Business Tax Group Update – December 2013
2014 Tax Benefits Adjusted for Inflation
The IRS announced annual inflation adjustments for more than 40 tax provision for tax year 2014. Among the items covered are:
- The top tax rate of 39.6 percent will affect married taxpayers filing a joint return whose income exceeds $457,600 up from $450,000 and taxpayers filing a single return at income in excess of $406,750 up from $400,000. The income thresholds for the 10, 15, 25, 28, 33 and 35 percent tax rates also increased.
- The limitation on itemized deductions claimed goes into effect for 2014 tax returns on incomes of $254,200 or more for single taxpayers and on incomes of $305,050 or more for married taxpayers filing a joint return.
- The personal exemption rises to $3,950 up from $3,900. However, the exemption is subject to a phase out that begins on adjusted gross income of $254,200 or $305,050 for married couples filing jointly, and phases out completely at $376,700 or $427,550 for married couples filing jointly.
- The standard deduction rises to $6,200 for single taxpayers (up from $6,100) and to $12,400 for married taxpayers filing a joint return (up from $12,200).
- The alternative minimum tax exemption is $52,800 for single taxpayers up from $51,900, and $82,100 for married taxpayers filing jointly up from $80,800.
- The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements stays unchanged at $2,500.
- The exclusion amount for estates of decedents who die during 2014 is $5,340,000 up from $5,250,000 for estates of decedents who died in 2013.
- The annual exclusion for gifts remains at $14,000 for 2014.
The full of list of annual inflation adjustments can be found in Revenue Procedure 2013-35, which can be obtained at www.irs.gov.
Status of Expiring Tax Provisions Uncertain for 2014
Fifty-seven tax provisions are scheduled to expire at the end of the year 2013. Senate Finance Committee Chair Max Baucus (D. Mont.) and House Ways and Means Committee Chair Dave Camp (R. Mich.) have announced they will not renew the expiring tax provisions either by the end of this year or retroactively in 2014 (as has occurred in past years) in order to garner support for comprehensive tax reform in 2014. Regardless of the dance that takes place in Congress here are some of the tax extenders in jeopardy:
- The tax credit for research and experimentation expenses (section 41(h)(1(B) of the Internal Revenue Code of 1986, as amended).
- 15-year, straight line cost recovery for qualified leasehold improvements, and qualified retail improvements (section 168(e)).
- Increase in expensing to $500,000/$2 million and expansion of definition of section 179 property .
- Additional first year depreciation for 50% of basis of qualified property under sections 168(k) and 460(c)(6)(B).
- Reduction in S corporation recognition period for built-in gain under section 1374(d)(7).
- Tax-free distributions from individual retirement plans for charitable purposes (section 408(d)(8)).
- Deduction for state and local general sales taxes (section 164(b)(5)).
- Deduction for qualified tuition and related expenses (section 222(e)).
- Deduction for expenses of elementary and secondary school teachers (section 62(a)(2)(D)).
In addition, the provisions in jeopardy include those affecting qualified zone academy bonds, the new markets tax credit, various empowerment zone tax incentives, and various credits and exemptions for energy producing or efficient activities. Hopefully, Congress will act to extended or make permanent these and other expiring provisions as part of comprehensive tax reform or in a stand-alone tax bill. We will continue to monitor the fate of these provisions for our clients.
Treasury Says Partnership Start-Up/Organizational Expenses Not Deductible On Technical Termination
Generally, a partnership cannot deduct expenses incurred to organize and start-up the partnership until the partnership “terminates.” What happens, however, when the partnership does not actually terminate but is deemed by Congress to terminate under I.R.C. § 708(b)(1)(B) after a sale/exchange of 50% or more of the partnership interests (called a “technical termination”)? In other words, is what’s good for the goose good for the gander?
Treasury has issued proposed regulations that say “no” (or rather, “Congress did not intend for the gander to have it as good as the goose”). Specifically, Congress intended that start-up and organizational expenses should be amortized over the “actual” business life of the partnership (interestingly, Congress also deems the business life to be 15 or fewer years for amortization purposes), and that the actual business life of the partnership does not cease until the business venture actually stops. Thus, if the tax law simply deems the business venture to stop (even though it actually continues), these expenses should not be deductible. Treasury has requested comments on these proposed regulations—which apply to technical terminations occurring after December 8, 2013—by March 10, 2014. To be sure, the IRS can argue that these expenses are not deductible for technical terminations occurring on or before December 8, 2013 (even though the regulations do not apply).
