Taxpayers No Longer Need to Attach Copy of Section 83(b) Election to Form 1040

Summary

The IRS finalized regulations on July 25, 2016, adopting the  2015 proposed regulations, without change, that eliminate the requirement to file a copy of an 83(b) election with an individual’s income tax return for the year.  An 83(b) election allows the taxpayer to report as income when nonvested property is transferred in connection with the performance of services rather than when the property becomes substantially vested as provided under Section 83(a).

There are both pros and cons to making an 83(b) election that should be discussed with your tax advisor prior to making such an election.

The final regulations apply to property transferred on or after January 1, 2016.  For transfers of property on or after January 1, 2015, and before January 1, 2016, taxpayers may rely on the guidance in the proposed regulations, which is identical to the guidance contained the final regulations.

Details

When property is transferred to a taxpayer in connection with the performance of services, Section 83(a) generally requires inclusion of the excess of the fair market value of the property over the amount paid for the property in the year in which the taxpayer’s rights in the property are transferable or are not subject to a substantial risk of forfeiture.

Under Section 83(c)(1) and regulations thereunder, a substantial risk of forfeiture  exists if the full enjoyment of the property is conditioned on the future performance of substantial services or  the occurrence of a condition  that provides a substantial  possibility of forfeiture.  Property often increases in value between the transfer date and the time when there is no longer a substantial risk of forfeiture, resulting in an increased amount taxed as ordinary income.

As an alternative to delaying the taxation until there is no longer a substantial risk of forfeiture, Section 83(b)(1) allows the  person who performs services in connection with which property is transferred to elect inclusion of the excess fair market value of the property over the amount paid for it in gross income for the tax year of the transfer.

Prior to these new regulations, an 83(b) election was made by filing a written statement within 30 days of the transfer date with the IRS office with which the taxpayer’s return would be filed (a copy was also furnished to the service recipient).  An additional copy of the statement had to be submitted with the taxpayer’s income tax return for the year of transfer.  The requirement to attach a copy of the 83(b) election with the taxpayer’s income tax year proved to be an impediment to IRS’s preferred electronic filing.  The final regulations eliminate the requirement to attach a copy to the taxpayer’s income tax return.  Generally, a copy of any Section 83(b) election must be kept until the period of limitations expires (generally, three years from the due date of the return) for the return that reports the sale or other disposition of the property.

Insights

Taxpayers are not relieved of their general recordkeeping responsibilities under Section 6001 and accordingly must keep sufficient records to support the original cost of the property and the tax treatment as reported on their income tax returns.

Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Florida Expands the Authority of the Department to Estimate Unclaimed Property and Changes Domicile of an Unincorporated Business

Summary

On March 24, 2016, Florida Governor Rick Scott (R) signed into law H.B. 783, which authorizes the Department of Financial Services to estimate unclaimed property where a holder fails to provide requested documents, changes the definition of domicile to mean the state of organization in the case of an unincorporated business association, and specifically includes limited liability company and an association of two or more individuals in the definition of business association.  These changes go into effect July 1, 2016.

Details

Authority to Estimate Unclaimed Property
Prior to the enactment of H.B. 783, Florida law limited the Department’s authority to estimate the unclaimed property of a holder in the event the holder’s available records are insufficient to prepare an unclaimed property report.  Effective July 1, 2016, the Department may also estimate unclaimed property where the holder fails to provide requested records.

Domicile of Unincorporated Association
Prior to the enactment of H.B. 783, Florida law defined “domicile” for an unincorporated business association to mean the principal place of business.  Effective July 1, 2016, the definition means the state where the business association is organized.

Definition of Business Association
Prior to the enactment of H.B. 783, Florida law defined business association to include only a corporation, joint stock company, investment company, business trust, partnership, or association.  Effective July 1, 2016, the definition specifically includes a limited liability company, and an association of two or more individuals.

