hair restoration atlanta

taxes - iStockRecently we have been meeting with many of our clients to discuss operational results for the first half of the year. Generally speaking, business is up from last year for my clients. As a result, people are starting to think about the higher tax bill they are likely to encounter. With higher tax bills looming there is one phrase uttered in every meeting: “how can I lower my taxes.” In nearly every case we discuss with them the benefits of Internal Revenue Code §179 (§179 herein). Below I discuss what §179 is and what’s new with it.

WHAT IS IT?

Overly simplified, §179 allows a business (and its owners) to purchase capital assets and deduct the full cost in the year purchased and placed in service rather than deducting that cost over a number of years. The acceleration of the deduction is particularly beneficial for small business clients who pay very close attention to their cash flow.

LIMITATIONS

There are certain limitations to the application of this code section. The first limitation of this section is that the business has to be profitable for tax purposes for the deduction to be allowed. Like everything in the tax law, there are definitions and special rules to define profitability. In order to keep this simple, let’s just assume profitability means that the taxpayer (business or owner) is paying income tax on profits generated from the business operations.

Another limitation is that the assets purchased must be tangible personal property. Examples of tangible personal property include computer equipment, furniture, manufacturing equipment, servers, and even some computer software. For most purposes, assume tangible personal property as something you can move, touch and feel that are not permanently attached to something. Automobiles can qualify but there are special rules that apply to autos that I am not going to get into for this article. It is also important to note that buildings and land do not qualify for the §179 deduction because they do not meet the definition of tangible personal property.

WHAT IS NEW?

This year, as compared to recent years, the conversations surrounding §179 are very different. For the first time in recent memory we know exactly what the deduction is going to be for the tax year we are in. You may recall that in December of 2015 congress passed tax legislation that affected 2015 tax law. It wasn’t until December of 2015 that we finally knew how we were going to treat assets purchased in January of the same year. Prior to the PATH Act (more on the act below), the §179 deduction for 2015 was only $25,000. We went all of 2015 operating on the belief that we would only have $25,000 of §179 to utilize. So, some businesses were holding out on purchasing new business assets to maximize their tax savings. Thankfully we received clarity in December when they passed the PATH Act.

The PATH Act permanently extended §179 limits at the historically high levels. As a result we no longer have to wait and see what the deduction is going to be. Having that knowledge early in the year should allow taxpayers to better plan for tax purposes when it comes to capital spending.

The recent legislation also gives us a roadmap for what the deduction will be in future years. The PATH Act provides for inflationary adjustments to §179 going forward. The new law allows for an annual adjustment equal to the increase in the cost of living adjustment used for Social Security purposes.

2016 LIMITS

For 2016 the §179 limit is $500,000. For companies who purchase more than $2,000,000 in assets, that amount is reduced dollar for dollar. So if a company places in service $2,500,000, they are not eligible for the deduction.

{ 0 comments }

Donations - iStock“Close” counts with horseshoes and hand grenades. Unfortunately, it doesn’t count for entitlement to deduct a charitable contribution, once the amount claimed exceeds a trigger point. When that happens, the taxpayer’s own records – no matter how convincing – won’t suffice. There has to be an acknowledgement from the charity itself that follows the law and regulations precisely. Otherwise no income tax deduction whatsoever will be allowed.

The “rant” below was brought on by a client’s question about contributions of property to charities, unfortunately asked too late to save a large deduction. It concerns only that – contributions of property – and only in situations where the deduction sought is large enough to invoke this acknowledgement requirement.

Documentation of a property contribution in a taxpayer’s own records won’t be considered here.[1] My focus is on what the recipient charity must give the taxpayer. Proof of the value of what was contributed – potentially a significant documentation burden – likewise isn’t addressed. (There, close does count, since experts can disagree about the value of virtually anything.[2])

Special relevance to older clients and personal representatives

In retirement planning or estates and trusts practice, we deal with two very common events that involve atypically large property contributions, and thus potentially significant tax benefits. One of those events is the transition from a single-family home to a smaller living space, often to gain access to some personal services such as daily living assistance or medical care. The other event involves the settling of a decedent’s affairs where, not infrequently, contributions are made by the individuals who succeed to the property (rather than as permitted by or directed by a will or trust instrument[3]). This might be done to dispose of what is left after an estate sale, or as a result of second thoughts (e.g., no room for the grand piano).

