The 2015 Protecting Americans from Tax Hikes (PATH) Act

The Protecting Americans from Tax Hikes (PATH) Act – the extenders component of H.R. 2029 makes permanent several lapsed business, individual, and charitable giving incentives, such as the research credit, the subpart F exception for active financing income, and tax-free IRA distributions for charitable contributions by individuals age 70-1/2 and older. It also renews a handful of provisions such as bonus depreciation, the work opportunity and new markets credits, and production and investment tax credits for wind and solar energy for five years.

1. BUSINESS EXTENDERS

1. Permanent extensions: The PATH Act permanently extends several business provisions retroactive to the end of 2014. It also modifies certain provisions prospectively.
1. Research and experimentation credit – The research credit is made permanent. For taxable years beginning after 2015, the credit is modified to allow an eligible small business to claim the credit against both its regular tax and alternative minimum tax (AMT) liabilities. Beginning in 2016, certain small businesses also may claim the credit against the employer portion of their payroll tax liability, rather than against their income tax liability.
2. Increased expensing limits under section 179 – The bill makes permanent the increased expensing limit and phase-out threshold under section 179 – $500,000 and $2 million, respectively – which most recently lapsed at the end of 2014. (Under current law, those amounts have fallen to $25,000 and $200,000, respectively). Additionally, the extenders bill permanently allows taxpayers to expense off-the-shelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) under section 179provisions that also lapsed at the end of 2014. For taxable years beginning after 2015, the bill (1) indexes the expensing limits to inflation, (2) repeals the limitation on the amount of section 179 property that can be attributable to qualified real property, and (3) adds air conditioning and heating units to the definition of qualifying property.
3. Other business provisions made permanent – The legislation also makes permanent a handful of other business incentives, including the:

1. Reduced recognition period (i.e., five years rather than 10) after which S corporations can avoid built-in gains tax following conversion from C corporation status;
2. 100 percent gain exclusion for Qualified Small Business Stock, including the elimination of the exclusion as an AMT preference item;
3. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

2. Long-term extensions: A handful of other business provisions receive longer-term, but not permanent, extensions. These include:

1. Bonus depreciation – The PATH Act extends bonus depreciation for qualified property placed in service over the next five years (i.e., through 2019), subject to a phase-out schedule: 50 percent bonus depreciation continues for 2015, 2016, and 2017, with the percentage falling to 40 percent in 2018, and 30 percent in 2019. After 2015, the bill also allows bonus depreciation to be claimed on qualified improvement property regardless of whether the property is subject to a lease, and removes the requirement that an improvement be placed in service more than three years after the building was placed in service.
2. Work opportunity tax credit – Under the PATH Act, the work opportunity tax credit (WOTC) is extended through 2019 and expanded beginning in 2016 to include as a targeted group certain long-term unemployed individuals (i.e., those certified as having been unemployed at least 27 weeks). Employers who hire individuals from this new targeted group would be eligible to receive a credit of 40 percent of the first $6,000 in wages paid.

2. CHARITABLE GIVING EXTENDERS

The PATH Act makes permanent several incentives to promote charitable giving by businesses and individuals.
1. Charitable contributions of food inventory: The legislation permanently extends the deduction for charitable contributions of food inventory and expands it by:

1. Increasing the contribution limit for C corporations to 15 percent (from 10 percent) of the taxpayer’s net income for the taxable year, and increasing the limit for a taxpayer that is not a C corporation to 15 percent of the taxpayer’s aggregate net income for the taxable year from all trades or businesses from which such contributions were made for the taxable year;
2. Providing a five-year carryforward for qualifying food inventory contributions that exceed the 15 percent limit; and
3. Adding presumptions that certain taxpayers may use in determining the tax basis and the fair market value of donated food inventory.
4. The extension generally is effective for contributions made after December 31, 2014. The expanded incentives apply for tax years beginning after December 31, 2015.

2. Other charitable giving provisions: Several other charitable giving incentives are made permanent without additional modifications. These include:

1. Tax-free treatment of distributions from individual retirement plans by individuals age 70-1/2 and older for charitable purposes;
2. The special rules for contributions of capital gain real property made for conservation purposes;
3. The basis adjustment to stock of S corps making charitable contributions of property.

3. INDIVIDUAL EXTENDERS

1. Among the items in the PATH Act targeted at individual taxpayers is a provision that permanently extends the deduction for state and local sales taxes in lieu of a deduction for state and local income taxes. This is of particular interest to itemizers in states that do not impose an income tax.
2. The PATH Act also makes permanent enhancements to the earned income tax credit and child tax credit that were enacted in the American Recovery and Reinvestment Act of 2009 and scheduled to expire in 2017.
3. Notable among the items extended for 2015 and 2016 is one provision that allows individuals to exclude from income for tax purposes the debt forgiven by a bank on the short sale or foreclosure of a home and another that treats private mortgage insurance premiums as deductible interest payments.

