When initiating an overall year-end tax strategy for any given year, surveying what’s new for the year has always been considered a good first step. This is particularly true for 2016 year-end tax planning at this time, when forecasting into 2017 remains more speculative until after Election Day. With that in mind, this month’s column takes a look back at some of the new opportunities and restrictions that have developed over the course of the past year — with an eye toward what can be done before year’s end as a result.
PATH ACT “EXTENDERS”
The Protecting Americans from Tax Hikes Act of 2015, or PATH Act, permanently extended many heretofore temporary tax incentives for individuals, removing for the first time in many years the year-end concern over whether these incentives will be extended retroactively for the current year or prospectively into the coming year. Not all of these provisions were extended beyond 2016, however, and some were modified in the process. Others were extended for up to five years, deferring to “tax reform” a more lasting course. A few notable extenders include:
- Teachers’ classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary–school teachers’ classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016; because of rounding, no increase has been made for 2016. Additionally, starting in 2016, the act includes within the scope of the deduction “professional development expenses,” which include the cost of courses related to the curriculum in which the educator provides instruction.
- Two-year extensions for individuals. The PATH Act renewed several extenders related to individuals for two years through 2016, so they are up for renewal again at the end of 2016. This group includes the above-the-line deduction for qualified tuition and fees for post-secondary education and the treatment of mortgage insurance premiums as deductible interest that is qualified residence interest subject to an adjusted gross income phaseout. The act’s two-year extender provisions also included the mortgage debt exclusion that has enabled those taxpayers underwater or otherwise in trouble with their mortgages to negotiate workouts with their lenders without the burden for having the debt forgiveness taxed as income. One change, however, can reach into 2017, even without the expectation of eventual renewal by Congress: The exclusion applies to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016.
- Permanent extensions for businesses. The act makes permanent many business-related provisions that had been up for renewal, including the 100-percent gain exclusion on qualified small-business stock; the reduced, five-year recognition period for S corporation built-in gains tax; 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements; charitable deductions for the contribution of food inventory; and others. Perhaps most significant, especially for small businesses, enhancements starting in 2016 were added to both a permanently extended research credit and the Code Sec. 179 expensing deduction.
- Research credit. The PATH Act made permanent the credit for increasing research activities (the research credit). Particularly relevant to small businesses starting in 2016, the act added the research credit to the list of general business credit components designated as “specified credits” that may offset the Alternative Minimum Tax as well as regular tax, effective for credits determined for tax years beginning after Dec. 31, 2015. An eligible small business may instead elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees.
- Code Sec. 179 expensing. The PATH Act permanently set the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phaseout (both amounts indexed for inflation, in 2016 at $500,000 and $2.01 million, respectively). New for 2016, the PATH Act also removed the $250,000 cap related to the expensing of qualified real property. Consequently, for a tax year beginning in 2016, up to $500,000 of the cost of qualified real property may be applied toward the overall $500,000 limitation that applies to a tax year beginning in 2016. Also made permanent was the special rule allowing off-the-shelf computer software to be treated as Code Sec. 179 property and the ability of a taxpayer to revoke a Code Sec. 179 election without IRS consent.
- Five-year extensions for businesses. The PATH Act extended several business-related provisions so they are available for five years, under the expectation that general tax reform will consider a more permanent fate. Among these provisions, bonus depreciation and the Work Opportunity Credit have widespread applicability.
- Bonus depreciation. Bonus depreciation (additional first-year depreciation) has been extended but under a phase-down schedule through 2019: at 50 percent for 2015-2017; at 40 percent in 2018; and at 30 percent in 2019. The PATH Act also continues the election to accelerate the use of AMT credits in lieu of bonus depreciation (made on a timely filed tax return) and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. Rev. Proc. 2016-48 provides the procedures for claiming or not claiming bonus depreciation for qualified property for taxpayers with a tax year beginning in 2014 and ending in 2015. Additionally, the PATH Act modifies bonus depreciation to include qualified improvement property, as well as certain trees, vines and plants bearing fruits or nuts.
- Qualified improvement property. Effective for property placed in service on or after Jan. 1, 2016, qualified improvement property qualifies for bonus depreciation. The “qualified improvement property” category replaces the “qualified leasehold improvement property” category of property qualifying for bonus depreciation. “Qualified improvement property” is defined as any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was “first placed in service.”
REVISED REPAIR REG RULES
In 2013, the IRS issued final repair regulations on accounting for costs to acquire, repair and improve tangible property (TD 9636). Rather than confine itself to that tax year, however, the repair regs impact virtually all asset-based businesses and have reverberated into 2016, with additional “clean up” expected in 2017.
- De minimis safe harbor. Effective starting in 2016, Notice 2015-82 increased the de minimis safe harbor limit under the repair regs — from $500 to $2,500 — for taxpayers without an applicable financial statement. However, despite waiving the AFS requirement, certain IRS officials have indicated that an unwritten policy employing a $2,500 per-item deduction limit must still be in effect as of the beginning of the 2016 tax year in order for the $2,500 limit to apply for the 2016 tax year. Thus, use of the safe harbor for 2017 requires a policy be in place by Jan. 1, 2017. Further, the per-item deduction limit may exceed $2,500 but only items costing $2,500 or less receive safe harbor protection.
