The IRS has released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also modified the 2014 limitations to reflect passage of the Tax Increase Prevention Act of 2014 late last year.
At the end of 2014, Congress extended bonus depreciation to the 2014 tax year in the case of passenger vehicles. Congress has not, however, done the same for passenger vehicles placed in service during 2015. This means that although several of the 2015 limits have been adjusted upward for inflation, the total amount a taxpayer may deduct for a vehicle placed in service during 2015 will be effectively $8,000 lower than for a vehicle placed in service during 2014, unless Congress again provides retroactive relief this year.
Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year. Under Code Sec. 280F(d)(7), the IRS adjusts for inflation the amounts allowable for depreciation deductions. In Rev. Proc. 2015-19, the IRS has provided depreciation limits for passenger automobiles, light trucks and vans.
The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed in service during the 2015 calendar year are:
- $3,160 for the first tax year;
- $5,100 for the second tax year;
- $3,050 for the third tax year; and
- $1,875 for each succeeding tax year.
Trucks and vans
The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2015 calendar year are:
- $3,460 for the first tax year;
- $5,600 for the second tax year;
- $3,350 for the third tax year; and
- $1,975 for each succeeding tax year.
SUVs and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative definition. Congress in 2004 placed a $25,000 limit on Code Sec. 179 expensing of heavy SUVs but has not extended it to Code Sec. 280F.
Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicles’ business use. However, lessees must include a certain amount in income during the year that the vehicle is leased, to partially offset the amounts by which the lease payments exceed the luxury automobile limits. Rev. Proc. 2015-19 includes tables that identify the income inclusion amounts for passenger automobiles, trucks and vans with lease terms that begin in calendar year 2015.
Rev. Proc. 2015-19
A federal district court has concluded that two buildings designed to be retail stores had been placed in service when the buildings were substantially complete, even though they were not yet open to the public. As a result, the buildings were eligible for 50 percent bonus depreciation.
The buildings, as nonresidential real estate located in the Gulf Opportunity (GO) Zone in Louisiana, had to be placed in service before January 1, 2009, to qualify for bonus depreciation. The taxpayer was a retail seller of home building materials and supplies. The buildings themselves were substantially complete. They had been issued certificates of occupancy (CEOs) that allowed them to receive equipment, shelving and merchandise, plus appropriate personnel to install the equipment and stock the shelves. The CEOs did not allow customers to enter; as of December 31, 2008, the buildings were not open for business.
Under the income tax regulations, an asset’s depreciation period begins when it is placed in service, defined as being in a condition of readiness and availability for a specifically designed function. A building that will house machinery and equipment is placed in service when its construction is substantially complete.
The court concluded that the buildings had been placed in service before 2009 because they were substantially complete and in a condition of readiness to perform the function for which they were built – to house and secure racks, shelving and merchandise. The court cited IRS proposed regulations and an Audit Technique Guide indicating that the issuance of a certificate of occupancy indicated that a building had been placed in service. The court found that there was no authority for the government’s claim that a building was not placed in service until it was open for business.
Stine LLC, DC-La., January 27, 2015
The IRS recently announced that it will continue its offshore voluntary disclosure program (OVDP) for an indefinite period until otherwise announced. Since the program’s inception, there have been over 50,000 disclosures, and the IRS has collected more than $7 billion. The IRS reported in 2014 that more than 45,000 taxpayers had made disclosures and had paid $6.5 billion in back taxes, interest and penalties.
The IRS reported that individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts and nominee entities (often shell corporations and trusts) and then accessing the funds with debit cards, credit cards, and wire transfers. The IRS has conducted thousands of offshore-related civil audits, and the Department of Justice (DOJ) has entered into non-prosecution agreements with foreign banks to obtain the identities of account holders. DOJ has also aggressively prosecuted tax evasion cases involving foreign income.
Under the OVDP, taxpayers enter into an agreement with the IRS to disclose their accounts and pay back taxes and interest, plus a penalty of 27.5 percent. In exchange, taxpayers avoid criminal prosecution. Significantly, in 2014 the IRS increased the penalties to 50 percent in some cases.
With new foreign account reporting requirements phasing in over the next few years, the IRS indicated that hiding offshore income is becoming increasingly difficult. “The recent string of successful actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore,” IRS Commissioner John Koskinen said in the announcement. “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.”