Insights

  • Florida expanded the authority of the Department to estimate and issue unclaimed property assessments to a holder that chooses not to comply with the Department’s request for records.  This could embolden the Department to be more aggressive, in terms of quantity and quality, with respect to its unclaimed property audit efforts.
  • Unincorporated holders will need to remember that, effective July 1, 2016, unclaimed property should be reported to Florida only if the owner’s last known address is in Florida, or if the holder was formed under Florida law (i.e., not if the holder’s principal place of business is in the state).  This law change should make ascertaining domicile easier and more certain.

Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Issuance of Proposed Regulations Impacting Valuation of Family Controlled Businesses for Estate, Gift and Generation Skipping Tax Purposes

Summary

Gift, estate and generation skipping taxes are imposed on the value of property transferred.  Proposed regulations regarding estate planning and valuation discounts were released on August 2, 2016, and if they become final, would significantly impact the availability of minority or lack of control discounts for transfers of family controlled business interests among family members.  In general, the effective date will be the date the regulations are published as final regulations.  Prop. Treas. Reg. Section 25.2704-3, concerning transfers subject to disregarded restrictions, will apply to transfers occurring 30 or more days after the date of publication.

Details

On August 2, 2016, the IRS and Department of Treasury issued proposed regulations amending current regulations under IRC sections 2701 and 2704.  If these proposed regulations are made final they will have a profound impact on estate planning and valuation discounts with respect to family controlled entities.

Effective Date of Proposed Regulations
In general, the effective date will be the date the regulations are published as final regulations.  Prop. Treas. Reg. Section 25.2704-3, concerning transfers subject to disregarded restrictions, will apply to transfers occurring 30 or more days after the date of publication.  A hearing is scheduled to receive comments concerning the proposed regulations on December 1, 2016, thus the regulations will not become final until after that date.

Substantive Changes

The preamble and proposed amendments to the regulations contain 50 pages of complex technical discussions and rules.  A full discussion of the rules and issues raised are beyond the scope of this Alert.
In brief, the proposed regulations would accomplish the following:

  1. Expand definition of entities beyond simply a corporation and partnership to include LLCs and other entities and arrangements;
  2. Create a bright-line test for deathbed transfers (within 3 years of death) that result in a lapse;
  3. Treat assignee interests as a lapse subject to transfer tax;
  4. Redefine “applicable restriction” to eliminate the state law safe harbor; and
  5. Add a new provision disregarding certain restrictions that are not “applicable restrictions,” including any restrictions that prevent an owner from causing a redemption of his or her interest after 6 months’ notice.

Item 5 of this list will have the most impact on estate planning because the focus is on the ability of the owner to have his or her interest redeemed rather than restrictions on the ability to liquidate the entity.

Insights

The proposed regulations would have a significant impact on lack of control and minority discounts for estate, gift and generation skipping tax purposes when clients transfer interests in family controlled entities.  Given that the regulations, as proposed, may become final as early as the end of this year, clients holding interests in family controlled businesses may want to complete estate planning transfers of such interests prior to the date the regulations could be published as final.

Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

MPI Internet of Things Study

The “MPI Internet of Things Study” shows the statistics on why manufacturers are unsure about cybersecurity protections and loT R&D credit opportunities. The infographic is broken down into three segments that explain why manufacturers are hesitant:

  1. Manufacturers are eager, yet unprepared to operate in an loT-enabled environment
  2. Manufacturers need stronger cybersecurity measures
  3. Tax credits and incentives could help manufacture new opportunities

Click here to view the infographic.

This article originally appeared in BDO USA, LLP’s “Manufacturing & Distribution” newsletter (Spring 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Traditional Manufacturing Vs. Advanced Manufacturing

According to data from the Manufacturing Institute, seven out of 10 executives reported a shortage of workers with adequate technology, computer and technical training skills. Attracting the right talent to fill new and evolving positions, replace retiring baby boomers and emerge from last decade’s economic downturn to compete in a rapidly changing business landscape is critical for manufacturing business.

