New Temporary Tax Regulations Commercial Real Estate Owners Should Consider

The IRS has issued temporary regulations, which are effective January 1, 2012, that provide guidance on costs to acquire, produce, improve, maintain and repair depreciable assets, including buildings, land, land improvements, leasehold improvements, machinery, equipment, furniture and fixtures.  These temporary regulations describe situations when costs should be deducted or capitalized. 

Prior to these temporary regulations, costs were currently deductible as a repair expense as long as they were incidental in nature and neither materially added to the value of the property or appreciably prolonged its useful life.  On the other hand, costs would be capitalized if they were for permanent improvements or betterments that increased the value of the property, restored its value or use, substantially prolonged its useful life, or adapted it to a new or different use.

Some specific retained and changed rules include the following.

• Repairs:  Repairs and maintenance costs can be deducted unless otherwise required to be capitalized.  

• Rentals and leased property:  Costs to acquire a leasehold interest (e.g. lease commissions and legal costs) are amortized over the life of the lease, but leasehold improvement costs are depreciated over the applicable cost recovery period, not amortized over the life of the lease, whether incurred by the lessor or lessee.      

• Dispositions:  Retirement of a structural component of a building (e.g. roof, HVAC) that has been replaced or leasehold improvement that has been abandoned can be written off at the time of replacement or abandonment instead of continuing to be depreciated.  There may be an opportunity to go back abandoned and retired assets in prior years by filing Form 3115.        

• Compliance:  Changes to comply may be a change in accounting method, which would require filing Form 3115 and require an adjustment in the current tax year and might require IRS consent.  Additional guidance is forthcoming from the IRS and/or the U.S. Treasury.         

These new temporary regulations are comprehensive and will require significant analysis of costs incurred to acquire, produce, improve, maintain and repair real and personal property, plus deducting retired and abandoned depreciable assets.

Please let us know if you have any questions or comments, or would like to meet to discuss this in more detail.

Thank you,

David

Kurtz & Company, P.C. Team is Growing!

We are in the midst of tax season.  Help couldn't have come at a better time!  We are thrilled to announce  the names of our expanding team.  Please help me congratulate our promoted team members and new hires at Kurtz & Company, P.C.

Emily Wang, promoted:

Senior Tax Accountant

Sallie Scherer, new hire:

Senior Tax Accountant

Amy Kurtz, new hire:

Administrative Assistant

Minsu Chen, Intern

Eugene Kim, Intern

Cheryle Chen, Intern

 Wenwen Zhu, Intern

16 Federal Tax Developments You Should Know About

During the fourth quarter of 2011, there were many important federal tax developments. This letter highlights some of the more important federal tax developments for you. As always, please give our office a call or send us an email if you have any questions about these developments.

1. Tax legislation

President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011, extending the employee-side payroll tax cut through the end of February 2012. In November, President Obama signed the 3% Withholding Repeal and Job Creation Act of 2011, which repeals three percent government withholding, enhances the Work Opportunity Tax Credit (WOTC) to cover more military veterans, expands the IRS's continuous levy authority, and more. In October, President Obama signed the Trade Adjustment Assistance Extension Act, enhancing the health care tax credit (HCTC) for qualified individuals.

In related news, the IRS advised employers to implement the reduced employee-side payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees' pay as soon as possible but no later than March 31, 2012, the IRS instructed

2. Foreign accounts

The Foreign Account Tax Compliance Act (FATCA) generally requires certain U.S. taxpayers holding specified financial assets outside the United States to report them to the IRS. FATCA also requires foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The IRS posted a final version of Form 8938, Statement of Specified Foreign Financial Assets, and Instructions on its website in December.

The IRS also issued a Fact Sheet alerting dual citizenship taxpayers, as well as U.S. citizens who reside abroad, to their obligation to file U.S. income tax returns and, if appropriate, a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The IRS described possible penalties for failure to file, and grounds for avoiding the penalties.

3. Mileage rates

The IRS announced in December that the business standard mileage rate for 2012 will be 55.5 cents-per-mile, which is unchanged from the second half of 2011. The standard mileage rate for medical and moving expenses will be 23 cents-per-mile, reflecting a 0.5 cents-per-mile reduction from 2011. The statutorily-determined rate for the charitable deduction remains unchanged at 14 cents-per-mile for 2012.

4. Capitalization of tangibles

Just before year-end 2011, the IRS issued much-anticipated revised regulations on the capitalization of tangible assets. The IRS withdrew proposed regulations issued in 2008 and issued temporary and proposed regulations. The new guidance, the IRS explained, is intended to clarify existing standards and provide certain bright-line tests for applying the standards. The text of the temporary regulations serves as the text of the proposed regulations. The temporary regulations are binding on both taxpayers and the government.

5. Worker classification

A new IRS program - the Voluntary Classification Settlement Program (VCSP) - will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied.

6. Inflation adjusted amounts

The IRS issued cost of living adjustments (COLAs) for various provisions in the Tax Code for 2012. Because of inflation, many provisions are adjusted upward for 2012. For example, the standard deduction for single taxpayers increases from $5,800 for tax years beginning in 2011 to $5,950 for tax years beginning in 2012, and the standard deduction for married couples filing a joint return increases from $11,600 for 2011 to $11,900 for 2012.

7. Social Security wage base

The Social Security Administration (SSA) announced that the maximum amount of earnings subject to Social Security will be $110,100 for 2012, up from $106,800 for 2011. SSA also reported that the so-called "nanny tax" threshold will increase to $1,800 for 2012.

8. Qualified plans

Many retirement plan contribution and benefit limits will increase in 2012, the IRS announced. The 2012 cost of living adjustments (COLAs) affect a variety of retirement savings vehicles, including defined contribution plans, defined benefit plans, employee stock ownership plans (ESOPs), and individual retirement arrangements (IRAs).

