The Protecting Americans from Tax Hikes Act (“The Act”) was signed into law by the President on December 18, 2015. The Act includes a number of significant tax changes. Some of the more important changes effective after December 31, 2014, (unless indicated) are as follows:
• R&D Credit – The Act retroactively and permanently extends the research credit and may be used as an offset against Alternative Minimum Tax (AMT) in certain situations. No changes were made to the calculation method of the R&D credit.
• R&D Credit – Offset against AMT. The Act provides that the R&D credit can be claimed against an AMT offset for an eligible small business (ESB), which is defined as a business with $50 million or less of gross receipts effective January 1, 2016.
• R&D Credit – Offset against payroll taxes. Effective after December 31, 2015, the Act provides that a qualified small business (QSB), which is defined as having gross receipts of less than $5 million in current year and not having gross receipts for more than $5 million in the prior year, is eligible to offset their R&D credit against their payroll taxes. The maximum payroll tax offset is $250,000.
• Section 179 – The $500,000 expensing limitation and $2 million phase-out amounts are retroactively extended and made permanent; after 2015, the limits are indexed for inflation.
• Section 179 – The rule that allows expensing for off-the-shelf computer software is retroactively extended and made permanent.
• Bonus Depreciation – The Act extends bonus depreciation for qualified property acquired and placed in service during 2015 through 2019 (50% for 2015-2017, 40% for 2018, and 30% for 2019).
• Qualified Leasehold Improvements – The Act retroactively extends and makes permanent the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year Modified Accelerated Cost Recovery System (MACRS) class.
• Built-In-Gains Tax – The Act retroactively and permanently provides that for determining the net recognized built-in gain, the recognition period is a 5-year period.
• Work Opportunity Credit – The Act retroactively extends the work opportunity credit so that it applies to eligible veterans and non-veterans who begin work for an employer before January 1, 2019. With respect to individuals who begin work for an employer after December 21, 2015, the credit applies to employers who hire certain qualified unemployed individuals. The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages.
• Empowerment Zone Tax Incentives – The Act extends for two years, through December 31, 2016, the period for which the designation of an empowerment zone is in effect.
• New Market Credit – The Act retroactively extends the new markets tax credits through 2019. It provides up to $3.5M in qualified equity investments for each calendar year from 2015 through 2019. The carryover period for unused new markets credits is extended through 2024.
• Exclusion of Gain from Certain Small Business Stock – The Act retroactively and permanently extends the 100% exclusion and the exception from minimum tax preference treatment.
• Tax-free IRA Transfers to Charities – The Act retroactively and permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per year.
• Mortgage Insurance Premiums – The Act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before January 1, 2017.
• Qualified Tuition Deduction – The Act retroactively extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education.
• American Opportunity Tax Credit (AOTC) – The Act makes the AOTC permanent.
• Child Tax Credit (CTC) – The Act makes the enhanced CTC permanent by setting the threshold dollar amount for purposes of computing the refundable credit at an unindexed $3,000.
• Look-through Rules for Payments between Related to Controlled Foreign Corporations (CFC) under the Foreign Personal Holding Company Income — The Act retroactively extends the look-through treatment for related CFC’s for five years making it applicable to qualifying CFC’s for tax years beginning on or before January 1, 2020, and to the tax year of US shareholders with or within the tax years of the qualifying CFC end. This rule provision generally permits the tax treatment of the receipt of dividends, interest, rents, and royalties income items as non- foreign personal holding income (FPHCI) sources and does not require immediate income inclusion for US tax reporting purposes provided that such income items under the look through provisions are determined to be attributable or properly allocable to non-subpart F income, or such income items are determined to be not effectively connected with the conduct of a US trade or business of the payer.
Maryland taxpayers that have received refunds or filed refund claims because of the decision in Comptroller v. Wynne can preserve their right to receive the full 13% interest taxpayers are typically paid on refunds. Last year, Maryland enacted legislation stating taxpayers receiving Wynne-related refund claims would only be paid the prime interest rate rounded to the nearest whole number, instead of the general rate of 13%. Thus, the current interest rate being paid on Wynne refund claims is only 3%; the legislation is expected to be challenged in court on constitutional grounds. A number of taxpayers seeking the full 13% interest rate have already filed appeals with the Comptroller.
In anticipation of litigation on this issue, the Comptroller has established a procedure whereby taxpayers can challenge the interest they received on their Wynne refunds. A summary of the procedure is below.
The Comptroller has indicated that it is currently processing protective refund claims filed in 2014. All protective claims (i.e., claim filed before the Wynne decision was issued in May of 2015) are expected to be processed by the end of the year. This means that most of the refund claims that have been submitted since the Wynne decision was issued will likely not be processed until 2016.
If you have questions related to a Wynne refund claim or another Maryland tax issue, please contact your Aronson tax advisor or Michael L. Colavito, Jr.at 301-231-6200.