Click here to view our infographic on the traits of the next generation of manufacturers.

This infographic originally appeared in BDO USA, LLP’s “Manufacturing & Distribution” newsletter (Spring 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Templeton & Company, LLP Named to the AICPA’s Group of 400

West Palm Beach, Fla. – May 31, 2016 – Templeton & Company, LLP, has been named to the Group of 400 (G400) by the American Institute of Certified Public Accountants (AICPA). Membership in this group recognizes Templeton & Company as one of the Top 500 CPA Firms in the country.

Within the AIPCA’s 46,000 firm membership, the organization identifies the top 100 firms with membership in the G100. Firms that rank 101 to 500 earn membership in the G400. G400 membership gives firms the opportunity to interact and gain greater insight into the opportunities, and challenges of running a successful practice, discuss critical professional issues and priorities, find solutions and develop strategies for future growth and prosperity.

For more than 25 years, Templeton & Company has been dedicated to providing the highest-quality audit, tax and consulting services to its clients across the United States. The firm has been recognized as one of the Top 300 accounting firms in the country by INSIDE Public Accounting and consistently ranks as one of South Florida’s largest CPA firms.

“The G400 provides a wonderful venue to share best practices with our peers and gain the insights and relationships to help ensure that we furnish great service to our clients .” said Steven Templeton, Managing Partner of Templeton & Company.

About Templeton & Company

Founded in 1990, Templeton & Company, LLP is a professional services firm providing comprehensive business solutions to help its clients discover and realize their vision for success. Located in Fort Lauderdale, West Palm Beach, and Wellington, Fla., the firm provides consulting services to businesses in multiple industries with a focus on audit, tax, technology, accounting, succession strategy, and business valuations. Templeton & Company is also an independent member of the BDO Alliance USA, a national network of leading CPA firms. For more information about Templeton, its people, services, experience, and alliances, visit www.templetonco.com.

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PATH Act Changes Make Research Credit Creditable Against Other Taxes for Small Businesses

The 2015 year-end legislation that retroactively extended and made the popular research tax credit permanent was welcome by many business taxpayers. But the “Protecting Americans from Tax Hikes Act of 2015” (the 2015 PATH Act) also included additional unexpected taxpayer-friendly bonuses: beginning in 2016, eligible small businesses (i.e., those with $50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be used by certain even smaller “start-up” businesses against the employer’s Social Security portion of the employer’s payroll tax (i.e., FICA) liability.

Research credit. The 2015 PATH Act retroactively extended the research credit (which had expired at the end of 2014) and made it permanent. In general, the research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); and (3) 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium. ( Code Section 41 )

The base amount is a fixed-base percentage of the taxpayer’s average annual gross receipts from a U.S. trade or business, net of returns and allowances, for the 4 tax years before the credit year, and can’t be less than 50% of the year’s qualified research expenses. The fixed base percentage for a non-startup company is the percentage (not exceeding 16%) that the taxpayer’s total qualified research expenses are of total gross receipts for tax years beginning after ’83 and before ’89. A 3% fixed-base percentage applies for each of the first five tax years in which a startup company (one with fewer than three tax years with both gross receipts and qualified research expenses) has qualified research expenses..

A taxpayer can elect an alternative simplified research credit equal to 14% of the excess of the qualified research expenses for the tax year over 50% of the average qualified research expenses for the three tax years preceding the tax year for which the credit is being determined. If a taxpayer has no qualified research expenses in any one of the three preceding tax years, the alternative simplified research credit is 6% of the qualified research expenses for the tax year for which the credit is being determined.

Under pre-2015 PATH Act law, the research credit wasn’t a specified credit (as defined under “Offset against AMT,” below) with respect to any taxpayers. Because the extension of the research credit is retroactive to include amounts paid or incurred after December 31, 2014, taxpayers, such as fiscal year corporations that already filed returns for a fiscal year that includes part of 2015, or any other taxpayers that have filed returns for tax years ending after December 31, 2014, should consider filing an amended return to claim a refund for the amount of any additional tax paid because of not claiming amounts now eligible for the credit.