9. Decedents’ estates

The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, and its Instructions. Executors will use Form 8939 to make a "Section 1022 Election" to opt out of the 2010 estate tax and apply modified carryover basis.

10. IRS basis regs

The U.S. Supreme Court agreed to resolve the split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis. The government asked the Supreme Court to decide whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the extended six-year assessment period; and whether a final Treasury regulation, which reflects the IRS's view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference.

11. "Hot Stock" rule

The IRS finalized temporary regulations, which the agency described as mitigating the impact of the "hot stock" rule on Code Sec. 355 spinoffs if the controlled corporation is a member of the distributing corporation's separate affiliated group (SAG). The final regs generally adopt the substantive rules of the temporary regs without change.

12. Per diem rates

The IRS issued the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2011, retaining the high-low method. The simplified high-low per diems have increased for 2012 to $242 for high-cost localities and to $163 for all other localities, an increase from $233 and $160, respectively, for 2011. The IRS also announced it will not discontinue use of the "high-low" method for substantiating travel expenses.

13. Whistleblowers

A whistleblower who reported her employer's significant tax underpayment to the IRS would be entitled to anonymity, the Tax Court held in December. However, the court found the whistleblower was not entitled to an award because the IRS had been unable to collect any additional tax from the employer.

14. IRS operations

The Treasury Inspector General for Tax Administration (TIGTA) highlighted some of the management and performance challenges confronting the IRS for fiscal year (FY) 2012 in November. According to TIGTA, the challenges include: keeping taxpayer data secure; tax compliance initiatives; modernization; implementing major tax law changes; fraudulent claims and improper payments; providing quality taxpayer service operations; human capital; globalization; taxpayer protection and rights; and achieving program efficiencies and cost savings.

15. Identity theft

A top IRS official told Congress that the IRS intends to take additional measures to combat identity theft during the 2012 filing season. In 2011, the IRS began issuing Identity Protection Personal Identification Numbers (IP PINs) to victims of identity theft under a pilot program The IRS intends to expand the IP PIN program.

16. Ponzi schemes

The IRS modified guidance issued in 2009 that allows investors to take losses in certain Ponzi schemes. The new guidance, the IRS explained, ensures that investors will still be able to deduct their losses if the lead figure in the Ponzi scheme has died.

Again, if you have any questions about these or any federal tax developments, please contact our office.

Thank you,

David

Facetime with the Dallas Business Journal

Hello and Happy New Year!  We hope you are having a wonderful start to 2012.  This week, David was interviewed by the Dallas Business Journal .  We have been long time subscribers to the Dallas Business Journal; we urge you to head over to the online version and check it out.  Here’s a snippet from “Facetime: David M. Kurtz of Kurtz and Co. PC” by Jeff Bounds, Senior Staff Writer for the Dallas Business Journal:

"WHAT WILL WE SEE IN THE TAX ARENA IN 2012? I expect to see corporate tax rates go down from 35 percent to 25 percent to be more competitive with the rest of the world. Individual taxes are likely to go up, in particular on capital gains and dividends. Those are basically because what everybody knows to the Bush tax cuts will expire at the end of 2012. Because of the country’s debt and its deficit, most likely taxes have to go up. But it will be most likely be on individuals, not corporations. "

Thanks again to Dallas Business Journal and Jeff Bounds! 

-The Kurtz and Company, P.C. Team

6 Tips to Help You Save on Corporate Income Tax

I was on a panel for the First Tuesday Connections meeting held November 1, 2011 at III Forks Restaurant in Dallas, Texas.  The topic was “Corporate Taxes: You Can Run, But You Can’t Hide”.  The moderator was Ronald Pyke, B2B CFO, and the other two panelists were Jim Smith of Smith, Jackson, Boyer & Bouvard, PLLC (CPAs) and Robert Ruhlin of Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP (Attorneys).  The following was taken from my materials used.

Year-end 2011 tax planning is especially challenging because of the uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond.  Even if there's no major tax legislation in the immediate future, next year Congress will have to grapple with a host of thorny issues.

Regardless of what Congress does late this year or early the next year, there are some solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011. These tax breaks may be gone next year unless they are extended by Congress. 

Here are six corporate income tax planning tips based on current federal income tax rules that may help save corporate income tax dollars as long as you act before the end of 2011.

1.  Businesses, not just corporations, should consider making expenditures that qualify for the business property expensing option.  For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000.  Also, a limited amount of expensing may be claimed for qualified real property.  However, unless Congress changes the rules, for tax years beginning in 2012 the dollar limit will drop to $139,000, the beginning-of-phase-out amount will drop to $560,000, and expensing won't be available for qualified real property.  

2.  Businesses, not just corporations, also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service in 2011.  The 100% first-year write-off will become 50% for 2012 unless Congress acts to extend it.  Thus, enterprises planning to purchase new depreciable property in 2011 or 2012 should try to accelerate their buying plans as long as doing so makes sound business sense.

3.  Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.

4.  Delay year-end billing to clients so that revenues are not accrued or received until 2012.

5.  A corporation can accelerate deductions into 2011 by analyzing its business accounts receivable and writing off those receivables that are totally or partially worthless.  By identifying specific bad debts, a corporation should be entitled to a deduction.  The analysis can be completed after year-end as long as the write-offs are reflected in the 2011 year-end financial statements.

6.  Corporations should check for subnormal goods in their inventory.  Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange.  If your business has subnormal inventory as of the end of 2011, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date.  The inventory does not have to be sold within the 30-day timeframe, just offered for sale.

Do you have questions?  Feel free to give us a call or ask questions in the comments section of this blog post.  Thanks!  David.