Tax preparers and their clients might be experiencing an uneasy déjà vu as the 2015 tax filing season opens, perhaps late. As of the beginning of December, the situation recalled the close of 2012 and the “fiscal cliff” dilemma, which was temporarily remedied by Congress’s extension through the end of 2013 of many expired items. During 2014, the House of Representatives passed bills to make some of those provisions, such as the Sec. 41 research and development (R&D) credit and bonus depreciation, permanent. In the end, however, Congress settled on a “patch” extending expired items only through the end of 2014. Still unclear was whether enough time remained for a smooth start to filing season. (Update: The IRS announced the filing season will begin on time; see coverage here.)
Download the accompanying “Quick Guide” PDF to use throughout filing season.
IRS Commissioner John Koskinen warned congressional tax writers in early October that the Service would have to delay the opening of the 2015 tax processing season and processing of returns if Congress did not decide by the end of November whether to renew the expired provisions. They included such popular mainstays for individuals as the above-the-line deduction for qualified higher-education expenses and, for businesses, the higher Sec. 179 expensing limits and the R&D credit.
In addition to the extended provisions, some new features for 2014 returns of individuals and businesses that practitioners should know about have taken effect. Several relate to provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA), P.L. 111-148, that took effect in 2014. This article outlines some of these changes and provides references to articles, guidance, and resources for tax practitioners. They include the accompanying Quick Guide PDF containing important 2014 general tax rate tables, along with common income thresholds, limitations, phaseouts, credit amounts, and deduction limits.
Individual health coverage mandate. One PPACA provision new for 2014 affects all individual returns at least minimally: the Sec. 5000A “individual mandate” to maintain health insurance coverage. Under the individual mandate, for each calendar month, an applicable individual must maintain insurance coverage that qualifies as minimum essential coverage and ensure that any of his or her dependents who are applicable individuals maintain such coverage or be subject to a penalty called a “shared-responsibility payment.” An applicable individual is any individual, unless he or she is incarcerated, or is not a U.S. citizen or national or an alien lawfully present in the United States. In addition, individual who qualify for a religious exemption under Sec. 5000A(d)(2) are not applicable individuals. However, no penalty will be imposed on an otherwise applicable taxpayer who qualifies for an exemption under Sec. 5000A(e). This includes individuals who are unable to afford coverage, have a gap in coverage of less than a three-month period, or have household income below the applicable filing threshold.
Applicable individuals who are liable for the penalty must pay it when they file their return. The draft Form 1040, U.S. Individual Income Tax Return, and other forms in the 1040 series for 2014 have a line in the “Other Taxes” section of the return for entering any penalty due. In addition, there is a checkbox, on line 61 of Form 1040, for taxpayers to indicate they had minimum essential coverage for the full year. The penalty amount due is calculated on worksheets in the instructions to new Form 8965, Health Coverage Exemptions.
As the name of Form 8965 implies, it is also used to claim an exemption from the mandate for each applicable member of the taxpayer’s household. Taxpayers claiming any of the types of exemptions that are granted by a health insurance exchange must have an exemption certificate from the exchange and enter its number on the form. According to draft instructions for Form 8965, taxpayers who need to apply for a coverage exemption from an exchange and do not have time to do so before their return filing deadline may request an extension to file their tax return while they obtain the certificate. Exemptions granted by an exchange include those for members of a health-sharing ministry and members of certain religious sects; members of federally recognized Indian tribes; and “hardship” exceptions based on low income that makes coverage unaffordable, circumstances that prevent the taxpayer from obtaining coverage, and being ineligible for Medicaid solely because the taxpayer resides in a state that does not participate in the Medicaid expansion under PPACA. For more on exemptions from the individual mandate, see “Tax Practice Corner: Religious Exemptions From the Health Care Individual Mandate,” JofA, March 2014, page 62, and “Tax Matters: Individual Mandate Hardship Exemption Expanded,” JofA, March 2014, page 67.
Health insurance providers will report information about individuals who have minimum essential coverage to taxpayers and the IRS on Form 1095-B, Health Coverage. However, this reporting requirement has been postponed until coverage year 2015. For more on how the IRS plans to monitor compliance for 2014 and assess the payment (which it may do by offset against any overpayment or refund owed to the taxpayer but, under Sec. 5000A(g)(2), not by lien or levy or by criminal penalty), see “IRS Signals PPACA Compliance Issues” in the January 2015 issue of The Tax Adviser.