Offset against AMT. For credits determined for tax years that begin after December 31, 2015, eligible small businesses (generally, those with $50 million or less of gross receipts, see below) may claim the credit against their AMT liability. ( Code Sec. 38(c)(4)(B)(ii) )

Specifically, the provision provides that, in the case of an eligible small business (as defined in Code Section 38(c)(5)(C) , after application of rules similar to the rules of Code Section 38(c)(5)(D) ), the research credit determined under Code Section 41 , is a specified credit. As a specified credit, the research credits of an eligible small business may offset both regular tax and AMT liabilities.

Under Code Section 38(c)(5)(B) , for tax years beginning in 2010, an eligible small business was allowed to offset both the regular and AMT liability with the general business credits determined for the tax year (eligible small business credits). For this purpose, an eligible small business was, with respect to any tax year, a corporation, the stock of which was not publicly traded, a partnership, or a sole proprietor, if the average annual gross receipts did not exceed $50 million. ( Code Section 38(c)(5)(C) ) Credits determined with respect to a partnership or S corporation were not treated as eligible small business credits by a partner or shareholder unless the partner or shareholder met the gross receipts test for the tax year in which the credits were treated as current year business credits. ( Code Section 38(c)(5)(D) A calendar year corporation meets the $50 million gross receipts test for eligible small business qualification (see background above) for calendar Year 4 if its average annual gross receipts beginning for calendar Years 1, 2 and 3 do not exceed $50 million. Similarly, a fiscal year taxpayer meets the $50 million gross receipts test for its tax year beginning in calendar Year 4 if its average annual gross receipts for its tax years beginning in calendar Years 1, 2 and 3 do not exceed $50 million.

Illustration:  ABC Corporation, a calendar year taxpayer, had gross receipts of $75 million in Year 1, $45 million in Year 2, and $36 million in Year 3. ABC’s average annual gross receipts for the three-tax-year testing period are $52 million [($75 million + $45 million + $36 million) ÷ 3]. Since ABC’s gross receipts for the three-tax-year testing period exceed $50 million, ABC isn’t an eligible small business, and so, for Year 4, its research credits can’t offset the AMT.

Offset against payroll tax. For tax years that begin after December 31, 2015, qualified small businesses may elect to claim a portion of their research credit as a payroll tax credit against their employer Federal Insurance Contributions Act (FICA) tax liability, rather than against their income tax liability. ( Code Section 41(h) and Code Sec. 3111(f) ) The FICA payroll tax that is imposed on employers and employees is each composed of two parts: (1) the Social Security or old age, survivors, and disability insurance (OASDI) tax equal to 6.2% of covered wages up to the taxable wage base ($118,500 for 2016); and (2) the Medicare or hospital insurance (HI) tax equal to 1.45% of all covered wages (with an additional 0.9% for employees on wages received in excess of certain threshold amounts).

That is, a qualified small business may elect for a tax year to claim a certain amount of its research credit as a payroll tax credit against its employer OASDI liability, rather than against its income tax liability. The payroll credit tax portion isn’t treated as a research credit (i.e., as a credit for income tax purposes) except for purposes of Code Section 280C (under which, generally, neither deduction nor capitalization are allowed for expenditures for which a research credit is allowed, unless the taxpayer elects to reduce the amount of its research credit). ( Code Section 41(h)(1) )

Taxpayers eligible for the credit. A qualified small business is one that, in the case of a corporation or partnership, with respect to any tax year:

  • (1)  has gross receipts (as determined under the rules of Code Section 448(c)(3) , without regard to Code Section 448(c)(3)(A) ) of less than $5 million, and
  • (2)  did not have gross receipts (as determined in (1), above) for any tax year preceding the 5-tax-year period ending with the tax year. ( Code Section 41(h)(3)(A)(i) )

