November 2015 - Anders CPA

November 23, 2015

De Minimis Safe Harbor Provides Relief for Lowered Sec. 179 Limits

Millions of small businesses have taken advantage of Code Sec. 179 to deduct equipment and enhance their bottom line. Code Sec. 179 allows taxpayers to elect to expense the cost of “section 179 property” instead of depreciating it over its useful life. Section 179 property includes almost all types of business equipment that your company buys or finances and is limited to the company’s net income.

Starting in 2015, Sec. 179 limits have been lowered, and it’s important to be aware of them and other options available. The Section 179 deduction limit for tangible personal property has gone from $500,000 to $25,000, and the spending cap on purchases has also been reduced from $2,000,000 to $200,000 going forward. However, there is another option that can provide a way around the new limits.

Safe Harbor Election

The “de minimis safe harbor election” is an annual election that was introduced with the recently released IRS tangible property repair regulations. The election allows businesses to expense specified amounts paid to acquire or produce tangible property, provided the amounts do not exceed applicable thresholds.  If conditions are met, costs that a business would otherwise have to capitalize and depreciate over its useful life can instead be deducted in the year of purchase.

This election can be very beneficial for companies because amounts expensed under the safe harbor won’t fall under the $25,000 Section 179 expense limit.

What Qualifies

The de minimis safe harbor election applies to amounts paid during the tax year to acquire or produce what the regulations call a “unit of property” (UOP), or to acquire a material or supply, if

(1) at the beginning of the tax year, the taxpayer has accounting procedures or a policy in place to expense amounts paid for property costing less than a specified dollar amount, or with an economic useful life of 12 months or less.  These procedures must be written procedures for taxpayers with “applicable financial statements”, AFS, defined below.

(2) the taxpayer treats the amount paid for the property as an expense on its AFS, if it has one, or on its books and records if it does not, under its accounting procedures; and

(3) the amount paid for the UOP doesn’t exceed $5,000 per item if the taxpayer has an AFS, or $500 if the taxpayer doesn’t have one.

An AFS is a certified audited financial statement. There are also a few other items that qualify as an AFS, but a review and a compilation do not.

Details to Note

Taxpayers who meet the de minimis safe harbor requirements, including having written accounting procedures in place at the beginning of its tax year and treating qualifying amounts paid for property as expenses in accordance with those procedures, are not required to get IRS approval for a change in those procedures (such as to conform to or adjust the $5,000/$500 limits).

Although amounts expensed under the de minimis safe harbor election aren’t subject to capitalization under Code Sec. 263(a), they may have to be capitalized under Code Sec. 263A if the UNICAP rules apply to the taxpayer.

Business will need to monitor tax law changes to discover if Congress will adjust the Section 179 limits to a higher amount for tax year 2015.

If you have any questions regarding Code Sec. 179 or the de minimis safe harbor, please contact an Anders advisor.

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November 17, 2015

Reducing Your Estate Taxes Through Lifetime Gifting

Gift giving throughout your lifetime is a great way to share your wealth with those you care about, while helping reduce your estate taxes. For taxpayers interested in gifting, some important tax consequences will need to be considered.

Estate Tax Exclusion

Each year, the government adjusts the estate and gift tax exclusions for inflation. For 2016, the IRS increased the lifetime estate tax exclusion to $5,450,000 while the annual gift tax exclusion remains at $14,000. The lifetime estate tax exclusion allows taxpayers to give up to $5,450,000 tax-free, but it disregards the gifts that qualify under the annual exclusion. This means that a taxpayer will only dip into the lifetime exclusion for gifts given to a recipient that exceed the annual gift tax exclusion amount ($14,000 for 2016) in a single year.

Single taxpayers can give up to $14,000 each to any number of persons in a single year without incurring a taxable gift. Neither the recipient nor the donor will owe tax on gifts up to the $14,000 threshold. Both the estate tax exclusion and gift tax exclusion double for spouses splitting gifts.

For elderly taxpayers, gift giving can be an important aspect of estate planning. Let’s say you have a taxpayer who is 100 years old and wealthy i.e. their net worth exceeds $5,450,000. When the taxpayer gives gifts, those gifts will not flow into the estate of the taxpayer when they unfortunately pass away. If they choose not to give, the money, property, stock, etc. will flow into their estate and will face the inheritance tax. For estates in excess of the exemption amount, the inheritance tax is currently 40%. Gifting allows taxpayers to pass their wealth to their loved ones rather than to the government through the inheritance tax.

If you are thinking about gifting, the type of gift will also be something to consider due to tax ramifications. Contact an Anders advisor to help you decide what gift will be the most beneficial for you and for your unique situation.

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November 10, 2015

MOST 529 Plan: a Tax Saving Way to Prepare for Your Child’s Future

Contributing to a MOST 529 college savings plan is a great way to save for your child’s future.  The 529 plan is a type of investment account, typically state sponsored, that is used as a savings for higher-education.  Eligible education institutions include 2 and 4-year colleges, post-secondary trade and vocational schools, and postgraduate programs.  The money can be used for most education expenses including tuition, supplies, books, equipment, and certain room and board fees.  Benefits of using a 529 plan are the potential tax savings, such as qualified withdrawals being tax-free for federal and state, and having earnings that grow deferred from federal and state income taxes.

Missouri is one of the many states that participate in the program.  The MOST 529 plan allows taxpayers to save for both higher-education and on their taxes, as there is a limit on the state tax deduction for the plan.

Eligibility

Almost anyone can participate in the MOST 529 college savings plan; there are no income or age restrictions.  The taxpayer must be a U.S. citizen or resident alien with a valid Social Security number or other taxpayer identification number.  For a taxpayer to be eligible to take advantage of the state tax deduction, they are required to be a Missouri resident.  It is also possible for different taxpayers to open separate accounts for the same beneficiary.  For example, both a parent and a grandparent can each open a separate account for the same beneficiary.  They can also open separate accounts for other beneficiaries as well. The beneficiary is solely the person the taxpayer is opening the account for, and they can be a child, grandchild, yourself, or a friend. All beneficiaries must be a U.S. citizen or resident alien with a valid Social Security number or other taxpayer identification number.

Contributions

Taxpayers can contribute up to $14,000 per year if filing under the single status. If filing under the married filing jointly status, they can contribute up to $28,000 per year. Taxpayers can contribute up to $70,000 ($140,000 if married filing jointly) in a single year per beneficiary and then treat it as though you contributed that amount over a five year period.  It’s important to note that you will not be able to make additional gifts to the same beneficiary during that five year time period without dipping into the lifetime gift tax exclusion.

Deductions

If the taxpayer is a resident of Missouri and is also the account owner, they can deduct up to $8,000 of their MOST 529 plan contributions when their state income tax return is filed, if filing under the single status.  If the taxpayer is filing under the married filing jointly status, they can deduct up to $16,000 of their MOST 529 plan contributions.  Please keep in mind that the tax benefits are not the same for every state.

Rollovers and Withdrawals

Money can be rolled over tax-free from another 529 plan to the MOST 529 plan for the same beneficiary as often as once every year. If the beneficiary decides that they do not want to continue their education, there are several options for the taxpayer.  The 529 plan can stay open and the taxpayer can continue to invest in case the beneficiary decides to attend school at a later time.  There is no age limit on using the money that has been contributed.  Also, the beneficiary can be changed to another eligible family member.   Another option would be to withdraw the money and use it for other nonqualified expenses, which would result in a 10% penalty tax on the earnings.  The penalty is for federal and state income taxes as well.

For more information about MOST 529 college savings plans, please contact an Anders advisor.

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