be made for 2012 or 2013. There is still time to make accounting method changes for 2014, so taxpayers that want to apply various safe harbors to 2014 still have time to make the accounting change.
Repair safe harbor changes include deducting materials and supplies of $200 or less per item, capitalizing and depreciating rotable and temporary spare parts, conforming tax capitalization to the taxpayer's book capitalization policy, and deducting routine maintenance of buildings and other tangible assets. Small taxpayers can elect to deduct building repairs that do not exceed $10,000. Taxpayers can also elect to place assets in a general asset account, which simplifies accounting for assets in the GAA. However, under the final regulations, recognition of a loss on a partial disposition is elective if not in a GAA and prohibited if in a GAA, making GAAs less attractive. GAAs could still be useful if you wish to continue to write off a structural component that has been disposed of.
Taxpayers that want to make a de minimis safe harbor expensing election, for items that cost up to $5,000, must have a written accounting policy in place at the beginning of the year to apply this policy. Taxpayers may want to investigate whether there is still time to develop a policy and make an election for 2015. If it is too late, they should consider whether to take the necessary steps by the end of 2015 to apply de minimis expensing for 2016.
Shareholder basis in S corporations. The IRS issued final regulations clarifying when a shareholder of an S corporation can increase basis in the S corporation because of the S corporation's indebtedness to the shareholder. The final regulations provide two different standards: For a shareholder loan to the S corporation, the debt must be bona fide; and for a guarantee of S corporation debt, there must be an actual outlay by the shareholder. After some debate over whether to apply these clarified rules retroactively, the IRS decided to allow their application as the result from any transaction that occurred in a year for which the period of limitations on the assessment of tax has not expired before July 23, 2014.
Retail inventory method. Final regulations released in 2014 on the retail inventory method of accounting clarify the computation of ending inventory values and provide a special rule for the treatment of margin protection payments and vendor allowances. This revised version of Reg. Sec. 1.471-8 on the retail inventory method applies to tax years beginning after Dec. 31, 2014. The prior version of Reg. Sec. 1.471-8 continues to apply to tax years beginning before Jan. 1, 2015. At the same time, the IRS provided the exclusive procedures (Rev. Proc. 2014-48) to obtain consent to make certain changes within the retail inventory method to comply with the final regulations. Those procedures were made effective for tax years beginning after Dec. 31, 2014.
Contribution reductions/suspensions. The IRS in late 2013 released final regulations allowing employers facing economic difficulties to reduce or suspend non-elective contributions to safe harbor Code Sec. 401(k) plans (TD 9641). The final regulations generally track proposed reliance regulations issued in 2009 with some modifications intended to ease the rules for non-elective contributions, while also toughening the rules for matching contributions, the agency explained. In particular, these regulations also revise the requirements for permitted mid-year reductions or suspensions of safe harbor matching contributions for plan years beginning on or after Jan. 1, 2015.
Magnetic media/transit benefits. The IRS issued Rev. Rul. 2014-32 to update guidance on the requirements for employers using smartcards, debit cards, and cash reimbursement arrangements to provide qualified transportation fringe benefits to employees. Looking ahead to after Dec. 31, 2015, employers will no longer be permitted to provide qualified transportation fringe benefits in the form of cash reimbursement in geographic areas where a terminal-restricted debit card is readily available.
Professional employer organizations. In certain situations, employers will contract with professional employer organizations, or PEOs, also called employee-leasing organizations, to help the employer lower health and worker's compensation insurance costs or to provide other employee benefits. They also complete and file returns and pay and withhold employment taxes with respect to wages paid to employees. The ABLE Act (as part of the Tax Increase Prevention Act of 2014) authorizes the IRS to certify qualifying PEOs, which would allow the PEO to become solely responsible for the customer's employment taxes. The ABLE Act requires the IRS to establish a PEO certification program by July 1, 2015, with a $1,000 annual user fee to participate. Treatment of a PEO as the sole employer under the new law is effective for wages for services performed on or after Jan. 1, 2016.
Tax professionals typically need to straddle the past and the future. An examination of 2014 tax developments, as they apply both to 2014 return preparation and to compliance and planning starting in 2015, fits well into that profile. Keeping an eye on 2015 developments as they evolve and further revise 2014 rules also forms an integral part of that process - and future material for this column.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer, CCH Tax and Accounting.
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