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Monday, January 25, 2016

Recent Tax Law Change Cautions

 
There were numerous public laws enacted in 2015 changing our federal tax system. The largest in terms of number of change (over 130) is Public Law 114-113 (12/18/15). See basics and links in my 1/10/16 post. That's a lot of changes.  There are a variety of effective dates including many that are retroactively effecting back to 1/1/15. Did we need all of these changes? I don't think so.  Or at least not all at once. 

I want to note a few cautions based on what I've learned from reading this and thinking about it for the past several weeks.  I've been covering many of these updates in update presentations I've been making for the past few weeks.

This is not all of the cautions.  Please comment to this post if you have more to offer.
  • Look at the legislative language (go to Division P and Q) and Joint Committee on Taxation explanation to get the real understanding of the change. As noted in my 1/10/16 post, some quick summaries implied that the Section 25D residential energy credit was extended to 2021. That is an overstatement as only two items from the five items at this section were extended. The other three continue to expire at the end of 2016 as was the case before PL 114-113. See the 1/10/16 post for a track change version of Section 25D.
  • At least one change required quick action.  If you have a 529 qualified tuition plan and in 2015 you paid for a qualified expense, such as tuition, but got all or part of it refunded, you have 60 days after 12/18/15 (that should be 2/16/16) to return it to your 529 plan to avoid taxability of it. Going forward you'll have a 60 day period to rollover the refund. Click here to see a track changes version of the changes to Section 529 qualified tuition programs.
  • There are significant changes to bonus depreciation and Section 179 expensing. Take a careful look to determine if property (personal or real) might fall under both and what only falls under one. Still, bonus is only for new assets (original use with the taxpayer) and Section 179 applied to qualified used or new property. But there are also differences between 2015 and beyond 2015 as well as for leased property. And don't forget about the de minimis safe harbor election at Reg. 1.263(a)-1(f).
  • The temporary provision allowing an individual age 70 1/2 or older to transfer up to $100,000 from her IRA directly to a qualified charity and omit the income and the donation from her tax return was made permanent (Section 408(d)(8) - qualified charitable distribution). Be cautious in doing this.  Notice 2007-7 and Pub 590-B (see page 13) and the legislative history to the Pension Protection Act of 2006 (which was the originating legislation) stress that the rules for charitable contribution deductions must be followed. Here an excerpt from the 2006 legislation (PL 109-280; 8/17/06):  “exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.”
    I believe that means you can have a very bad result if you don't do the charitable contribution part correct. Let's say an eligible person transfers $100,000 but does not get the required "contemporaneous written acknowledgement" from the charity prior to filing the return. The result is that the individual must report the $100,000 of income and doesn't get a charitable contribution deduction!  It would be good to see a draft of the letter before making the contribution and be sure you get it before filing the return and be sure it meets the requirements of Section 170(f)(8) and Reg. 1.170A-13(f).
  • Watch the effective dates. There are several, such as the ability for small businesses to use the research credit against payroll tax or AMT, that are effective for tax years beginning after 12/31/15. However, when you read the Code section, that does is not in the text of the law. Thus, you might think it applies on your 2015 return. Similar issues occur to some of the bonus depreciation changes.  Again, check the legislative language or the Joint Committee on Taxation summary. 
Our tax law became more complicated with PL 114-113, but that's true of every law we've seen in the past 20+ years (post a comment if you know of a law that simplified the federal tax law in the past twenty years). While we tend to like special deductions and credits and exemptions, they make the law more complex.

What do you think?  Any other cautions you have to offer?

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