The United States Senate passed the Tax Increase Prevention Act of 2014 by a vote of 76 to 16 earlier this week, on Tuesday, December 16. This is the bill that the House of Representatives had passed earlier in December. I expect President to sign the bill into law soon.

The main purpose of the new tax legislation is to extend of bunch of tax provisions that expired at the end of 2013.

The biggest revenue impacts of the "Tax Increase Prevention Act"" (TIPA) were the deduction for state and local sales taxes and the credit for research and development.

Many of my business clients are favorably impacted by the extension of the 2013 deduction limit under Section 79. Had the 2013 limit of $500,000 not been extended the annual limitation for Section 179 would have been $25,000. Section 179 allows taxpayers to elect to deduct the entire cost of new property plaece in service in a trade or business, rather than the normal depreciation rule that spread the deductions out into the future.

I have several clients that were very interested in the provision that provides an exclusion from income up to $100,000 for an individual that directly makes charitable gifts with IRA (or other qualified plan) distributions. This is beneficial to donors because it allows them to circumvent some of the limitations on deductions for charitable contributions.

Additional details will be published here soon. 

- Mark S Gleason CPA
  www.lakes-cpa.com

Congress Cuts IRS Budget Again

There is $10.9 billion to fund the IRS for fiscal year 2015 in the spending bill that is working it's way through congress.  This is a 3% reduction from the funding level for 2014.

A spokesperson for the National Treasury Employees Union issued a statement saying
"This budget hurts everyone in our country by further eroding the IRS' ability to provide tax assistance to millions of Americans, curb tax fraud and collect the taxes owed that finance vital programs and services and reduce the federal deficit".

The IRS estimates that it will be able to answer about half the calls it receives with this budget. The IRS has lost 5,000 enforcement personnel and audit and collection activities have been impaired since congress began implementing a series of budget cuts that began in 2010 reducing the IRS annual budget by about 10 percent.


- Mark S Gleason CPA
  www.lakes-cpa.com

New Standard Mileage Rate is 57.5 Cents Per Mile

The standard mileage rate for 2015 has been increased to $ .575 per mile, up from the 56 cents that was allowed for 2014.  The new rate is effective on January 1, 2015.

- Mark S Gleason
  www.lakes-cpa.comwww.lakes-cpa.com

The IRS Has Over $ 1 Trillion in Frozen Credit Accounts.

Here are some figures from a report issued by the Treasury Inspector General for the United States (TIGTA),  Further Actions Are Needed to Resolve Millions of Dollars of Frozen Credits in Taxpayer Accounts, dated September 26, 2014 (Reference Number: 2014-30-089).

Number of Tax modules in credit status (payments exceeding assessments) at the end of Fiscal Year 2012 [total dollar amount]:
Business Master Files :  10.1 million modules [$883 billion]
Individual Master Files: 1.5 million modules [$305 billion]

Number of Tax modules in credit status (payments exceeding assessments) at the end of Fiscal Year 2013 [total dollar amount]:
Business Master Files :  10.2 million modules [$977 billion]
Individual Master Files: 15.6 million modules [$392 billion]

These numbers are not just "millions" but "hundreds of billions". This is a much more interesting story about FROZEN than the animated tale about Princesses Elsa and Anna. The truth is that the IRS is sitting on a big chunk of the economy.  This story almost slipped by me.  I would have noticed a TRILLION DOLLARS in credits but they only said MILLIONS in the title of their report.

The federal budget deficit for fiscal year 2015 (Oct 2014 through Sept 2015) is projected to be only $564 billion (per Kimperly Amadeo, US Economy Expert)  It looks to me like the IRS has got it covered, sort of.

The TIGTA report discusses how these funds are being handled by the IRS and made a series of recommendations regarding nonfiler and bankruptcy training, turning off backup withholding under certain conditions, monitoring nonfiler referrals, decision documentation, working civil penalty credit transcripts, aging frozen credits and evaluation of procedures.

The IRS responded to more than one recommendation by stating they were in agreement with the recommendation but that corrective action will not be taken because of limited information technology resources.

- Mark S Gleason CPA
  www.lakes-cpa.com

IRS Reminds Us About Documenting Deductible Gifts to Charity

Last week the IRS issued a new "year end tax tips" document reminding taxpayers making year-end gifts to charity that there have been some tax law changes affecting their deductions.

For charitable contributions of clothing and household items, taxpayers must get a written acknowledgement from the charity for all gifts worth $250 or more. It must include, among other things, a description of the items contributed.

