Choosing the election to capitalize can be tricky and even stressful at times. Electing to capitalize taxes, interest, and carrying charges isn’t as black and white of a decision as choosing to capitalize other long term assets. Some taxes and carrying charges that would normally be deducted currently or amortized may be capitalized if the taxpayer chooses to elect. For depreciable property, this has the effect of deferring the deduction to later years as depreciation. For non-depreciable property, such as unimproved real estate, the capitalized expenses increase basis and reduce gain (or increase loss) on a later sale of the property.
The capitalization election may be made:
- For taxes, mortgage interest and deductible carrying charges on unimproved and unproductive real property.
- By a taxpayer engaged in the development of real estate or the construction of an improvement to real estate, for the following items relating to the project: loan interest; taxes measured by compensation paid to employees and taxes imposed on the purchase of materials, or on the storage, use, or other consumption of materials; and other necessary charges, including fire insurance premiums.
- For interest on a loan to finance the purchase, transportation, and installation of machinery and other assets, state and local taxes imposed on the taxpayer, transportation, storage, use or other consumption of the property, and state and local taxes, including sales and use taxes and state and federal unemployment taxes, and the taxpayer’s share of federal social security taxes on wages of employees engaged in transportation and installation of the assets.
If you have any questions please reach out to your Henry & Horne, LLP professional tax adviser.
By Daniel BlackwellPosted on February 26 2015 by admin
If you hire employees of a “targeted group” (defined below), you may be eligible for the Work Opportunity Tax Credit (WOTC). The IRS has granted a transitional relief period until April 30, 2015 (originally this was 28 days after hire date), for qualified employees hired January 1, 2014 through December 31, 2014, since the law extending the credit was not passed until late December 2014.
Background. The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee. Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it’s 25% for employees who have completed at least 120 hours, but less than 400 hours, of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages.
The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.
Before an employer may claim the WOTC, the employer must obtain certification that the hired individual is a targeted group member. Certification of an individual’s targeted group status is obtained from a DLA-a State employment security agency. Targeted groups include: qualified IV-A recipients (qualified recipients of aid to families with dependent children or successor program); qualified veterans; qualified ex-felons; designated community residents; vocational rehabilitation referrals; qualified summer youth employees; qualified supplemental nutrition assistance benefits recipients; qualified SSI recipients; and long-term family assistance recipients.
An individual isn’t treated as a member of a targeted group unless: (1) on or before the day the individual begins work, the employer obtains certification from the DLA that the individual is a member of a targeted group; or (2) the employer completes a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) on or before the day the individual is offered employment and submits such notice to the DLA to request certification not later than 28 days after the individual begins work.
A reduced WOTC for hiring qualified veterans is also available to a tax-exempt employer.
Extension of time provided. IRS Notice 2015-13 provides that a taxable employer that hired a member of a targeted group, or a qualified tax-exempt organization that hired a qualified veteran, on or after Jan. 1, 2014 and before Jan. 1, 2015, will be considered to have satisfied the requirements if it submits the completed Form 8850 to request certification, to the appropriate DLA not later than Apr. 30, 2015.
By Jeremy Smith, CPAPosted on February 25 2015 by admin
The Arizona Department of Revenue (ADOR) and Arizona cities are changing the rules for owners of residential rental properties. By 2016, all property owners who meet the licensing requirements will be required to be licensed and to individually file sales tax returns (transaction privilege tax). Licensing requirements for residential rentals are available on the ADOR website at Residential Rental Tax & Licensing Matrix.
The cities and Arizona are moving from the existing varied practices to a uniform licensing and tax return filing system. All cities and towns have agreed that 2015 will be the transition year, and to help facilitate this transition, cities in Arizona and ADOR will treat property managers and their owner clients as follows:
Effective for 2015:
- Property Managers are allowed to continue filing tax returns in the same manner they did for each City and ADOR in 2014.
- Property Managers will provide a list to the City no later than February 28, 2015 that identifies each of the Owners and their properties so the Cities can begin the process of creating these new records for consolidation with the ADOR system.
- Not later than June 30, 2015, all individual Owners must have complete license applications on file with the Non-Program Cities, or with ADOR for properties located in Program Cities.