- Remodel-refresh. The IRS supplemented the tangible property regs with a safe harbor that allows a taxpayer operating a retail establishment or a restaurant to change to a method of accounting that allows the taxpayer to treat 25 percent of qualified remodel-refresh costs as capital expenditures under Code Sec. 263 and 75 percent of such costs as currently deductible repair and maintenance expenses (Rev. Proc. 2015-56; Rev. Proc. 2016-29). The IRS also described how taxpayers may obtain automatic consent to change to the safe harbor method of accounting.
PARTNERSHIP AUDIT RULES
The Bipartisan Budget Act of 2015 repealed the TEFRA unified partnership audit rules and replaces them with streamlined procedures. The budget act delays the effective date of the new audit rules for returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new regime to any partnership tax year beginning after Nov. 2, 2015.
The IRS issued temporary and proposed regs that provide the time, form and manner of election for a partnership to opt in to the new partnership audit regime (TD 9780, NPRM REG-105005-16). The election to opt-in generally must be made when the IRS first notifies the partnership in writing (a notice of selection for examination) that it has selected a partnership return (for an eligible tax year) for examination. The partnership must make the election within 30 days of receiving the notice of selection for examination. The election-in, once made, cannot be revoked unless the IRS consents.
DEFINITION OF MARRIAGE
The Supreme Court held in June 2015 that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex (Obergefell, 2015-1 ustc ¶50,357). Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state. Proposed regulations issued soon after Obergefell reflect and clarify earlier guidance that treated same-sex married couples the same as opposite-sex married couples for federal tax purposes (NPRM REG-148998-13). Final regulations (TD 9785) generally follow the proposed regs, with a transition rule for employee benefit plans.
OTHER DEADLINES AND CHANGES
Additional IRS guidance, regulations and case law released so far in 2016 also impact year-end tax planning. Some of these 2016 developments include:
- Revised Form 3115. The IRS issued a revised Form 3115, Application for Change in Accounting Method, for taxpayers to request IRS consent to any change in method of accounting (Announcement 2016-14). Mandatory use of the new form has been generally required since April 20, 2016.
- Charitable contribution substantiation. In response to concerns from some in Congress and the nonprofit community, the IRS withdrew proposed regs (NPRM REG-138344-13) providing an optional reporting procedure for donees to substantiate certain charitable contributions of $250 or more. That proposed method of information reporting would have included the donor’s name, address and taxpayer identification number/Social Security number (“Donee Report”). Many charitable organizations expressed concerns about the information reporting requirements, particularly Social Security numbers from donors.
- Relief for late rollovers. The IRS unveiled a new self-certification procedure for taxpayers who inadvertently miss the 60-day time limit for certain retirement plan distribution rollovers (Rev. Proc. 2016-47). The procedure eliminates the costs associated with requesting a private letter ruling for the 60-day waiver. Rev. Proc. 2016-47 is generally effective Aug. 24, 2016; further, the IRS may grant a waiver during an examination of the taxpayer’s income tax return.
- Per taxpayer mortgage deduction. The IRS announced its acquiescence in Voss, 2015-2 ustc ¶50,427. In Voss, the Ninth Circuit Court of Appeals, reversing the Tax Court, had found that when multiple unmarried taxpayers co-own a qualifying residence, the debt limit provisions under Code Sec. 163(h)(3) apply per taxpayer and not per residence. So, rather than sharing the $1.1 million mortgage debt limit to which married, joint filers are subject, the two, unmarried taxpayers sharing the same residence and same mortgage debt are effectively allowed a combined $2.2 million limit.
- Certified professional employer organizations. The IRS issued interim guidance, on which taxpayers may rely, on the new voluntary certification program for professional employer organizations designed to take care of taxpayers’ employment tax obligations (Notice 2016-49). Under the interim guidance, the effective date of certification for a CPEO applicant that submits a complete and accurate application for certification on or before Sept. 30, 2016, and is certified, will be Jan. 1, 2017. This treatment will apply even if the date of its notice of certification is after Jan. 1, 2017.
- Partner working for disregarded entity. The IRS issued final, temporary and proposed regs that preserve a partner’s status as a partner, and not an employee, where the partner works for a disregarded entity owned by the partnership (TD 9766, NPRM REG-114307-15). The regs do not apply until the later of either Aug. 1, 2016, or the first day of the latest-starting plan year after May 4, 2016, for an “affected” plan sponsored by a DE. Affected plans include qualified plans, health plans and cafeteria plans. This effective date was set to give partnerships time to make payroll and benefit plan adjustments.
Year-end tax planning will move into high gear once the results on the presidential and congressional elections are known following Nov. 8. Now is a good time to get prepared for that sprint to the 2016 finish line. Determining what recent development may impact any particular taxpayer, as well as taking stock of projected income, deductions and credits for 2016 and 2017, can put everyone in a better position to engage in the later acceleration or deferral of income or deductions that has become the stock in trade of effective action right at year’s end.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer US, Tax & Accounting.
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