The IRS has announced proposed regulations to address the definitions of various terms in the Tax Code relating to marriage, in view of the 2013 U.S. v. Windsor Supreme Court decision striking down part of the Defense of Marriage Act as unconstitutional, and of the 2015 Obergefell v. Hodges Supreme Court decision that same sex couples have a fundamental right to marry in any state, thus rendering state bans unconstitutional.
The proposed regulations effectively state that:
These regulations, if adopted, will have far reaching consequences to same sex married couples who have otherwise been filing single returns for each spouse. The regulations do not apply to other relationships such as civil unions or registered domestic partnerships.
For questions about your specific tax situation, please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301-222-8212.
Alabama has revoked a twenty-year-old sales tax ruling, and in doing so has ruled that electronically transmitted information is taxable tangible personal property for sales tax purposes. The notice issued by the Alabama Department of Revenue on September 3, 2015 cites advances in technology and analogous expansions of the definition of “tangible personal property” to canned (i.e., prewritten) software and electricity as support for it decision. Alabama’s decision seems troubling when considering the otherwise limited application of it sales tax and the means by which it has expanded its sales tax in the past.
The application of a state’s sales tax to what most states consider a service (i.e., an information service) is typically accomplished by the enactment of a statute that specifically enumerates the service as being subject to sales tax. Alabama’s informal memorandum (which seems to be the best characterization of the document issued by the Department) is a prime example of a significant change in tax policy being established by an administrative agency. Other states have issued similar informal guidance, for example, by ruling that sales tax applies to software-as-a-service (SaaS). However, states that have administratively concluded that SaaS is taxable have largely already had an enacted statute stating that canned software is taxable regardless of the method of delivery. In such case, the taxing authority is arguably making a reasonable interpretation of existing law. Here, Alabama does not otherwise tax information services.
The expansion of Alabama’s tax base to canned software was accomplished through an Alabama Supreme Court case in 1996, which held that canned software is “tangible personal property.” The Department of Revenue subsequently promulgated a regulation addressing the taxation of computer software in more detail. Thus, in the case of software, the Department had a decision of the state’s highest court that it was interpreting. The Department’s reliance on that very case, which addressed the narrow issue of whether canned software is subject to sales tax, to support its conclusion that electronically transmitted information is also tangible personal property is quite a stretch.
This is especially the case given the fact that Alabama does not otherwise tax information services. How expansive are taxpayers to interpret this pronouncement? Is all electronically transmitted information now taxable? Can sales tax be avoided if the information is delivered in hard copy because the application of the “true object” test, which Alabama applies, results in the principal purpose of the sale being a nontaxable transfer intangible property?
Essentially, Alabama’s notice leaves taxpayers, both those providing information services online and in a tangible form, with a significant amount of uncertainty. Still, this is not terribly surprising, given the slow nature of state legislatures to react to new methods by which products and services are delivered. Tax administrators across the country are routinely faced with similar questions requiring them to fit a square peg into a round hole. Unfortunately, the conclusions are anything but uniform; leaving taxpayers, especially those offering products and services online to customers in multiple states, with a certain level of risk.
If you are interested in learning more about how states are taxing technology companies, please join us for our upcoming webinar series: Taxing Tech. If you have questions about the application of sales tax on your products or services, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
As the summer heat cranks up, it is tempting to squeeze in some leisure time during a business trip. But what does that do to the ability to deduct the costs associated with the trip?
If the trip is structured so that it is primarily business, the cost of the round trip transportation is deductible. The cost of lodging while on business is also deductible, as is 50% of the cost of meals.
To be considered “primarily business.” there is no bright line test; rather it is based on facts and circumstances. Reg. § 1.162-2(b)(2) speaks to the relative amount of time spent for business compared to personal. Presumably, if the majority of the days contain business activities, the trip was primarily for business.
What about weekends? For example: a conference taking place Thursday, Friday, and wrapping up Monday; or concluding business on Friday but taking a flight out on the weekend because it would result in more overall savings than taking a flight on Friday. Under the first set of facts, the weekend would still count as business days because it would be impractical to fly home Friday and back Monday. Likewise, under the second set of facts, the weekend counts as business days because the entire trip ends up costing less by staying over a weekend. The latter is addressed in PLR 9237014, as a “common sense” test. While private letter rulings cannot be cited as precedent or as the basis for taking a tax position, they do give an insight as to how the IRS thinks and how they would tend to view similar circumstances.
What about the cost of bringing the family? Some of it may still be deductible. For instance, renting a hotel room or car will cost the same whether there is one person or four people. But if additional costs are incurred, such as needing two rooms or a passenger van, the additional costs are not deductible. Likewise, their meals are not deductible, nor are their airfare costs. Bottom line – the deduction is limited to what it would cost to travel alone. That said, with proper planning and cozy living arrangements, the family could come along for a subsidized vacation.