The IRS has issued a proposed revenue procedure to clarify questions from employers regarding what information must be provided in an employee’s consent to a refund claim made under Code Sec. 6402 for an overpayment of Federal Insurance Contributions Act (FICA) tax or Railroad Retirement Tax Act (RRTA) tax. The proposed revenue procedure permits-but does not require-the employee consent to be requested, furnished, and retained in an electronic format, as an alternative to a paper format. An employer may rely on the proposed procedure for employee consents requested before the date the final revenue procedure is published, the IRS explained.
The IRS clarified that in addition to containing the employee’s name, address and taxpayer identification number, a valid employee consent must identify the basis of the refund claim and be signed by the employee under penalties of perjury. Additionally, the IRS explained when an employer may request, furnish and retain employee consent in electronic format as an alternative to paper.
Notice 2015-15 also described what constitutes “reasonable efforts” to secure the employee’s consent when consent cannot be obtained. Generally, an employer that has not repaid or reimbursed an employee is not allowed a refund for the employer share of the overpaid FICA taxes unless the employer has secured the employee’s consent and included a claim for the refund of such employee tax. However, this rule does not apply if the employer has made reasonable efforts to obtain consent and been unable to do so.
Notice 2015-15 provides that an employer will be deemed to have made reasonable efforts with respect to a request for a consent if:
- The employer properly requested a consent of the employee as provided in this revenue procedure;
- request for a consent sent electronically provides for an acknowledgement of receipt of the email message. A read-receipt message is not sufficient;
- The employer retains a record of mailing the request for a consent, record of emailing the request for a consent (including acknowledgement of receipt of the email message), or record of personal delivery to the employee who does not furnish an employee consent, or a response indicating that the employee was not authorizing the employer to claim a refund of FICA taxes on his or her behalf;
- In the event the mailing is undeliverable, the employer makes an effort to determine the employee’s current address and, if a new address is discovered, the employer delivers a request for a consent in a paper format to the new address or delivers a request for a consent by email or by personal delivery, giving the employee not less than 45 days from the date of the request to reply to the subsequent request; and
- In the event of an email delivery failure (for example, the employer is notified that the message the employer tried to send did not reach the employee because of a problem with the email address) or in the event that the employee does not acknowledge receipt of the email message, the employer mails a request for a consent in a paper format to the employee’s last known address or provides a request for a consent to the employee by personal delivery giving the employee not less than 45 days from the date of the request to reply to the subsequent request.
The IRS has announced that it will disallow claims for refunds of Federal Insurance Contributions Act (FICA) taxes paid with respect to most severance payments and will take no further action on any of the appeal requests from denied FICA tax refund claims that it suspended pending the resolution of the Quality Stores case. The IRS restated the holding of Rev. Rul. 90-72, in which it determined that supplemental unemployment benefits (SUB) payments were wages for FICA tax purposes except for payments falling under a narrow exception: SUB payments to terminated employees must be linked to the receipt of state unemployment benefits and not paid in lump sum. The IRS’s action follows the U.S. Supreme Court’s 2014 decision in Quality Stores, 2014-1 ustc ¶50,228.
Quality Stores involved an employer that made severance payments to several hundred of its employees who had been terminated while the company was in Chapter 11 bankruptcy. The government withheld FICA tax from the payments, and the company sought a refund on its behalf and on behalf of its former employees.
Initially, the Sixth Circuit Court of Appeals held that the severance payments were not wages for FICA tax purposes. This created a Circuit split because the Sixth Circuit’s decision contradicted the Federal Circuit’s 2008 ruling in CSX Corp., 2008-1 ustc ¶50,218 that severance payments were wages for FICA and tax purposes.
Ultimately, the U.S. Supreme Court reversed the Sixth Circuit. It held that FICA defines wages as all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The Court found that the term “employment” encompasses any service, of whatever nature, performed . . . by an employee for the person employing him. Severance payments, the Court held, are therefore remuneration. Severance payments are made to employees only. It would be contrary to common usage to describe as a severance payment, remuneration provided to someone who has not worked for the employer, the Court observed.
The IRS reported that before the Supreme Court’s decision in Quality Stores, it had received FICA refund claims (along with claims for refunds of Federal Unemployment Tax Act (FUTA) and Railroad Retirement taxes (RRTA) paid with respect to severance payments). After the IRS disallowed these claims, many taxpayers appealed to IRS Appeals. Action on these appeals was also suspended pending the Supreme Court’s decision in Quality Stores.
