In the recently enacted “Tax Increase Prevention Act of 2014,” Congress has once again extended a package of expired or expiring individual, business, and energy provisions known as “extenders”. Congress has repeatedly temporarily extended the tax breaks for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” The new legislation generally extends the tax breaks retroactively, most of which expired at the end of 2013, for one year through 2014.

The following provisions which affect individual taxpayers are extended through 2014:

… the $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom;

… the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income;

… parity for the exclusions for employer-provided mass transit and parking benefits;

… the deduction for mortgage insurance premiums deductible as qualified residence interest;

… the option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes;

… the increased contribution limits and carry forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;

… the above-the-line deduction for qualified tuition and related expenses; and

… the provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70 and ½ or older.

On Dec. 16, 2014, Congress passed the “Tax Increase Prevention Act of 2014” (TIPA), which the President is expected to sign into law. TIPA extends through 2014 depreciation and expensing provisions for businesses that had expired at the end of 2013:

• Increased Section 179 expense amounts for 2014

TIPA retroactively extends for one year the increased $500,000 maximum expensing amount under Code Sec. 179 and the increased $2 million investment-based phase out amount. These increased amounts will apply for qualified property placed in service before January 1, 2015. For tax years beginning after 2014, the maximum expensing amount is again scheduled to drop to $25,000 and the investment-based phase out amount is scheduled to drop to $200,000.

• 50% bonus first year depreciation extended 

TIPA extends 50% first year bonus depreciation for one year so that it applies to qualified property acquired and placed in service before January 1, 2015 (before January 1, 2016 for certain longer-lived and transportation property).

• First year depreciation cap for 2014 autos and trucks increased by $8,000

For passenger automobiles placed in service in 2014, the adjusted first year depreciation expense limit is $3,160; for light trucks or vans, it is $3,460.

TIPA provides that the first year depreciation limit in increased by $8,000 provided the qualified vehicle is new and placed in service before January 1, 2015.

• 15-Year write off for qualified leasehold and retail Improvements and restaurant property extended

TIPA retroactively extends for one year the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before January 1, 2015.

As year-end approaches, it would be worthwhile for practitioners to consider whether corporate clients could benefit from the following “last minute” tax-saving moves, including adjustments to income to preserve favorable estimated tax rules for 2015, deferral of certain advance payments to next year, and fine-tuning bonuses to make the most of the Code Sec. 199 domestic production activities deduction.

Accelerating or deferring income can preserve estimated tax break. Corporations (other than certain “large” corporations, see below) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year. Otherwise, they must pay estimated taxes based on 100% of the current year’s tax. However, the 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed a return for the preceding year that showed a liability for tax. A return showing a zero tax liability doesn’t satisfy this requirement. Only a return that shows a positive tax liability for the preceding year makes the safe harbor

Accrual basis business can take a 2014 deduction for some bonuses not paid till 2015. An accrual basis corporation can take a deduction for its current tax year for a bonus not actually paid to its employee until the following tax year if (1) the employee doesn’t own more than 50% in value of the corporation’s stock, (2) the bonus is properly accrued on its books before the end of the current tax year, and (3) the bonus is actually paid within the first 2 1/2 months of the following tax year (for a calendar year taxpayer, within the first 2 1/2 months of 2015).

For employees on the cash basis, the bonus won’t be taxable income until the following year. The 2014 deduction won’t be allowed, however, if the bonus is paid by a personal service corporation to an employee-owner, or by an S corporation to an employee-shareholder, or by a C corporation to a direct or indirect majority owner.

Accrual-basis taxpayers can defer inclusion of certain advance payments. Accrual-basis taxpayers generally may defer including in gross income advance payments for goods until the tax year in which they are properly accruable for tax purposes if the income inclusion for tax purposes isn’t later than it is under the taxpayer’s accounting method for financial reporting purposes.

An advance payment is also eligible for deferral—but only until the year following its receipt—if:

(1) including the payment in income for the year of receipt is a permissible method of accounting for tax purposes;

(2) the taxpayer recognizes all or part of it in its financial statement for a later year; and

(3) the payment is for (a) services, (b) goods (other than goods for which the deferral method discussed above is used), (c) the use of intellectual property (including by lease or license), (d) the occupancy or use of property ancillary to the provision of services, (e) the sale, lease, or license of computer software, (f) guaranty or warranty contracts ancillary to the preceding items, (g) subscriptions in tangible or intangible format, (h) organization membership, and (i) any combination of the preceding items.