Therefore, if a sale/exchange of 50% or more of your partnership’s interests occurred during the 2013 tax year, you must evaluate your ability to deduct start-up and organizational costs (especially in light of these new proposed regulations).
New In-Plan Roth Rollover Rules Benefit Retirement Plan Participants
A newly released IRS Notice regarding in-plan rollovers to Roth accounts provides advantageous planning opportunities for qualified retirement plan sponsors and participants. Before 2010, retirement plan participants had no way of converting their existing non-Roth retirement-plan balances to Roth accounts within the same plan. A revision to the law in 2010 attempted to bridge this gap but fell short of full relief by only allowing in-plan Roth rollovers for amounts that were otherwise distributable under the plan’s terms. That usually meant a participant could not roll over non-Roth balances to a Roth account unless they were 59 and the plan allowed in-service distributions. As a result, the 2010 legislation provided little practical relief for participants who could otherwise take advantage of in-plan Roth rollovers but did not meet the plan’s distribution requirements. Congress addressed this shortcoming in 2012 by expanding the availability of in-plan Roth rollovers to include amounts that aren’t otherwise eligible for distribution.
The new IRS Notice 2013-74 provides welcome guidance for participants and plan sponsors. It confirms that in-plan Roth rollovers may now include elective deferrals, employer matching contributions, and employer nonelective contributions that may not otherwise be distributed from the plan—although in-plan Roth rollovers still are limited to vested account balances. With this new opportunity also comes a potential pitfall: A large in-plan Roth rollover will result in a corresponding tax liability, and the IRS guidance confirms that income tax withholding is not permitted in these transactions. As a result, participants will have to plan carefully to ensure they can meet their tax obligations after triggering income taxes on their entire in-plan Roth rollover. On the employer’s end, plan sponsors must adopt a plan amendment to include the full scope of in-plan rollover options now available. But because the guidance came so late in the year, the IRS also extended the deadline for plan sponsors to adopt such an amendment until December 31, 2014, even if the plan begins offering expanded in-plan Roth rollovers before the end of 2013. Employers may, therefore, begin offering in-plan Roth rollovers of otherwise nondistributable amounts before the end of this year without amending their plan. (Recall that these broadened in-plan Roth rollovers—and all in-plan Roth rollovers—are only permissible plan features, and are not required.)
Our experienced attorneys stand ready to assist participants or plan sponsors who may benefit from in-plan Roth rollovers.
Taxpayer-Friendly Final Regulations Govern Self-Rental Activities for NII Tax Purposes
As a general rule, if a taxpayer leases property to a business in which the same taxpayer materially participates, the rental income is by rule non-passive. This income is often referred to as “self-rental income,” and the rule is sometimes called the “anti-PIG” rule.
The Net Investment Income (NII) Tax places a 3.8% tax on all net investment income, including income from a business in which the taxpayer does not materially participate. With respect to self-rental income, the preamble to the Temporary Regulations governing the NII Tax stated that self-rental income in most cases would be passive income unless the rental activity itself was an active business in which the taxpayer materially participated. Accordingly, self-rental income would still be subject to the NII tax notwithstanding the anti-PIG rule. Needless to say, this was cause for confusion and concern.
The Final Regulations (published on November 27, 2013), however, resolved the confusion by stating that self-rental income is by rule non-passive regardless of whether the taxpayer actually participates materially in the rental activity itself. Specifically, the Final Regulations state that a self-rental activity is non-passive to the extent the income derived from the activity is recharacterized as active by the anti-PIG rule. In other words, the Final Regulations deem the rental activity itself to be an active business in which the taxpayer materially participates. These taxpayer-friendly regulations thus exclude from a taxpayer’s NII his or her self-rental income, making the income not subject to the NII Tax.
Members of the Business Tax Group are available to help you apply the new NII final regulations and the anti-PIG rule to your particular situation. We are also available to walk you through the new NII 3.8% tax and its consequences on your specific activities.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2021.