As a result of the Supreme Court’s holding in Quality Stores, the IRS stated in Announcement 2015-8 that it will disallow all claims for refund of FICA or RRTA taxes paid with respect to severance payments that do not satisfy the narrow exclusion in Rev. Rul. 90-72. The IRS will also disallow all claims for FUTA tax refunds. This treatment, the IRS explained, applies to all pending refund claims before the IRS. No further action will be taken on these claims, the IRS reported.
Rev. Rul. 90-72
In Rev. Rul. 90-72, the IRS provided one narrow exception under which SUB payments were not wages for FICA tax purposes by laying out specific factual circumstances under which SUB payments would qualify for the exemption. In summary, the exception states that to be excluded from the definition of wages for FICA purposes, SUB payments must be linked to the receipt of state unemployment compensation and must not be paid to the employee in a lump sum. The IRS clarified in Announcement 2015-8 that the exception in Rev. Rul. 90-72 continues to be in effect.
The IRS recently issued the maximum fair market value (FMV) amounts that designate the proper valuation rule for employers calculating fringe benefit income from employer-provided automobiles, trucks, and vans first made available for personal use in 2015. Taxpayers with employer-provided vehicles within the designated FMV amounts may apply the vehicle cents-per-mile rule or fleet average valuation rule, as appropriate.
An employer that has provided a vehicle for an employee’s personal use must include the value of that personal use in that employee’s income and wages as a fringe benefit under Code Sec. 61. Employers and taxpayers may calculate the value of their personal use using several valuation methods, including the cents-per-mile valuation rule outlined in Reg. §1.61-21(e) or the fleet average valuation rule under Reg. §1.61-21(d).
Cents-per-mile valuation rule
To qualify to use the cents-per-mile valuation rule, the employer must reasonably expect the vehicle to be regularly used in the employer’s business throughout the calendar year, or the vehicle must be used primarily by employees, including for commuting, and be driven at least 10,000 miles that calendar year.
Employers and employees arrive at the value of the fringe benefit provided in a particular calendar year by multiplying the standard mileage rate for the year by the total number of miles the vehicle is driven by the employee for personal purposes. The standard business mileage allowance rate for 2015 is 57.5 cents-per-mile (up from 56 cents-per-mile for 2014).
Employers and employees may not use the cents-per-mile rule, however, if the fair market value of the vehicle exceeds the sum of the maximum recovery deductions under Code Sec. 280F(a) for the first five years of service. The maximum 2015 FMV amounts for use of the cents-per-mile valuation rule are:
- $16,000 for a passenger automobile (the same as for 2014 and 2013); and
- $17,500 for a truck or van, including passenger automobiles such as minivans and sport utility vehicles, which are built on a truck chassis (up from $17,300 in 2014).
Employers maintaining a fleet of at least 20 automobiles can value the FMV of each automobile as equal to the average value of the entire fleet. The fleet average value is the average of the FMV of all automobiles used in the fleet.
The maximum FMV amounts for use of the fleet-average valuation rule in 2014 are $21,300 for a passenger automobile (the same as for 2014) and $22,900 for a truck or van (up from $22,600 in 2014).
Taxpayers must obtain the IRS’s consent to change any of their accounting methods under Code Sec. 446(e). The IRS has updated and made changes to its revenue procedures for obtaining IRS consent. In Rev. Proc. 2015-13, the IRS has updated the general procedures for taxpayers to obtain either advance consent or automatic consent to change their accounting methods. In Rev. Proc. 2015-14, the IRS has described the accounting methods for which taxpayers can obtain automatic consent to change their method.
These procedures provide the roadmap for taxpayers to consult when changing an accounting method. For any change, taxpayers must submit Form 3115, Application for Change in Accounting Method. However, the timing for submitting the form depends on the change and the type or consent. Advance consent requires that the taxpayer file Form 3115 with the IRS and wait to obtain consent before making any changes. Automatic consent allows the taxpayer to make the changes on its own and to file Form 3115 in the year after the year of change.
Rev. Proc. 2015-13 updates and supersedes the procedures that were in Rev. Proc. 2011-14 (automatic consent procedures) and Rev. Proc. 97-27 (advance consent procedures). The procedures clarify and modify rules for changing accounting methods in several dozen areas. Rev. Proc. 97-27 is superseded. However, certain provisions of Rev. Proc. 2011-14 remain in effect. Generally, the changes are effective for Forms 3115 filed on or after January 16, 2015 for a year of change ending on or after May 31, 2014. Transition rules apply for certain automatic changes.