Thus, the above rule disqualifies a taxpayer as a qualified small business if it has gross receipts in any year before the fourth preceding tax year and so generally limits qualified small business status to start-ups

An individual can qualify if he meets the above two conditions, taking account the aggregate gross receipts received by the individual in carrying on all his trades or businesses. ( Code Section 41(h)(3)(A)(ii) ) Special aggregation rules apply. And an organization exempt from tax can’t be a qualified small business. ( Code Section 41(h)(3)(B) )

For purposes of this provision, all members of the same controlled group or group under common control are treated as a single taxpayer. ( Code Section 41(h)(5)(A) ) The $250,000 amount (see below) is allocated among the members in proportion to each member’s expenses on which the research credit is based. Each member may separately elect the payroll tax credit, but not in excess of its allocated dollar amount. (JCS-1-16)

Amount of the credit. The payroll tax credit portion is equal to the lesser of:

  • an amount specified by the taxpayer that does not exceed $250,000;
  • the research credit determined for the tax year; or
  • in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward under Code Section 39 from the tax year (determined before the application of Code Section 41(h) to the tax year). ( Code Section 41(h)(2) )

Illustration: Corpco, a C corporation that is a qualified small business for the tax year, has a research credit of $120,000 determined for the tax year. However, Corpco’s business credit carryforward from the tax year, determined without regard to an election, is only $40,000. Thus, Corpco’s payroll tax credit portion for the tax year can’t exceed $40,000.

The payroll tax portion of the research credit is allowed as a credit against the qualified small business’s OASDI tax liability for the first calendar quarter beginning after the date on which it files its income tax or information return for the tax year. The credit can’t exceed the OASDI tax liability for a calendar quarter on the wages paid with respect to all employees of the qualified small business. If the payroll tax portion of the credit exceeds the qualified small business’s OASDI tax liability for a calendar quarter, the excess is allowed as a credit against the OASDI liability for the following calendar quarter. ( Code Section 3111(f) )

The credit allowed against employer FICA can’t be taken account for purposes of determining the amount allowable as a payroll tax deduction. ( Code Section 3111(f)(4) )

Electing the credit. For any tax year, the election must specify the amount of the credit to which the election applies, and must be made on or before the due date, including extensions, of:

  • for a qualified small business that is a partnership, the return required to be filed under Code Section 6031 (i.e., the partnership information return);
  • for a qualified small business that is an S corporation, the return required to be filed under Code Section 6037 (i.e., the S corporation information return); and
  • for any other qualified small business, the return of tax for the tax year. (Code Section 41(h)(4)(A))

A taxpayer may not make an election for a tax year if it has made such an election for five or more preceding tax years. ( Code Section 41(h)(4)(B)(ii) )

In the case of a partnership or S corporation, an election to apply the credit against its OASDI liability is made at the entity level. ( Code Section 41(h)(4)(C) )

An election to apply the research credit against OASDI liability may not be revoked without IRS’s consent. ( Code Section 41(h)(4)(A)(iii) )

 

 

Recent Tax Developments may Affect Your Tax Situation

The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

2016 inflation adjustments announced for two tax breaks. The “Protecting Americans from Tax Hikes Act of 2015” (the PATH Act) made permanent the annual election to expense under Section 179 up to $500,000 of assets placed in service during the year; this dollar limitation begins to phase down when the amount of expensing-eligible assets placed in service during the year exceeds $2 million (the investment ceiling). The PATH Act also provided for post-2015 inflation adjustments to these dollar amounts. The IRS has announced that for tax years beginning in 2016, the $500,000 dollar limitation remains unchanged but that the investment ceiling increases to $2,010,000.

The IRS also announced that for 2016, the inflation-adjusted excludable amount for transit passes and commuter transportation in a commuter highway vehicle is $255 (up from $250).