The deferral method cannot be used for (1) rent (unless it’s for items (c), (d), or (e), above), (2) insurance premiums, (3) payments on financial instruments (e.g., debt instruments, deposits, letters of credit, etc.), (4) payments for certain service warranty contracts, (5) payments for warranty and guaranty contracts where a third party is the primary obligor, (6) payments subject to certain foreign withholding rules, and (7) payments in property to which Code Sec. 83 applies.

If an advance payment is only partially attributable to an eligible item, it may be allocated among its various parts, and the deferral rule may be used for the eligible part.

Taxpayers wishing to change to the above method may use automatic consent provisions (with certain modifications). Advance consent procedures apply in certain cases, e.g., where advance payments are allocated.

Making the most of the domestic production activities deduction. Businesses can claim a domestic production activities deduction (DPAD) under Code Sec. 199 to offset income from domestic manufacturing and other domestic production activities.

The Code Sec. 199 deduction equals 9% of the smaller of—

(a) the taxpayer’s “qualified production activities income” or QPAI, for the tax year, or

(b) the taxpayer’s taxable income (modified adjusted gross income, for individual taxpayers), without regard to the Code Sec. 199 deduction, for the tax year.

Qualified production activities eligible for the deduction include items such as: the manufacture, production, growth or extraction of qualifying production property (i.e., tangible personal property such as clothing, goods, or food as well as computer software or music recordings) by a taxpayer either in whole or in significant part within the U.S.; construction or substantial renovation of real property in the U.S., including residential and commercial buildings and infrastructure such as roads, power lines, water systems, and communications facilities; and engineering and architectural services performed in the U.S. and relating to the construction of real property. (Code Sec. 199(c)(4))

However, the Code Sec. 199 deduction can’t exceed 50% of the W-2 wages of the employer for the tax year. Generally, these wages are the sum of the aggregate amounts that must be included on the Forms W-2 of employees under Code Sec. 6051(a)(3) (i.e., wages subject to withholding) and Code Sec. 6051(a)(8) (elective deferrals). The wages must be allocable to the taxpayer’s domestic production activities, and they include tips and other compensation as well as elective deferrals to 401(k) and other plans. (In addition, the otherwise allowable Code Sec. 199 deduction of a taxpayer with oil-related QPAI is subject to a special reduction.)

It is important for businesses to calculate the tentative Code Sec. 199 deduction and the W-2 deduction cap before year-end. If the deduction cap will limit the otherwise available deduction—for example, in the case of a closely held business whose owners do not draw substantial salaries—the business may want to bonus out additional compensation to maximize the Code Sec. 199 deduction. Bear in mind that in some cases, an accrual-basis corporation can deduct a bonus that is declared before year-end but not paid until the following year (see discussion above).

Taxpayers also need to factor the Code Sec. 199 deduction into other year-end tax planning strategies. For example, when determining whether to defer or accelerate income, a taxpayer must determine the marginal tax rate for each year. Depending on the type of income or deduction that the taxpayer is dealing with when working on such strategies, the Code Sec. 199 deduction may have the effect of decreasing the taxpayer’s marginal rate.

For more information please contact our office at 239-261-8337.

The Internal Revenue Service urges taxpayers to double check their returns for often-overlooked tax benefits and then file their returns electronically or paper. Taxpayers who purchase their own software can also choose e-file, and most paid tax preparers are now required to file their clients’ returns electronically. Free File, either the brand-name software, offered by the tax agency’s commercial partners to individuals and families with incomes of $58,000 or less.

Although Oct. 15 is the last day for most people, some still have more time, including members of the military and others serving in Afghanistan or other combat zone localities who typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.

Before filing, the IRS encourages taxpayers to take a moment to see if they qualify for these and other often-overlooked credits and deductions:

• • Benefits for low-and moderate-income workers and families, especially the Earned Income Tax Credit. The special EITC Assistant can help taxpayers see if they’re eligible.
  • Savers credit, claimed on Form 8880, for low-and moderate-income workers who contributed to a retirement plan, such as an IRA or 401(k).

• American Opportunity Tax Credit, claimed on Form 8863, and other education tax benefits for parents and college students.
• Same-sex couples, legally married in jurisdictions that recognize their marriages, are now treated as married, regardless of where they live.

Anyone expecting a refund can get it sooner by choosing direct deposit. Taxpayers can choose to have their refunds deposited into as many as three accounts. See Form 8888 for details.

The new IRS Direct Pay system now offers taxpayers the fastest and easiest way to pay what they owe. Available through the Pay Your Tax Bill  icon on IRS.gov, this free online system allows individuals to securely pay their tax bills or make quarterly estimated tax payments directly from checking or savings accounts without any fees or pre-registration. Other e-pay options include the Electronic Federal Tax Payment System (EFTPS) electronic funds withdrawal and credit or debit cards. Those who choose to pay by check or money order should make the payment out to the “United States Treasury.”