In either of these cases, the people who arrange the property contributions are often under stress, and critical details may be overlooked. Or there may just be a belief (not unreasonably) that a good faith effort to substantiate the deduction should be enough. Compounding the problem, many charities and thrift shops offer curbside pickup, or drive-through drop-off sites, where the donor is given a DIY (do it yourself) receipt that is often not dated or signed (and thus, as discussed below, it fails as support of a deduction).

So once more, with feeling: if the deduction sought is above a threshold, whether even dollar one will be allowed depends on receipt of a proper acknowledgement.

The trigger point.

When the total value of property (or cash, or both) given to one charitable organization in one tax year is $250 or more, the taxpayer must obtain a “contemporaneous written acknowledgement” from the recipient organization to be entitled to any deduction whatsoever.[4] The focus here is on property contributions, but one-time or infrequent cash contributions also involve risks that necessary acknowledgements will not be obtained.

Contemporaneous means contemporaneous.

Waiting to obtain a charity’s acknowledgement until there’s a request for it in a return examination means the deduction is lost. The acknowledgement must be obtained before the earlier of the date of filing of the original return for the year of the contribution or the due date (including extensions) for that return.[5] A court might express its sympathy for a taxpayer who was late obtaining an acknowledgement but had solid proof of the fact of a contribution and its value; nevertheless, the court would still disallow the deduction.[6]

There can be a trap in this earlier-of requirement. Many charities issue acknowledgements in a batch process after the end of each calendar year, which only makes sense for their supporters who make several yearly contributions. But what about the one-time contributor who might also want to file a tax return as early as possible? If the return is filed before the acknowledgement is received, the deduction is lost, even if the acknowledgement arrives before the return’s due date. Clearly, the safest approach for a one-time contributor is to obtain the acknowledgement at the time of the contribution.

Written means written.

Apparently, a writing can be paper or electronic, and it need not be on official letterhead or of a particular size.[7] How much of the writing can be done by the taxpayer, and how much by the charity, is not settled, and perhaps is unnecessary hair-splitting, but clearly some part must be produced by the charity in order for the writing to reflect an act of acknowledgement.

Acknowledgement means acknowledgement.

Someone at the recipient charity, or someone acting as an agent[8] at the time of the contribution, must have done something to recognize and memorialize the event. Pre-signed receipts, or unsigned thank-you cards, will fail as acknowledgements because they don’t show that someone other than the taxpayer actually observed and logged the items received.[9] More colloquially, if an inference can be made that the taxpayer supplied all of the content of a document that was simply “rubber-stamped” by the charity, that document will probably fail as an acknowledgement.

All means all.

The following information has to be included in a charity’s acknowledgement if a deduction of $250 or more will be claimed for transfers to it during a given tax year:

  • The amount of cash, a description of the property (but not necessarily its value[10]), or both, received from the donor;
  • An affirmative statement of whether or not the charity provided any goods or services as consideration, in whole or in part, for what it received from the donor;
  • If the charity did provide any consideration (other than intangible religious benefits), then a separate statement of its good faith estimate of the value of that consideration; and
  • If the charity provided the donor with any intangible religious benefits, either as the sole consideration or as part of the consideration, an affirmative statement that it did so.[11]

Comments about two of the terms here may be helpful.

First, consideration is anything that the donor expects to receive in exchange for what was given, including anything expected to be received at a later time.[12] Even some value to be provided in the following year, such as discounted or free admission to a ticketed event conducted by the charity, is included. Second, whether an intangible religious benefit was present is only a question for an organization operating exclusively for religious purposes, and this type of benefit is limited to something not generally sold in commercial transactions.[13] So an organization having a mixed spiritual and social welfare mission would not have to address the issue in an acknowledgement.