The significant changes made by Rev. Proc. 2015-13 include provisions that:
- Clarify that an issue is under consideration as of the date of the operative written notification to the taxpayer, and that an item ceases to be an issue under consideration after an examination ends unless the examining agent provides the taxpayer with written notification that the item is an issue placed in suspense;
- Modify the rules for when a taxpayer under examination may file a Form 3115 by replacing “issue pending” and “consent of director” in with broad eligibility rules; and
- Modify the rules for when a taxpayer under examination filing a Form 3115 may receive audit protection by replacing the 90-day window that began on the first day of the taxpayer’s tax year with a three-month window that applies to taxpayers that have been under examination for at least 12 consecutive months as of the first day of the three-month window.
In Rev. Proc. 2015-14, the IRS highlighted significant changes to its list of accounting methods for which automatic consent is available, including:
- Research and experimental (R&E) expenditures under Code Sec. 174;
- Reasonable allocation methods for self-constructed assets;
- Changes from the cash to an accrual method for specific items;
- Long-term contracts;
- Trade and business expenses including materials/supplies and repairs/maintenance; and
- Computing ending inventory under the retail inventory method
The necessity of implementing a change in a method of accounting based on current and changing IRS procedures is generally a situation faced by any business over the course of several years. This frequency has been accelerated for many more businesses recently because of requirements – and opportunities – connected with those situations listed above, and more.
Please contact this office if you have any concerns over how these new procedures impact your business.
Treasury and the IRS have issued proposed regulations on the research tax credit with respect to computer software developed for internal use. The proposed regulations define “internal use software” as software developed by the taxpayer for use in general and administrative functions that facilitates or supports the conduct of the taxpayer’s trade or business. The regulations became effective as of the date of their publication, meaning that the regulations will apply for tax years beginning after January 20, 2015.
Except to the extent permitted by regulations, a taxpayer’s expenditures for software it develops for its internal use are ineligible for the research credit. The proposed regulations describe internal use software, clarify what is not internal use, and allow more internal software to satisfy a high threshold of innovation test.
Under the proposed regulations, software is not developed primarily for internal use if it is developed to be commercially sold, leased, licensed, or otherwise marketed to third parties, or to enable a taxpayer to interact with third parties or to allow third parties to initiate functions or review data on the taxpayer’s system. Whether software is developed primarily not for internal use depends upon the intent of the taxpayer and the facts and circumstances at the beginning of the software development.
High threshold of innovation test
The proposed regulations maintain the high threshold of innovation test, although they remove the appropriate design component from the method of determining substantial uncertainty. (The second prong of the high threshold of innovation test requires that computer software development entail significant economic risk, which exists if the taxpayer commits substantial resources to the development and there is substantial uncertainty.) Some practitioners have predicted that the elimination of the appropriate design component from this test could introduce added complexity.
For computer software to qualify for the research and development credit, the high threshold of innovation test requires that the:
- Software must be innovative,
- Software development must involve significant economic risk, and
- Software must not be commercially available to the taxpayer.
TDNR JL-9744; NPRM REG-153656-03
At the end of 2014, Congress passed the Tax Increase Prevention Act of 2014 (2014 Tax Prevention Act) (P.L. 113-295), which extended numerous provisions for the 2014 tax year. One of these extensions provides parity for employer-provided mass transit and parking benefits under Code Sec. 132(f) through 2014.
In response, the IRS published guidance (Notice 2015-2) to clarify how employers should address the retroactive increase. The IRS also provided a special administrative procedure for employers to make adjustments on their Forms 941, Employer’s Quarterly Federal Tax Return, filed for the fourth quarter of 2014, and in filing Forms W-2, Wage and Tax Statement.
Before the 2014 Tax Prevention Act, the adjusted maximum monthly excludable amount for 2014 for the aggregate of transportation in a commuter highway vehicle and any transit pass was $130; and the adjusted maximum monthly excludable amount for qualified parking was $250. The 2014 Tax Prevention Act, however, retroactively enacted parity between the two amounts for the 2014 tax year. Therefore, the maximum monthly excludable amount for the period of January 1, 2014, through December 31, 2014, is $250 for transit passes and van pool benefits and also $250 for qualified parking. However, nothing in the 2014 Tax Prevention Act mandates that employers provide additional transit benefits to employees.