- As long as new license fees for these Owners are paid by June 30, 2015, Cities will not assess any penalty for failure to file a timely complete application.
- Any Owner formerly reported under a Property Manager’s license that has already become individually licensed doesn’t need to do anything.
- ADOR and the Cities will continue to accept Property Manager tax returns through 2015 if they were allowed in 2014.
Effective for 2016:
- Every Owner must be separately licensed and identify each separate property as a separate business location.
- Every Owner must file a separate tax return. The return can be filed and paid directly by the Owner or by the Property Manager on their behalf. This is an issue of services provided between the Property Manager and the Owner.
- Property Managers that file returns on behalf of an Owner must provide a POA, or have inserted language to that effect in their contract with the Owner and entered into an MOU with ADOR.
Most Owners who have property with a Property Manager will be required to file. Additional information is available at Licensing Guidance.
Welcome to Arizona Sales Tax Simplification!
By Melinda Nelson, CPA & Michael WillettPosted on February 24 2015 by admin
Last week the Obama administration reported that 800,000 people who signed up for health insurance under the Affordable Care Act received incorrect tax information on the forms they received from the federal exchange and should wait to receive new ones before filing their taxes.
It was reported that roughly 95 % of those who received the erroneous 1095-A forms have yet to file their tax returns. New forms are anticipated to be issued in early March to the impacted taxpayers. Meanwhile, the IRS is considering what to do to remedy the issue for taxpayers who may have used the incorrect information to file their tax returns. The administration indicated that it will provide additional information “shortly.”
Those who have already filed may need to file an amended tax return, possibly resulting in additional tax to pay or less of an anticipated refund, in addition to refunds being delayed.
In connection with these errors, the administration indicated that it would also provide a special enrollment period for taxpayers who were unaware they could face penalties for not having health insurance coverage and for missing the February 15th deadline to obtain health insurance coverage through the federal marketplace at HealthCare.gov.
The one-time special enrollment period will be extended from March 15th to April 30th. If consumers do not sign up for health insurance coverage during this period, they may possibly have to pay an even larger penalty when they file their 2015 taxes. Eligible filers must live in one of the 37 states with a federally facilitated insurance marketplace.
To qualify for the special enrollment, consumers must attest that when they filed their 2014 tax return they paid the penalty for not having health coverage that year and that they first became aware of the implications of not enrolling in a timely manner after they began preparing their 2014 taxes.
The IRS estimated that 2% to 4 % of tax filers, or roughly six million people, may pay a penalty for not having the appropriate health insurance coverage for 2014. The penalty is calculated at $95 per person or 1% of income reported on the tax return. In 2015, the fee increases to $325 per person or 2% of income. Those who enroll during the special period, March 15th to April 30th, will still owe fees for the months they were uninsured in 2014 and 2015. The special period is being offered to allow people to avoid additional penalties for 2015.
If you have questions related to potential penalties or your filing status please contact a CPA for assistance.
By Gary W. Fleming, CPAPosted on February 19 2015 by admin
The IRS issued regulations in 2013 & 2014 trying to bring clarity to the many conflicting rules in the area of capitalization vs expensing of business property. These new regulations are commonly called the “tangible property and repair regulations” or TPR regulations.
The new regulations, which apply to tax years beginning in 2014, have many new provisions including new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.
One of these new safe harbors is the Building Safe Harbor for Small Taxpayers which allows the taxpayer to immediately expense costs/improvements related to real estate without having to determine if the cost should be capitalized under the new regulations.
To qualify for the safe harbor, the taxpayer has to meet a series of requirements:
- The owned or leased building must have an unadjusted basis of $1M or less (eligible building).
- The taxpayer must have average annual gross receipts of $10M or less (3 previous years) (qualifying taxpayer). See below for what qualifies under “gross receipts”.
- Total amounts for repair, maintenance and improvement expenses for the tax year must not exceed lesser of $10,000 or 2% of unadjusted basis of eligible building. Amounts deducted under the de minimis safe harbor and routine maintenance safe harbor for building must be included when computing the annual amount paid or incurred for repair, maintenance and improvement to building.
- Include annual election statement with timely filed, original return, including extensions.
The Building Safe Harbor for Small Taxpayers annual election is applied on an eligible by eligible building basis.