Why substantial compliance with the rule isn’t good enough

One major purpose of enacting this all-or-nothing rule was to increase compliance with another one that Congress believed was subject to abuse – that in a bargain sale to a charity, only the bargain element can be deducted.[14] Even so, the acknowledgement rule applies equally to contributions made without any return consideration of any kind. An acknowledgement that omits any of the required information totally forecloses the possibility of a deduction for what was “acknowledged”.[15]

Conclusion

The above is old news. But it seems to be overlooked frequently, and where the potential tax savings may be large enough to justify more attention. A taxpayer’s own documentation of a property contribution may be above reproach, but that will not save the deduction if an acknowledgement from the charity is also required, and that acknowledgement is not obtained or is obtained too late. Zero means zero: no acknowledgement, or late or incomplete acknowledgement, no deduction at all. In situations where unusually large property contributions will be made, this unforgiving rule has to be top of mind.

 

[1] Those documentation requirements are not insubstantial, and have their own trigger points at which additional requirements are imposed. See generally, IRC § 170(f); Treas. Reg. §§ 1.170A-13(b) and (f).

[2] Valuation of property is a question of fact. Treas. Reg. § 1.1001-1(a). But the Tax Court, at least, has upon occasion made very clear that it wants disagreements about valuation resolved between the parties, and that it discourages any effort “…to infuse a talismanic precision into an issue which should frankly be recognized as inherently imprecise and capable of resolution only by a Solomon-like pronouncement.” Messina v. Commissioner, 48 TC 502, 512 (1967).

[3] Charitable contributions of an estate or trust are deductible under IRC § 642, not IRC § 170. The acknowledgement requirement discussed here applies only to deductions under the latter Code Section. Treas. Reg. § 1.170A-13(f)(1). No corresponding requirement exists in the former, or its Regulations, which authorize charitable deductions “in lieu of the limited charitable contributions deduction authorized by section 170(a).” Treas. Reg. § 1.642(c)-2(a). Note, however, that the acknowledgement requirement does apply to charitable contributions passed through to owners of S corporations and partnerships. Treas. Reg. § 1.170A-13(f)(15). And it applies to C corporations, because IRC § 170 controls the deduction of charitable contributions in arriving at corporate taxable income. IRC § 170(b)(2).

[4] IRC § 170(f)(8)(A); Treas. Reg. § 1.170A-13(f)(1).

[5] IRC § 170(f)(8)(C); Treas. Reg. § 1.170A-13(f)(3). Possible statutory postponements of these deadlines, e.g., under IRC § 7508 for Presidentially-declared disaster areas, are not covered here.

[6] Daniel Gomez, et ux., TC Summary Opinion 2008-93.

[7] IRS Publication 1771, Charitable Contributions (Rev. 3/16), page 3.

[8] An otherwise acceptable acknowledgement can be made by an agent, e.g., for a car donation. Rev. Rul. 2002-67, 2002-2 C.B. 873.

[9] Thad D. Smith, TC Memo 2014-203 1468, 1472.

[10] Apparently, including a value estimate for what was received is an option, though anecdotal evidence suggests that few charities will actually do so.

[11] IRC § 170(f)(8)(B); Treas. Reg. § 1.170A-13(f)(2).

[12] Treas. Reg. § 1.170A-13(f)(6). Note, however, that relatively insubstantial consideration (e.g., a coffee mug or refrigerator magnet) given by the charity can be disregarded in the acknowledgement. Treas. Reg. § 1.170A-13(f)(8). Because no value has to be assigned to such consideration, it won’t be treated as a quid pro quo that reduces the amount of a donor’s deduction.

[13] IRC § 170(f)(8)(B). Likewise here, because no value has to be assigned to such a benefit, it won’t reduce the amount of a donor’s deduction.

[14] Addis v. Commissioner, 94 AFTR 2d 2004-5134, 2004-5137 (9th Cir. 2004).

[15] Addis, 94 AFTR 2d at 2004-5139.

{ 0 comments }

PROBATE CODE UPDATES

by Emma Maddy on June 20, 2016

Close up of vintage typewriter machine - iStockStarting August 1, 2016, the amounts available under the Minnesota Probate Code (Minn. Stat. Ch. 524) for a number of issues will be adjusted for the first time in more than 25 years. These issues include the family allowance, collection of personal property by affidavit, and spousal intestate share with children from a previous relationship. The updates will also affect amounts under exempt property under Minn. Stat. § 524.2-403(a) and (c), and the threshold for summary administration, in addition to a number of changes that do not relate to dollar amounts.