The IRS explained that, under the 2014 Tax Prevention Act, any transit benefits provided in 2014 by an employer to an employee in excess of $130 (capped at $250) is excluded from the employee’s gross income and wages. (The notice refers to this additional $120 as “excess transit benefits.”) The exclusion applies whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through salary reduction arrangements.
The guidance clarifies, however, that employees may not retroactively increase their compensation reduction for 2014 to take advantage of the increase in the excludable amount for transit benefits in 2014. In addition, employees may not reduce their compensation by more than $130 per month in 2015 to make up for any permissible reimbursement of transit benefits incurred in 2014. The 2014 Tax Prevention Act‘s transit benefits parity provision applies to the 2014 tax year only.
Employers that treated “excess transit benefits” as taxable wages and that have not yet filed their fourth quarter Form 941 for 2014 (due February 2, 2015) should repay or reimburse their employees the over-collected FICA tax on the excess transit benefits for all four quarters of 2014, on or before filing the fourth quarter Form 941, the IRS explained.
The employer, in reporting amounts on its fourth quarter Form 941, may reduce the fourth quarter wages, tips and compensation reported on line 2; taxable Social Security wages reported on line 5a; and Medicare wages and tips reported on line 5c, by the excess transit benefits for all four quarters of 2014.
Employers that have filed the fourth quarter Form 941 must use normal procedures and must file Form 941-X, Adjusted Employer’s Federal Tax Return or Claim for Refund, to make an adjustment or claim a refund for any quarter in 2014, the IRS explained. Similarly, employers that, on or before filing the fourth quarter Form 941, did not repay or reimburse employees who received excess transit benefits in 2014 must use Form 941-X.
Employers that have not furnished 2014 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, Wages, tips, other compensation; box 3, Social Security wages; and box 5, Medicare wages and tips, the IRS explained. Employers that have already filed 2014 Forms W-2 should file Form W-2c, Corrected Wage and Tax Statement.
National Taxpayer Advocate (NTA) Nina Olson has released her 2014 Annual Report to Congress and cautioned that due to budget cuts, the IRS’s customer service has reached unacceptably low levels and will continue to deteriorate. Olson also identified problems with the IRS’s geographic footprint, its work toward implementing the Patient Protection and Affordable Care Act (PPACA), its offshore voluntary disclosure program (OVDP), and more.
Every year, the NTA identifies some of the most serious problems encountered by taxpayers and makes legislative recommendations. For 2014, Olson identified 23 problems and made 19 recommendations. Among the recommendations to Congress is codification of the Taxpayer Bill of Rights, which the IRS adopted in 2014.
Olson also recommended that Congress require the IRS to publish detailed information regarding the names and contact information for managers of local IRS groups or territories for different functions of the IRS, as well as managers of service and compliance functions located in IRS campuses. This recommendation would ostensibly enable taxpayers to circumvent the complicated phone tree that prevents them from obtaining answers to their tax questions.
Olson stressed that because of the budget cuts, taxpayer services are expected to continue to decline to the point where fewer than 50 percent of taxpayers who call the IRS would be able to reach a customer service representative.
Olson also criticized what she called disproportionate penalties in the OVDP. Olson explained that the agency changed the streamlined program in 2014 in ways that allow many taxpayers to pay lower penalties. However, the new rules do not allow taxpayers who already had entered into closing agreements with the IRS at higher penalty rates to amend those agreements, Olson cautioned. Olson encouraged the IRS to revisit the OVDP.
IR-2015-2; NTA 2014 Annual Report to Congress
Legislation has been introduced in the Texas House of Representatives proposing changes to the Texas franchise tax.
H.B. 1315 proposes to extend the temporary alternative rates of 0.95% of taxable margin and 0.475% of taxable margin for taxable entities primarily engaged in retail or wholesale trade to taxable reports due on or after January 1, 2016, and before January 1, 2018. Currently, the rates are in effect for taxable reports due on or after January 1, 2015, and before January 1, 2016.
H.B. 1316 proposes taking the same current temporary alternative rates of 0.95% of taxable margin and 0.475% of taxable margin and making them permanent.
[CCH Note: Gov. Greg Abbot called for a permanent reduction of the franchise tax rates in his State of the State address.]
H.B. 250 proposes phasing out the franchise tax by reducing the tax rates each year until it is eventually repealed effect January 1, 2020.
H.B. 321 proposes repealing the franchise tax effective January 1, 2016.
H.B. 250, H.B. 321, H.B. 1315, and H.B. 1316, as introduced in the Texas House of Representatives on February 11, 2015