As we close the book on 2013 it is important to note some key changes in our tax code starting with tax year 2013, with others set to take effect January 1st of 2014. Two of the most notable changes that require special attention are the tangible property regulations and qualified charitable IRA distributions.
After two years of issuing temporary regulations, the Treasury Department and the IRS have addressed major distinctions between tax deductible repair expenses and repairs to be considered depreciable capital improvements for tangible property. The new regulations are quite complex and will apply to tax years beginning or after January 1, 2014. For the tax years 2012 and 2013, taxpayers have three options as to how to apply regulations; to apply the old law prior to the aforementioned temporary regulations; to apply the temporary regulations issued in the last couple of years, or to apply the final regulations. For tax years beginning January 1, 2014 a taxpayer must adopt the final regulations once they are finalized.
Generally, taxpayers are required to capitalize amounts paid to acquire a unit of real property. The regulations provide rules related to amounts paid for the acquisition or improvement of tangible property as well as when to expense purchases of materials and supplies. The rules do contain de minimis (minimums) exceptions allowing qualified taxpayers to deduct certain amounts paid for property; for example, when the per item or per invoice amount does not exceed $5,000. To qualify, taxpayers must have certified financial statements and a written capitalization policy. Certified financials are those either provided to the SEC, an audited financial statement used for credit or any other substantial non-tax purpose, or one provided to any United States federal or state government agency other than the SEC or IRS. For taxpayers without a certified financial statement, the dollar threshold is reduced to $500. Additionally, expenses on the financial statement must be consistent with the written policy. This de minimis safe harbor election is made by attaching a statement to your timely filed tax return and be can be revoked year to year depending on your situation. Taxpayers with per item or invoice thresholds above $5,000 should also consider making the election so to protect the deduction of $5,000 or less per item from challenge on an IRS audit.
As a result of these new property regulations, there is possibly a substantial amount of work as far as compliance and optimizing your tax position are concerned. Examples of this work are filing accounting method changes to comply with the regulations, creating or revising tangible property policies, adopting tangible property regulation methods, and correcting prior errors.
As part of tax legislation passed in early 2013, Congress reinstated the ability of IRA owners age 70 ½ or older to make charitable donations directly from their IRA accounts through the end of 2013. The IRA account owner can donate up to $100,000 to public charities and providing the transfer is qualified, the account owner does not recognize income and can satisfy up to $100,000 of his/her annual required minimum distribution. In order to qualify, the distribution must be made directly between the IRA custodian and the charitable organization. Owners of inherited or beneficiary IRAs can also qualify if they are 70 ½ years of age. Unfortunately, distributions from other retirement plans such as 401(k) or defined benefit plans do not qualify.
If not qualified, the charitable contribution will indeed be counted in your 2013 taxable income, so it is important to be careful that all transfers are done correctly. Donors who made IRA donations in 2013 retroactively for 2012 can still make donations for 2013. If both spouses qualify, the total amount that can be contributed is $200,000. This legislation is set to expire at the end of 2013.
Another important new tax item is the new 3.8% Medicare tax on net investment income imposed by the Affordable Care Act. With this tax comes a plethora of tax planning possibilities which require a great deal of planning. For example, real estate professionals, or active participants in one’s business, can avoid this tax with the help of proper tax planning. Companies and individuals can benefit from being on top of, and ahead of, these new regulations. At RSSM & Co. we are at the forefront of these new regulations and would be happy to meet with any proprietor to discuss at length implementation and tax planning relative to these regulations. For more information or to set up a meeting call Ikey Hedaya (firstname.lastname@example.org) at (212) 303-1864 or Neil Sonenberg (email@example.com) at (212) 303-1886.