THE FAMILY ALLOWANCE

The family allowance is designed to provide funds to a spouse and minor children during the administration of an estate. The allowance can constitute monthly payments for up to one year if the estate does not have enough funds to pay all allowed claims, or eighteen months if the estate is fully solvent. These funds come out of the estate before any distributions are made, and the personal representative currently has the ability to determine a monthly allowance of up to $1,500. On August 1st, that amount will increase to up to $2,300 per month.

COLLECTION OF PERSONAL PROPERTY BY AFFIDAVIT

Collection of personal property by affidavit (see Jamie Held’s article from April 2011 here) refers to the maximum amount of probate assets that can be transferred from the decedent’s name without use of the probate process. If the decedent had funds in a trust in order to avoid probate, this is the maximum amount that could be held outside that trust in the decedent’s own name. That amount is currently $50,000, but will increase to $75,000 on August 1st. The process for this collection is outlined in Minn. Stat. § 524.3-1201.

SPOUSAL INTESTATE SHARE

When a person dies without a valid will or trust, the state has enacted statutes that govern that “intestate” succession. One of the standard assumptions that go into that calculation is that the decedent spouse would elect to support the surviving spouse and any surviving children. The statutory default if the surviving spouse is the parent of all surviving children is that the surviving spouse is entitled to the entire intestate estate, because that spouse is likely to support those children.

The calculation gets a little more complex when the surviving spouse is not a parent of one or more of the surviving children, because, while there might be a personal or ethical compulsion to pass on funds to or support the surviving children, there is no biological connection. In order to better ensure support of those children, the statutory default in that case grants the surviving spouse the first $150,000 of the estate, plus one-half of any remaining funds, with the remainder going to the decedent’s children from a previous relationship. On August 1st the amount available to the surviving spouse will be raised to the first $225,000, plus one-half of the remaining funds.

{ 0 comments }

MN Animal Lovers – Rejoice!

by Jennifer Santini June 3, 2016 Estate Planning 101

Until recently, Minnesota was one of the few remaining states that did not allow for a trust to be created for the benefit of animal. However, this past legislative session H.F. No. 1372 was signed […]

Read the full article →

Prince Leaves a Complex, Unplanned Estate

by Manish Bhatia May 4, 2016 Beneficiary

Unfortunately, too many recent newsletters have focused on the death of musical legends. This month left us with another untimely death. Prince, whose legal name was Prince Rogers Nelson, died on April 21st at his […]

Read the full article →

Life Insurance for Family Business Owners

by Bob Cohen April 5, 2016 Uncategorized

Owners of family businesses often find themselves in a dilemma over how to treat their adult children fairly when one or more is interested and capable of taking over the business and the other adult […]

Read the full article →

Vanishing Premiums Explained

by Bob Cohen March 23, 2016 Guest Articles

Many insured’s are confused and angered when the premiums of their “vanishing premium” life insurance policy, either don’t vanish or reappear at a later date.  If the policy was promoted and sold on a “vanishing […]

Read the full article →

The Power to Revoke at Any Moment

by Sarah Sicheneder March 17, 2016 Uncategorized

A popular saying goes “bad planning on your part does not constitute an emergency on my part.”  Estate planners cannot rely on such platitudes.  It is our job to fix bad planning especially in emergency […]

Read the full article →

Spectrum of Withdrawal Limitations

by Manish Bhatia February 26, 2016 Beneficiary

The phrase “control from the grave” is often used to describe withdrawal limitations on an individual’s inheritance.  These provisions direct or require a beneficiary to reach certain benchmarks before a trustee can permit a withdrawal.  […]

Read the full article →

David Bowie’s Estate Plan

by Jamie Held February 19, 2016 In the News

It has been reported that David Bowie’s estate plan consists of a 20 page Will that was originally filed in 2004.  It splits the majority of his estate, estimated at $100 million, between his wife, […]

Read the full article →

5 Refreshing financial steps women should take before and during a divorce (or during any life transition)

by Kari McLeod February 19, 2016 Guest Articles

I know this is a finance post, but before I jump into giving you a checklist for financial steps to take before and during divorce, I first want to say: Stay positive and remember you […]

Read the full article →