Baldwin Haspel Burke & Mayer LLC

BHBM Tax Law Alert 1/22/2014


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In this newsletter you will find information on updates and changes in the law on both the Federal and State level. If you have any questions, please contact us at (504) 569-2900.

FEDERAL TAX LAW UPDATES

Expiring Tax Provisions/2014 Estate Planning

The Joint Committee on Taxation  published a new document entitled “List of Expiring Federal Tax Provisions 2013-2024.” This list details the expiration of certain tax credits, tax deductions and other miscellaneous items. A copy of this report can be found here. As you are likely aware, one of the most important provisions for businesses which expired at the end of 2013 is the bonus depreciation provision contained in IRC §168(k). Additionally, the increases in IRC §179 expense limitations have expired as well, meaning that the IRC §179 limit for 2014 is $25,000 (adjusted for inflation).

The annual exclusion for 2014 remained the same as 2013, $14,000. The lifetime exemption amount has increased from $5,250,000 in 2013 to $5,340,000 in 2014. Additionally the top estate tax rate has increased from 35% in 2013 to 40% in 2014. Thus, it is extremely important to encourage your clients to properly craft their estate plans to minimize the impact of a 40% estate tax rate.

New Tangible Property Regulations

The Treasury Department promulgated final regulations providing guidance on the application of IRC §162(a) and IRC §263(a) to amounts paid to acquire, produce or improve tangible property. The new regulations will affect most taxpayers that acquire, produce or improve tangible property.

The regulations provide guidance on which costs must be capitalized in connection with the acquisition or production of real or personal property. The general rule is that unless an expense qualifies as a material or supply, a taxpayer must capitalize amounts paid to acquire or produce a unit of property (UOP), whether real or personal property, including leasehold improvement property, land and land improvements, buildings, machinery and equipment, and furniture and fixtures. Generally, a UOP is composed of “functionally interdependent” components.

Amounts paid to acquire materials and supplies generally are deductible in the year they are consumed. Materials and supplies are tangible property for use in the taxpayer’s operation that are not inventory. Such items include a UOP costing $200 or less; a UOP with an economic useful life of 12 months or less; a component to maintain, repair or improve a UOP, including rotable, temporary and standby emergency spare parts; and fuel, lubricants and water reasonably expected to be consumed in 12 months or less.

The new regulations also contain a de minimis safe harbor for deductions, the amount of which varies depending on whether the taxpayer has an Applicable Financial Statement (AFS). An AFS includes a financial statement required to be filed with the Security and Exchange Commission (SEC), a certified audited financial statement accompanied by the report of an independent certified public accountant, or a financial statement required to be filed with a federal or state governmental agency. Thus, reviewed or compiled financial statements do not qualify as an AFS. For taxpayers with an AFS, the safe harbor applies to property that does not exceed $5,000 per invoice or per item as substantiated by the invoice. For taxpayers without an AFS, the safe harbor per invoice, or per item substantiated by an invoice, is $500. There must be a written capitalization policy in place prior to the beginning of the tax year for a taxpayer electing to use the safe harbor. The election is made by attaching an annual election statement with a timely filed original return including extensions. The safe harbor does not apply to inventory or land.

New Regulations Affecting Partnerships

The Treasury Department has promulgated proposed regulations concerning many areas in partnership taxation, including: (i) the contribution of built-in loss property under IRC §704(c)(1)(C); (ii) partnership basis adjustments under IRC §743; (iii) partnership basis adjustments pursuant to IRC §734(a) and 734(b); and, (iv) the allocation of basis adjustments pursuant to IRC §755.

Among other things, the proposed regulations describe the reporting requirements for basis adjustments pursuant to IRC §704(c)(1)(C). The proposed regulations require the partnership that owns 704(c) property for which there is a basis adjustment under IRC §704(c)(1)(C) to attach a statement to the partnership return for the year of the contribution of the 704(c)(1)(C) property detailing the name and taxpayer identification number of the partner contributing such property and the basis adjustment of such property.

Emotional Distress Damages

In a rather interesting case, the Tax Court held that a settlement received by a professor from a university for “emotional damages only” was taxable and was incorrectly excluded from the professor’s income. The Tax Court further found that the accuracy-related penalty applied to the substantial understatement of tax.

The professor (taxpayer) and another faculty member were involved in a dispute when the taxpayer reported missing equipment to the university which employed her. The taxpayer developed  muscle tension, migraine headaches, severe clinical depression, anxiety and post-traumatic stress order. The taxpayer brought two suits against the university where she worked: one for a workers’ compensation claim; and, the other seeking damages for the gross negligence of the taxpayer’s co-employee. The university entered into a settlement agreement with the taxpayer “for emotional damages only.” The taxpayer did not report the first installment of the settlement proceeds on her federal income tax return, but she attached a statement that the proceeds were excluded from her gross income pursuant to IRC §104(a)(1) (for workers’ compensation claim) and IRC §104(a)(2) (physical injuries or physical sickness). The court held that the taxpayer failed to prove that the settlement related to workers’ compensation claims under Iowa’s workers’ compensation law. The court further held that the settlement received by the taxpayer was not for physical damages as the settlement referenced “emotional damages only.”

The court upheld the assessment of the accuracy-related penalty since the taxpayer failed to show that relevant authorities supported her position.

How to Reinstate Tax-Exempt Status

In Rev. Proc. 2014-11, the IRS provided procedures for retroactively reinstating tax-exempt status of organizations that lost their tax-exempt status because the organization failed to file the required annual returns for three (3) consecutive years. The Revenue Procedure describes various procedures for reinstating the tax-exempt status, including a streamlined process for organizations that were eligible to file Form 990EZ, the Short Form Return of Organization Exempt from Income Tax (commonly referred to as the postcard filing). Generally, the organization must follow one of the procedures outlined in Rev. Proc. 2014-11 within fifteen (15) months from the later of: the date of the Revocation Letter; or, the date on which the IRS posted the organization’s name on the Revocation List.

STATE TAX LAW UPDATE

Louisiana Tax Credit Registry

Act 418 of the 2013 Regular Session enacted the Louisiana Tax Credit Registry Act to establish a central tax credit registry within the Louisiana Department of Revenue for the registration and recordation of transferable tax credits granted, issued and authorized by Louisiana.

All transferable tax credits granted on or after January 1, 2014 to be applied against taxes collected by the Louisiana Department of Revenue will be recorded in the Tax Credit Registry.  Various state agencies granting the transferable tax credits will notify the Louisiana Department of Revenue of the issuance of any such credits by submitting the “Agency Certification of Credit” form (R-6121) and any supporting documentation.  The Department of Revenue will then record the tax credit in the Tax Credit Registry and issue a “Credit Registration Form” (R-6135) to the party that earned the transferable tax credit.

For any transfer of the credits to another party, the owner of the credit and the buyer must jointly submit a completed “Credit Utilization Form” (R-6140), a copy of the Credit Registration Form (R-6135), a copy of the contract of sale, and applicable transfer fee within ten (10) days of the transfer.  Each transferee will need its own Credit Utilization Form.  The transfers will not be effective until recorded on the Tax Credit Registry.  Once the Louisiana Department of Revenue transfers the credits in the Tax Credit Registry, the Louisiana Department of Revenue will issue a Credit Registration Form to the transferee as the new owner of the credit.

When using purchased tax credits, the owner must submit a completed “Transferable Credit Payment Voucher” (R-6170) and a copy of the Credit Registration Form (R-6135).

This will apply to all transferable credits including without limitation, the Motion Picture Investor Tax Credit.

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