For cash contributions, a taxpayer must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of amount. The record must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

In addition, a taxpayer must obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Additional reminders from the IRS:

• Only give to qualified charities. Only donations to eligible organizations are tax-deductible. You can use Select Check, a searchable online tool available on IRS.gov to make sure the organizations you give to are eligible to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are also eligible to receive deductible donations. These is true even if they are not listed in the IRS's database.
• Contributions are deductible in the year made. Donations charged to a credit card before the end of 2014 count for 2014, even if the credit card bill isn’t paid until 2015. Also, checks count for 2014 as long as they are mailed in 2014.
• You must itemize your deductions. Individual taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). Most taxpayers don't itemize deductions, so for most taxpayers, there is no tax benefit to making charitable contributions.
• Recordkeeping: for all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written  record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• Special Rules. The deduction for a car, boat or airplane donated to charity is usually limited to the gross  proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• Form 8283: If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

IRS Publication 526 covers almost everything there is to know about tax deductions for charitable contributions.

- Mark S Gleason CPA
  www.lakes-cpa.com

You Can Pay in Advance for a Tax Deduction This Year Instead of Next Year

As the year draws to a close, many of my clients are looking for ideas on end-of-year tax saving strategies. 

For taxpayers wishing to shift taxable income from 2014 into 2015, saving dollars on their 2014 tax obligations, the idea of prepaying deductible business expenses often comes up.
This strategy usually works to provide a deferral of the taxes from one year to the next. Whatever taxes are saved in 2014 will have to be paid for 2015. But this is a particularly beneficial strategy if there is a bump-up in income in 2014 that is unlikely to repeat in 2015.
If a taxpayer is in a lower tax rate bracket in 2015 than in 2014, this results in a tax savings as well as a tax deferral.

There is no overall dollar limit on a taxpayer's ability to prepay business expenses but it is important not to waste money prepaying for things that might not be needed.

I have reviewed the rules for deducting prepaid expenses with three different clients in the past week, so I thought this would make a good topic for my blog.

Most taxpayers file their returns using the cash method, where income is taxed when received in cash and deductions are permitted when paid in cash. Almost all individual taxpayers and almost all small and medium size businesses are cash basis taxpayers.

Larger businesses are accrual basis taxpayers. They report their taxable income when it is earned and deduct their expenses when they are incurred. The distinction between cash and accrual basis is important and accountants study the rules for accrual basis accounting, known as Generally Accepted Accounting Principles in their college accounting courses.
The ability to deduct a prepayment is only permitted for cash basis taxpayers.  If you are an accrual basis taxpayer this idea will not work for you.

For cash basis taxpayers, IRS regulations prohibit deductions for prepaid interest which is not deductible until incurred. Payments that create an asset (tangible or intangible) are not deductible either. 

Since prepaid expenses are all considered to be assets, an exception to the rule, known as the 12-month rule is most useful. The exception that is almost as big as the rule itself. Under the 12-month rule, prepayments for expense items that create benefits for a relatively brief period of time, such as insurance, security, rent, and warranty service contracts may be immediately deducted when paid if the contract period to which the prepayment applies is not more than a year and the contract period does not extend beyond the end of the taxable year following the tax year in which the payment is made.

Other expenses that fit into this 12-month rule would be advertising, marketing, postage (stocking up on postage stamps), business travel expenses (buy those airline tickets before the end of the year), conference registrations and business education. Professional fees for legal and accounting advice will often fit within this rule, but not always.

A cash basis taxpayer receiving prepayments must include the prepayments in taxable income in the year received, so your plan to shift taxable income from 2014 to 2015 by prepaying your expenses may be foiled by your customers who prepay you.

- Mark S Gleason CPA
  www.lakes-cpa.com

IRS Predicting Extra Difficult Tax Filing Season (Again)

John Koskinen, Commissioner of Internal Revenue, addressed the American Institute of CPAs' (AICPA) National Tax Conference earlier this month. He talked about the upcoming 2015 tax filing season. “We believe it may be one of the most complicated filing seasons we’ve ever had, for a number of reasons".

“Continuing uncertainty about the extender legislation imposes stress, not only on the IRS, but on the entire tax community,” he said, and “if the uncertainty over extenders continues into December, the IRS could be forced to postpone the opening of the 2015 filing season.” With Congress now on Thanksgiving break, this seems to be a certainty.

I have written about the "extender legislation" in previous posts on this blog.

Reductions to the IRS's budget “will pose serious challenges to our customer service, enforcement efforts and information technology projects,” he said. Telephone service could drop from the 2014 service level of 71 percent to 53 percent in 2015, because the IRS has not been given the funds to hire sufficient staff to handle incoming calls.

Poor customer service at the IRS has been getting worse and worse every year because a hostile Congress has not given the IRS the funds they need to do the job. Because of long waits, I never even attempt to call the IRS on the phone. Rather, I write them a letter and send it in the mail.  It takes months to get a response. Thanks, Congress.

- Mark S Gleason CPA
  www.lakes-cpa.com