Changes to implementation of PPACA taxes
Both the PATH Act and the omnibus appropriations components of H.R. 2029 include provisions that suspend or delay implementation of certain PPACA taxes:

1. Medical device excise tax – The medical device excise tax is suspended for sales in 2016 and 2017 (included in the PATH Act).
2. Cadillac tax – Implementation of the so-called “Cadillac” tax on high-cost employer provided health insurance plans is delayed for two years, until 2020 (included in the omnibus appropriations section).
3. Annual fee on health insurance providers – This fee is suspended for 2017 (also included in the omnibus appropriations section).

Section 529 plan changes

The PATH Act includes a non-extender provision that liberalizes the rules for section 529 education savings plans by:

1. Expanding the definition of qualified higher education expenses to include computer equipment and technology;
2. Simplifying the treatment of distributions for individuals with multiple section 529 accounts; and
3. Treating as a qualified expense any recontribution of tuition refunds if the recontribution is made within 60 days.
4. These changes generally take effect for distributions made or refunds after December 31, 2014.

If you need help with preparing your business or personal taxes please contact Gregory J. Spadea at 610-521-0604.

Requesting Abatement of Interest Due to IRS Error or Delay

Clients will typically ask me if interest can be abated after I successfully abated all the IRS tax penalties. Unfortunately, interest cannot be abated for reasonable cause like penalties can. However, the interest charged on a penalty will be reduced or removed when that penalty is reduced or removed. If an unpaid balance remains on your account, interest will continue to accrue until the account is fully paid.

The IRS can abate interest if the interest is caused by IRS errors or delays. The IRS will abate the interest only if there was an unreasonable error or delay in performing a managerial or ministerial act. The term “managerial act” means an administrative act that occurs during the processing of your case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. An example would be if the auditor was assigned to a three month detail in the middle of handling your case and your case was not reassigned and just sat for three months until the auditor returned.

The term “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs during the processing of your case after all prerequisites of the act, such as an appeal conference and review by supervisors have taken place. For example if the IRS never sends you a final exam report or a statutory notice of deficiency at the conclusion of your conference with Appeals that would constitute IRS delay.

Remember that you cannot have caused any significant aspect of the error or delay. In addition, the interest can be abated only if it relates to taxes for which a notice of deficiency is required. This includes income taxes, generation-skipping transfer taxes, estate and gift taxes, and certain excise taxes. Interest related to employment taxes or other excise taxes cannot be abated.

You would have to file Form 843 to formally request an abatement of interest on your federal liability and indicate the dates of any payment of interest on the tax liability. If you need help filing the Form 843 call Gregory J. Spadea at 610-521-0604 of the Law Offices of Spadea & Associates, LLC located in Ridley Park, Pennsylvania.

5 Ways You Can Take Control of a Pennsylvania Sales Tax Audit

Undergoing any type of an audit can be scary, but just because your company is being audited, doesn’t mean that you can’t take control of the audit to help ensure a positive outcome.   One of the first steps in a sales tax audit is the opening conference with the auditor.  This is one of your first and best opportunities to take control of the audit and set the tone for how it will progress.  Here are five ways that you can set the tone for a sales tax audit during this opening conference.

• 1. Have the audit at your attorney’s office. The reason is you do not want the sales tax auditor disrupting your company’s operations. You will have to give a tour of the business to the auditor at some point but the records can be reviewed at your attorney’s office.   If the auditor is working in a windowless conference room they will stay focused on the job at hand and be on their way.  This also has the added benefit of not having the auditor work near your accounting department so they don’t accidentally overhear any sensitive information.
• 2. Have your Tax Attorney as the only contact person.  You should have your tax attorney deal directly with the auditor.   This ensures that potentially sensitive information won’t be leaked accidentally to the auditor by other employees. It also ensures you do not provide any information that could expand the scope of the audit./li>
• 3. Request the specific information needed to track a transaction. The auditor will ask for your gross receipts journal and your sales journal to determine you filed the monthly sales tax returns correctly. Then the auditor will select a specific transaction to examine, It is important that you only provide the auditor with the specific information they need and not any additional records that may expose a vulnerability or expand the scope of the audit.
• 4. Request the statute or rule that supports the auditor’s taxation.  Notify the auditor up front that you would like them to provide the statute or rule to back up their determination of taxation for any items that may be in question.
• 5. Request a supervisor’s involvement if there is a disagreement.  If you are encountering any issues during the audit, it’s best to deal with those issues while the auditor is on premises.  If you are unable to resolve an issue request a supervisor’s involvement. In addition you can always appeal a final assessment to the Pennsylvania Board of Appeals within 90 days if all else fails.

If you receive an audit letter please call Gregory J. Spadea at 610-521-0604 in Ridley Park, Pennsylvania.