Gross receipts for short tax years are annualized by multiplying the gross receipts for the short period by 12 and dividing the product by the number of months in the short period. Gross receipts for making the qualifying taxpayer determination include total sales (net of returns and allowances) and all amounts received for services. Gross receipts also include income from investments and from incidental sources, such as interest, dividends, rents, royalties and annuities, regardless of whether they were derived in the ordinary course of business.
Don’t overlook this tax saving opportunity for taxpayers!
By Melinda Nelson, CPA & Michael WillettPosted on February 18 2015 by admin
Wondering what is this “unit of property” term you keep hearing? Well, here is your answer.
The IRS issued new regulations in 2013 & 2014 trying to bring clarity to the many conflicting rules in the area of capitalization vs expensing of business property. These new regulations are commonly called the “tangible property and repair regulations” or TPR regulations.
The new regulations, which apply to tax years beginning in 2014, have many new provisions including new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.
One of the new definitions in the regulations is “unit of property”.
Per the regulations, a “unit of property” is comprised of all components that are functionally interdependent. Thus, a truck (including its engine, chassis, doors, etc.) or a building and its structural components (including the walls, roof, windows, etc.) comprise a unit of property. Conversely, a computer and printer are separate units of property because placing the computer in service is not dependent upon placing the printer in service.
Whether an expenditure is capitalized or expensed depends on whether the expenditure results in a betterment, restoration, adaptation or improvement of a unit of property.
The typical building is divided into the building structure and nine defined “building systems”. So for purposes of applying the TPR regulations, each building is divided as:
- Building structure including roof
- Plumbing systems
- Electrical systems
- Fire protection and alarm systems
- Security systems
- Gas distribution system
- Any other system defined by the Treasury
Using the appropriate “unit of property” can keep taxpayers from over capitalizing expenditures.
By Melinda Nelson CPA & Michael WillettPosted on February 17 2015 by admin
The Tangible Property and Repair Regulations & guidance issued in 2013 and 2014 has many new provisions including new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.
One area covered in the regulations is costs related to improving or repairing property and which of these costs must be capitalized versus expensed.
The Treasury included a new safe harbor for businesses that have routine and recurring amounts paid to keep property in working condition. The routine maintenance safe harbor gives businesses certainty in deducting these costs as repair costs.
The routine maintenance safe harbor applies:
- To Non-building property – If the taxpayer expects to perform the maintenance activity more than once over the property’s life.
- To Building property – If the taxpayer expects to perform the maintenance activity more than once during a 10 year period.
Routine maintenance costs for a building property can include inspection, cleaning and testing as well as replacement of damaged or worn parts with comparable and commercially available replacement parts.
Use of the routine maintenance safe harbor constitutes a change in method of accounting and requires the filing of a Form 3115, Change in Accounting Method to adopt the safe harbor method.
Be sure to discuss the use of the routine maintenance safe harbor in your business with your tax professional.
By Melinda Nelson, CPA & Michael WillettPosted on February 12 2015 by admin
One of the areas included in the new Tangible Property and Repair Regulations released in 2013 and 2014 is guidance from the IRS regarding what are materials and supplies and when a business can deduct them.
The new regulations which apply to tax years beginning in 2014 include:
- New definitions of materials and supplies
- Rules regarding when materials and supplies can be deducted
The regulations define materials and supplies as tangible items that are used or consumed in the taxpayer’s operations, not considered inventory, and that:
- Are components acquired to maintain, repair or improve another
- Consists of fuel, lubricants and similar items that will be consumed in 12 months or less
- Is a unit of property that has a useful life of less than 12 months
- Is a unit of property that costs $200 or less
- Identified in guidance from the Treasury as materials in supplies
The regulations also provide for the following accounting methods and accounting treatment for materials and supplies (other than rotable and temporary spare parts):
1. Incidental materials and supplies
a. Materials and supplies that are carried on hand and not tracked
b. Deductible in the taxable year in which paid.
2. Non-incidental materials and supplies
a. Generally must be inventoried
b. Deductible when used or consumed in operations.
3. Deduct under the de minimis safe harbor election if appropriate.
The new regulations don’t define “incidental” or “non-incidental”, so taxpayers will have to rely on prior guidance provided by the IRS.