Taxpayers with extensions should file their returns by Oct. 15, even if they can’t pay the full amount due to avoid the late-filing penalty, normally five percent per month. Interest, currently at the rate of 3 percent per year compounded daily, and late-payment penalties, normally 0.5 percent per month, will continue to accrue.

Taxpayers can also request a payment agreement by filing Form 9465. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.

For additional information or assistance please contact our office at (239) 261-8337.

Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.

You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are five tax tips you should know about hobbies:

1. Is it a Business or a Hobby?  A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider nine factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.

2. Allowable Hobby Deductions.  Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses.  Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

For more information please contact us at 239-261-8337.

The Form 1040NR, US Nonresident Alien Income Tax Return is due by June 15^th for the year ended 12/31/2013 for all nonresidents that have reportable and taxable income sourced in the U.S. during 2013.

If a U.S. person has a financial interest in or signature authority over a foreign financial account exceeding certain thresholds a Report of Foreign Bank and Financial Accounts (FBAR) must be filed.  

• The Financial Crimes Enforcement Network (FinCEN) has created a new form FinCEN Form 114, Report of Foreign Bank and Financial Accounts is the replacement for the previous FBAR Form TD F 90-22.1.
• FinCEN Form 114 must be filed electronically and is only available online through the BSA E-filing system website.
• The filing deadline is June 30, 2014 for the year ended 12/31/2013
• FinCEN notice 2013-1 has extended the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to June 30, 2015.

If you are a U.S. person or foreign individual that may require these filings, please call us to help you prepare and report the required forms

Beginning in 2013, a 3.8% tax applies to all or a portion of the net investment income of certain individuals, estates, and trusts. This net investment income tax (NIIT) is not withheld from a taxpayer’s unearned income. Instead the additional tax is calculated on Form 8960 (Net Investment Income Tax-Individuals, Estates, and Trusts) and reported on Form 1040 (for individuals) or Form 1041 (for estates and trusts).

The 3.8% NIIT does not apply to the investment earnings of corporations or limited liability companies (LLCs) treated as corporations. However, it may apply to dividend, interest, or other payments such entities make to individuals, estates, or trusts. The NIIT should be considered when calculating estimated taxes and/or withholding allowances. Taxes, including the NIIT, not paid during the year may be subject to an underpayment penalty. The NIIT is in addition to the 0.9% Medicare taxes on earned income that is applicable to individuals with earned income over certain thresholds. Therefore, certain taxpayers may owe both taxes.

Individuals with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married filing joint or a surviving spouse; $125,000 for married filing separately) must pay the 3. 8% NIIT on the lesser of

• net investment income (see paragraph 605.26), or
• MAGI (see paragraph 605.14) over $200,000 ($250,000 for married filing joint or a surviving spouse; $125,000 for married filing separately).

Estates and trusts must pay the NIIT on the lesser of

• undistributed net investment income, or
• the excess of adjusted gross income (AGI) over the amount at which the highest estate and trust income tax bracket begins ($11,950 for years beginning in 2013).

Estates and trusts are subject to the tax at relatively low income levels, unless net investment income is distributed. It may be beneficial for income tax purposes to distribute sufficient income to the beneficiaries rather than accumulate income that would generate the additional tax for the estate or trust. If beneficiaries are not subject to the additional tax, the tax savings could be substantial.

For purposes of the NIIT, net investment income

• Gross income from interest, dividends, annuities, royalties, and rents; less properly allocable deductions.

Note: Interest, dividends, annuities, royalties, and rents derived in the ordinary course of a trade or business (that is not a trade or business described in item b. or c.) are not subject to the tax.

• Gross income from a trade or business that is a passive activity, less properly allocable deductions.
• Gross income from a trade or business of trading in financial instruments or commodities, less properly allocable deductions.
• Net gain (to the extent taken into account in computing taxable income) from the disposition of nonbusiness property (e.g., capital gain from selling shares of stock) or the disposition of property held in a trade or business that is a passive activity or a trade or business of trading in financial instruments or commodities, less properly allocable deductions.
• Any income, gain, or loss attributable to an investment of working capital 

The IRS has also issued a set of frequently asked questions (FAQs), available at www.irs.gov , regarding the NIIT. (Search for “Net Investment Income Tax” to find these FAQs.) While the FAQs are not authoritative guidance, they do provide insight into how the Service administers the NIIT and are mentioned throughout this section.