If your business return seems extra thick this year, it could be a result of an “accounting method change” application — Form 3115 — buried in it.
The tax law requires taxpayers to get IRS permission to change a “method of accounting.” Without getting into all of the tedious details, and with great oversimplification, a “method of accounting” occurs when the way you account for something on your tax return affects the timing of income or expense, but not the total amount over time. In other words, it’s temporary vs. permanent differences.
Of course timing is everything in tax planning, and the IRS doesn’t want you to change accounting methods willy-nilly. The IRS doesn’t have the time to consider every accounting method change, though, so it publishes a long list of “automatic” method changes annually. This year’s list is in Rev. Proc. 2015-14.
This year will see more Forms 3115 than usual as a result of the so-called “repair regulations” that are effective for 2014 returns. These rules distinguish between “repair” expenses, which can be deducted, and “improvements,” which have to be capitalized and depreciated.
The repair regulations have provisions that let taxpayers treat their building components — HVAC, roofs, elevators, etc — as separate items under these rules. Their effect is to permit deductions for some costs that may have been trapped in the depreciable cost of the building. That makes the automatic method change under these rules (Rev. Proc. 2014-17) a good deal, as it can provide a catch-up deduction for prior capitalized costs. Many returns will also include a method change (Rev. Proc. 2014-16) to reflect updated rules for deducting or capitalizing “materials and supplies.”
Automatic method changes are a good thing; if you have a method change that isn’t automatic, special IRS permission is required, and it doesn’t come cheap. But even an automatic change isn’t free, especially if your preparer has to go through old repair records to determine the catch-up deduction. But if you have significant depreciable real property, it’s probably worth the effort.
Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll taxes and not paying them to the IRS. Would you:
(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.
An accountant from Stillwater, Minnesota — who happened to also be the Mayor — chose poorly.
Hank Stern, Counting down the ObamaTax:
Many (most?) folks believe that the tax is a mere $95 this year and, for some people, this may well be the case. But it’s actually just a minimum; the actual rate (this year) is 1% of income:
A common misconception.
Robert Wood, Beware Obamacare When Filing Taxes This Year. A roundup of the individual mandate penalty and the net investment income tax.
Annette Nellen, Due diligence for preparing 1040s for 2014:
What’s new for due diligence for 2014 individual tax returns? Virtual currency, Affordable Care Act, FBAR, Airbnb rentals, for sure. Also, the typical charitable contributions, mortgage interest and 1099-K review. The biggest new item for 2014 will the new line asking if the individual had health coverage for the year.
More work doesn’t come free. The post lists to a longer article about preparer “due diligence” this tax season.
Tim Todd, Tax Court Adopts Functional Test to Define “Bank”. “In sum, the Tax Court held that Moneygram satisfied neither the Staunton functional test nor the § 581 test because it failed to receive deposits, make loans, and was not regarded as a bank by any state or federal regulator. Consequently, Moneygram was not entitled to the reported bad debt deductions of the partial or wholly worthless asset-backed securities.”
Tony Nitti, Tax Geek Tuesday: Understanding Partnership Distributions, Part 1. “As you will see, the regime governing partnership distributions is drastically different from the one governing corporate distributions.”
TaxGrrrl, Fun With Taxes: Tax Haiku 2015. How about this:
insure worker health?
Better not reimburse it
Mitch Maahs, IRS Announces New Standard Mileage Rates (Davis Brown Tax Law Blog)
Robert D. Flach, BO SOTU PLANS TO INCREASE TAX ON THE “WEALTHY”. ” BO’s tax proposals, both to help the middle class and punish the wealthy, will never pass in the Republican controlled Congress.”
Matt Gardner, President Obama Takes on the Capital Gains Tax Inequity with New Proposals. By making it worse, of course, though not to hear Mr. Gardner tell it.
Renu Zaretsky, To Build a Better Tax Code, You Could Follow the Money. The TaxVox headline roundup is heavy on the President’s proposals.
TaxProf, The IRS Scandal, Day 621. This edition cites Stephen Moore’s Op-ed: “Congress needs to hold the IRS accountable and demand the firing of Mr. Kostiken because he has he admitted openly he can’t do his job.” Unfortunately, the President who hired him thinks he is doing his job, which is to be a partisan scandal goalie.
The headline that wins the internet: Foot Kissing Chiropractor Sentenced for Bribing IRS Agent (Jack Townsend)