IRS explained how employers should handle retroactive increase in 2015 excludable transit benefits. Late last year, the PATH Act retroactively increased the 2015 monthly exclusion for employer-provided transit and vanpooling benefits from $130 to $250. The IRS issued follow-up guidance clarifying that any “transit benefits” (i.e., total of vanpooling and transit pass benefits) provided by an employer to an employee in excess of $130 (the former maximum monthly excludable amount) up to $250 (the amended maximum monthly excludable amount) are excluded from the employee’s gross income and wages. The exclusion applies to these excess transit benefits whether the employer provided the transit benefits out of its own funds or whether the transit benefits were provided through compensation reduction arrangements. The IRS guidance also explained how to handle the increased exclusion on employees’ W-2s, and provided a special administrative procedure for employers to use in filing Form 941 (Employer’s Quarterly Federal Tax Return).

Relief for employers that want to claim retroactively revived WOTC. The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages. The PATH Act retroactively revived the WOTC for 2015 and extended it through December 31, 2019. Also, effective as of January 1, 2016, the list of WOTC-eligible “targeted groups” includes qualified long-term unemployment recipients. IRS announced transitional relief for (1) employers hiring a member of a targeted group, other than qualified long-term unemployment recipients, and who began or begins work for the employer on or after January 1, 2015, and on or before May 31, 2016; and (2) employers hiring an individual who is a long-term unemployment recipient and who began or begins work for that employer on or after January 1, 2016, and on or before May 31, 2016. These employers have until June 29, 2016, to file Form 8850, a key certification form needed to claim the credit.

Cuba off the list of sanctioned countries. Taxpayers can’t claim a foreign tax credit for income taxes paid or accrued to any country if the income giving rise to the tax is for a period during which the country is on the sanctioned list-i.e., the U.S. has designated the country as one that supports international terrorism, or has severed or does not conduct diplomatic relations with the country. Additionally, income derived from any controlled foreign corporation (CFC) from any foreign country while that country is on the sanctioned list is “sub-part F income” (meaning that the CFC’s U.S. shareholders are taxed on such income even if it’s not actually distributed to them). Cuba used to be on the list of sanctioned countries, but effective after Dec. 21, 2015, it has been removed from this list.

Cents-per-mile valuation of personal use updated. An employee’s personal use of an employer-provided auto must be treated as fringe benefit income and valued using one of several methods. One of the acceptable methods allows employers to value personal use at the mileage allowance rate (54¢ per mile for 2016). However, the cents-per-mile method may be used only if the auto’s fair market value does not exceed $12,800, as adjusted for inflation. The IRS has announced that the inflation-adjusted figures for vehicles first made available to employees for personal use in 2016 are $15,900 for autos (down from $16,000 for 2015) and $17,700 (up from $17,500 for 2015) for trucks and vans-i.e., passenger autos built on a truck chassis, including minivans and SUVs built on a truck chassis.

Controversial charitable contribution substantiation regulations withdrawn. The IRS has withdrawn proposed regulations issued last September that would have put in place an optional donee reporting procedure for substantiating charitable contributions of $250 or more. The regulations caused controversy because, even though the procedures contained in them were optional, donee organizations that elected to use those procedures would have had to obtain, store, and send to the IRS donor social security numbers, causing a potential identity theft problem.

Widened exclusion for identity protection services. Businesses, government agencies, and other organizations make significant efforts to secure the personal information of their customers and employees, but data breaches nonetheless occur. In response to such data breaches, organizations often provide identity protection services-credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services-to the customers, employees, or other individuals whose personal information may have been compromised as a result of the data breach. In 2015, the IRS announced that it would treat as nontaxable the cost of identity protection services provided at no cost to customers, employees, or other individuals whose personal information may have been compromised in a data breach. Now, the IRS has announced that it also won’t tax identity protection services provided free to employees or other individuals before a data breach occurs.