The regulations also include guidance for additional rules for rotable and temporary spare parts not covered here. See our blog “Expense Your Property under the De Minimis Safe Harbor” for additional information about the de minimis safe harbor election.
By Melinda Nelson, CPA & Michael WillettPosted on February 11 2015 by admin
The IRS issued regulations in 2013 & 2014 trying to bring clarity to the many conflicting rules in the area of capitalization vs expensing of business property. These new regulations are commonly called the “tangible property regulations”.
The new regulations apply to tax years beginning in 2014 and include new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.
One new taxpayer friendly provision is the de minimis safe harbor.
This safe harbor allows business taxpayers to elect to expense small items of tangible property versus adding them to the depreciation schedule. The safe harbor has a dollar limit on the maximum allowed per item or per invoice.
For taxpayers with an applicable financial statement (AFS), the maximum dollar limit per item or invoice is $5,000.
- An applicable financial statement (AFS) is:
- A Financial statement required to be filed with the Securities and Exchange Commission (SEC), such as a 10-K or the Annual Statement to Shareholders.
- A Certified audited financial statement accompanied by the report of an independent CPA, or
- Financial statement (other than a tax return) required to be provided to the federal government, state government or federal or state agency (other than the SEC or the IRS) [Reg. 1.263(a)-1(f)(4)].
- To use the safe harbor, taxpayers must have both a written policy in place at the beginning of the tax year for expensing amounts under a certain dollar amount and must treat the amounts as expenses on the financial statements in accordance with the policy.
For taxpayers without an AFS the limit for the de minimis safe harbor is $500 per item or invoice.
To claim the safe harbor election, you must file an election statement with your tax return each year.
Don’t miss this election that can simplify your fixed asset schedule and lower your taxes!
By Melinda Nelson, CPA & Michael WillettPosted on February 10 2015 by admin
One of our annual rites of passage here in Arizona, is the annual question we all ask – Will Arizona conform to the tax legislation that was passed by the federal government this year?
Okay, maybe everyone does not ask that – but those who are in the tax compliance business sure do!
And many of us sadly remember the 2009 tax year. Many of us made the assumption that, except for items related to depreciation and section 179 expensing, that Arizona would conform. Why did we assume that? Well, that had been their tactic for the past several years. We had nothing to go on that would lead us to determine otherwise.
But, that was not the case for the 2009 tax year. That year, the conformity bill did not pass until April 15, 2010. (See Arizona’s nonconformity with internal revenue code). This caused many Arizona taxpayers the necessity of amending their 2009 income tax returns – since the entire state did not go on extension for 2009!
However, either not all taxpayers received the message, or some just chose to ignore it. But Arizona is holding firm. There has been an Arizona Department of Revenue (ADOR) Hearing Office Decision (Decision 201400150-I) that upholds an initial assessment of income tax and interest on taxpayers who excluded from income the first $2,400 of unemployment earnings they received during 2009.
What is the moral to the story? Not really a good one – it is better for both taxpayers and tax preparers when Arizona decides on conformity much earlier in tax season. However, compared to 2009, anything done before the last efile form is released is earlier.
P.S. We are still waiting on conformity for the changes made by the late legislation passed by Congress in December 2014. Waiting, waiting, waiting.
By Donna H. Laubscher, CPA-- Older Entries »
There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne, LLP we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.
Before posting a comment on a blog post please be aware that we do not give free tax advice to non-clients by email, comment response, or phone. Thank you!
- Taxes, Interest and Carrying Charges – Election to Capitalize
- Work Opportunity Tax Credit – You May Still Qualify for 2014
- Do you own an Arizona Rental House? Get Ready to be Licensed
- WARNING – Federal Healthcare Coverage Information May be Incorrect
- Write Off Your Building Improvements under the Safe Harbor for Small Taxpayers
- What is a Real Estate Unit of Property?
- How to Deduct Recurring Maintenance? The Routine Maintenance Safe Harbor
- Materials and Supplies – IRS Guidance on How to Deduct
- Expense Your Property under the De Minimis Safe Harbor
- Arizona – To Conform or Not to Conform to Tax Legislation?