Premium tax credit. A second PPACA provision that affects many taxpayers filing 2014 returns is the premium tax credit under Sec. 36B. Eligible taxpayers claim the credit on their return and must reconcile with it any advance premium tax credits they received under Sec. 36B(f). Generally, this can become an issue if a taxpayer receiving an advance credit has a change in circumstances during the year affecting the calculation of the credit, which can include changes in family size, household income, and filing status, but also any change in the adjusted monthly premiums for the so-called benchmark plan by which the premium assistance amount is calculated (see Regs. Secs. 1.36B-4 and 1.36B-3). The amount of additional tax a taxpayer may be liable for in the case of excess advance credits is limited based on household income as a percentage of the federal poverty line.
Taxpayers who enrolled in coverage through an exchange should receive Form 1095-A, Health Insurance Marketplace Statement, in January from the exchange reporting premium amounts, applicable benchmark plan premium amounts, and advance credit payments, which they will use to complete new Form 8962, Premium Tax Credit (PTC). Any addition to tax or net credit will be reported in the “Tax and Credits” or “Payments” section of the individual return, respectively.
Other provisions. While Congress resurrected the scores of individual provisions that had expired at the end of 2013, taxpayers were uncertain for most of the year whether they could rely on them. CPAs may therefore need to double-check with clients to resolve any lingering uncertainty, obtain missing records, and make any necessary elections. They include the election to deduct state and local sales and use taxes in lieu of state income taxes, the above-the-line deduction for qualified tuition and related expenses, the above-the-line deduction for expenses of schoolteachers, the deduction of mortgage insurance premiums as qualified residence interest, and the exclusion from gross income of a discharge of indebtedness on a principal residence.
Repair regulations. One of the biggest changes for the 2014 tax year for many businesses will be implementing provisions of the tangible property, or “repair,” regulations, which govern the treatment (deduction versus capitalization) of tangible property expenses. These regulations generally affect any taxpayer that acquires, produces, or improves tangible property, including corporations, passthrough entities, and individuals who report business income on Schedule C, Profit or Loss From Business (Sole Proprietorship). Business taxpayers should review the rules for accounting method changes under Rev. Procs. 2014-16 and 2014-17 (see “Tax Matters: Guidance on Repair Regs. Updates Accounting Method Change Procedures,” JofA, May 2014, page 66) and assess application of the de minimis safe harbor (see “Tax Practice Corner: The De Minimis Safe Harbor Under the Repair Regulations,” JofA, May 2014, page 58).
Discharge of indebtedness secured by business real property. During 2014, the IRS provided in Rev. Proc. 2014-20 a safe harbor for excluding from gross income discharges of qualified real property business indebtedness under Sec. 108(a)(1)(D). The exclusion is for discharges of indebtedness secured by real property used in a trade or business. The phrase “secured by real property” is not defined in the statute or the regulations. In the revenue procedure, the IRS noted that a mortgage is not the only method by which such property may be secured and provided that it will treat indebtedness that is secured by 100% of the ownership interest in a disregarded entity holding real property as indebtedness that is secured by real property for purposes of the exclusion.
Business tax extenders. Business-related provisions that had expired at the end of 2013 that Congress extended in December for 2014 include the higher expensing limits and treatment of certain real property as Sec. 179 property. Pending action by Congress, these limits for 2014 would have reverted to a total of only $25,000 worth of Sec. 179 property placed in service during the tax year that could be expensed, subject to phaseout by the amount by which the cost of Sec. 179 property placed in service during the year exceeded $200,000. Also, qualified real property, which includes qualified leasehold and retail improvement property and qualified restaurant property, would not have been Sec. 179 property for 2014 if Congress had not extended the application of Sec. 179(f). Similarly, bonus depreciation under Sec. 168(k) was extended for 2014.
Another key business is the Sec. 41 R&D credit. While scrutinizing their 2014 R&D credit possibilities, business taxpayers may also wish to assess whether to amend returns for prior open tax years to use the alternative simplified credit method, as the IRS allowed in final regulations issued during 2014 (T.D. 9666).
While 2014 provided taxpayers with new reporting responsibilities and a new tax credit relating to health care coverage, it left considerable uncertainty surrounding the fate of many popular tax extenders and whether late action on them might delay the start of filing season. Tax return preparers and their clients can best contend with any resulting compression of the filing season by making the most of opportunities to scrutinize their reporting documents and records for tax savings.
Download the accompanying “Quick Guide” PDF to use throughout filing season.
Paul Bonner is a JofA senior editor, tax. To comment on this article or to suggest an idea for another article, contact him at firstname.lastname@example.org or 919-402-4434.
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